The Bretton Woods Crisis

As the external debt of Great Britain and the United States grew year by year and soon exceeded the value of the gold reserves of these countries,
foreign governments became increasingly convinced that, by maintaining the existing international monetary system, they were forced to finance
the deficits of Great Britain and the United States. They could not control the policies of these countries and sometimes did not agree with them,
so the two aforementioned conditions began to contradict each other.

The Bretton Woods system was well conceived, but it could only work effectively if the main reserve currency was stable. This condition was
ultimately not met. In the 1960s, the US balance of payments was mainly reduced to a negative balance, which meant that the number of dollars
held by foreigners grew rapidly as US gold reserves were depleted.

During the 1960s, the dollar gradually lost its ability to be exchanged for gold, but the system of the contractual credit and reserve standard allowed
the gold standard to be maintained, at least in appearance. As a result, the United States was able to avoid the need to eliminate the balance of
payments deficit by changing domestic economic policy or the dollar exchange rate for a long time. Eventually, however, when the US government,
instead of raising tax rates, began to increase the money supply in circulation to pay for the costs of the Vietnam War, the US experienced a surge
in inflation. As the money supply increased, interest rates fell, and prices on the domestic market rose rapidly, which led to a decrease in the
competitiveness of American goods.

The first crisis broke out in October 1960, when the price of gold on the private market briefly rose to $40 per ounce, while the official price was $35
per ounce. This crisis was followed by gold, dollar, and sterling crises. This development could have soon ended in a collapse of the entire world
monetary system, similar to the collapse of 1931, but in fact, it led to an unprecedentedly close cooperation of all the leading countries of the world
in the monetary sphere and increased the willingness of countries with excess reserves to continue financing operations to save the monetary
system for a period while fundamental reforms were being discussed.

Despite the growth in income from foreign investment, the positive balance of payments of the United States in the items of trade in goods and
services (including income from foreign investment), transfers, and pensions, which reached $7.5 billion in 1964, was replaced by a deficit of about
$800 million in 1971. In addition, the volume of capital exports from the United States remained stable at 1% of gross national product throughout
these years. However, if in the late 1960s the country's high interest rates contributed to the inflow of about $24 billion of foreign capital into the
United States, then in the early 1970s low rates caused a massive dumping of securities and an outflow of investment abroad.

The ability of the United States to maintain the convertibility of the dollar into gold was becoming impossible. In the early 70s, a redistribution of
gold reserves took place in favor of Europe, and more and more cash and non-cash US dollars participated in international circulation. Confidence
in the dollar as a reserve currency was further falling due to the gigantic deficit of the US balance of payments. The US deficit in official accounts
reached unprecedented levels – $10.7 billion in 1970 and $30.5 billion in 1971, with a peak of $49.5 billion (annualized) in the third quarter of 1971.

Significant problems arose with international liquidity, since gold production was small compared to the growth in international trade. New financial
centers were formed (Western Europe, Japan), and their national currencies began to be gradually used as reserve currencies. This led to the US
losing its absolute dominant position in the financial world.

According to IMF rules, the surplus of dollars that formed in the private foreign exchange market had to be absorbed by foreign central banks, which
was required to preserve existing currency parities. However, such actions gave rise to expectations of a depreciation of the dollar against the
stronger currencies of countries that had accumulated huge dollar claims, in particular France, West Germany, and Japan. These expectations were
supported by official statements from the US government that it viewed the change in exchange rates as a measure necessary to restore balance of
payments equilibrium and the competitiveness of American goods in foreign markets.

On August 15, 1971, the US officially announced the suspension of the exchange of dollars for gold. At the same time, to strengthen its position in
future negotiations, the US introduced a temporary 10 percent surcharge on import duties. The introduction of the surcharge had two goals: to limit
imports by making them more expensive and to warn foreign governments that if they did not take drastic steps to promote exports from the US, the
volume of their own exports to the US would be sharply limited.

Additional Aspects

1. Impact on Global Trade: The instability of the Bretton Woods system affected global trade, as countries faced difficulties in maintaining fixed
   exchange rates amidst fluctuating economic conditions.

2. Shift to Floating Exchange Rates: The eventual shift to floating exchange rates allowed currencies to fluctuate based on market forces,
   providing more flexibility for countries to manage their economies.

3. Role of Gold: The diminishing role of gold in the international monetary system marked a significant shift in how countries managed their
   reserves and conducted international trade.

4. Long-term Consequences: The collapse of the Bretton Woods system led to the development of new financial instruments and institutions to
   manage global economic stability, such as the increased role of the International Monetary Fund (IMF) and the World Bank.