Exchange rate turbulence since the end of the 1960s

It is well known that the Great Depression in the early 1930s was accompanied by a lack of cooperation among key countries, and devaluation races and trade wars that exacerbated the devastating crisis. After the end of the Second World War, the experience of this painful history led to a new international monetary order under the leadership of the United States, agreed upon at the Bretton Woods Conference in 1944. The countries participating in this system agreed to implement fixed exchange rates that could be adjusted in cases of high current account imbalances within the framework of political decisions. Participating countries fixed their exchange rate vis-à-vis the US dollar with a permissible fluctuation of ±1 per cent. It was their sole responsibility to defend the exchange rate. From the end of the 1960s, however, this system became increasingly unstable. Instabilities increased because international capital flows became more deregulated in the 1960s and the willingness of countries, including the United States, to defend the system eroded. In 1967 Britain suffered a balance of payment crisis and devalued sterling. In the following two years based on its high current account surpluses, Germany was particularly affected by high capital inflows and had to extensively intervene in the foreign exchange market, finally revaluing its currency. France also had to devalue the franc. In August 1971, US President Richard Nixon announced the suspension of the dollar's convertibility of central bank dollar reserves into gold, effectively ending the Bretton Woods system. Attempts to save the system in the Smithsonian Agreement of 1971, for example by allowing fluctuation of the exchange rate of ±2.5 per cent around the central rate, created short-term stability but the system finally collapsed in 1973. With its breakdown, the relative stability of international monetary relations after the Second World War came to an end. Western Europe also lost its monetary umbrella under which European integration had developed during the 1950s.

Figure 2.1 shows the instability of exchange rates after the collapse of the Bretton Woods system. During the 1970s the D-Mark appreciated around 50 per cent and then depreciated over 100 per cent.