ABSTRACT
Although the World Wars and the Great Depression had led to disintegration of the gold standard and the fixed exchange rate regime, the world saw a return to the latter as a necessary condition to foster the healthy growth of international trade and commerce. Gold, which had till then provided an anchor for exchange rates, was no longer available in sufficient quantities in many countries at the end of the Second World War. How could these countries return to a gold standard without gold reserves and if they were unable to, how would they rebuild their economies? Imports and capital inflows were after all necessary for them to do so. While the external economy was critical to their future, the Great Depression and the wars had also turned the focus on the need for internal or domestic stability that not only included stable prices but also full employment (or at least low unemployment) and a high rate of GDP growth. The latter elements sometimes warranted inflationary monetary policies that had become a necessity for political survival. Finding a solution that would allow countries to pursue fixed exchange rates and independent monetary policies at the same time was the task-on-hand at the Bretton Woods Conference (United Nations Monetary and Financial Conference) in 1944.
