IGNOU : M.COM : IBO 6 : UNIT 1 : Q - 3. What were the basic weaknesses of the Bretton Woods System?

Ans.  We may briefly mention the three major weaknesses of the bretton wood system. The First weakness was that the system did not provide a systematic means by which world reserves could grow with world trade and the world economy. The world reserves increased partially because of the increased production of gold, but mainly as a result of deficit the US Balance of Payments. To the extents the other currencies held dollars rather than purchase gold from the United States, Total gross world reserves increased as a result of the US Deficits. Thus the United States took on one major role of a world central bank, fulfilling a function left unspecified in the Bretton Woods agreement i.e. the creation of international money. The U.S. balance of payments were necessary to increase international liquidity. But as U.S. liabilities to foreign central banks grew the confidence in the convertibility of dollars into gold wavered. This problem is called Triffin dilemma, after Robert Triffin (1960) pointed out the difficulty of the existing monetary arrangements.

The second weakness of the Bretton Woods System concerned the balance of payments adjustment process. As individual countries faced balance-of-payments deficits, the international community provided credits and advice through the Fund. Exchange rate adjustment was a rare event in industrial countries and when they I occurred, they were large and adhoc in response to speculative attacks.

The third weakness was the failure of the system to cope with large disequilibrating capital flows. Interest rates differentials could induce sizeable movements of capital. These could not be controlled without controlling all international transactions thus creating disequilibrating forces.