ABSTRACT

The end of the Bretton Woods system in 1973 was significant for US financial policy in two respects. First, the failure to maintain a system of exchange rates inconsistent with market forces demonstrated the ineffectiveness of binding regulations on financial markets. Second, the same economic and technological forces ending the Bretton Woods system brought pressure on US policy makers to remove or relax a number of binding constraints on domestic financial markets. US policy during the Bretton Woods period had been predicated on the view that competitive financial markets were inherently unstable. The post–Bretton Woods system is based on something less than market-determined exchange rates since it incorporates the principle of government intervention to “smooth” short-run exchange rate movements. The start of financial reform in domestic markets coincided with the end of the Bretton Woods system.