[MUSIC] The new system featured a modified fixed exchange rate system called, a partially fixed or adjustable peg system. This system replaced the gold standard with a U.S. dollar standard. And the U.S. dollar was designated as the world's key currency. There after, most international trade and finance was to be transacted in dollars. And, fixed exchange rate parities for all currencies were set in both gold and dollar terms. For example, the parity of the British pound was set at 12.5 per ounce of gold. Given that the gold price of the dollar was $35 per ounce, this implied an official exchange rate between the dollar and the pound of $35 divided by 12.5, equals $2.80 per one pound. Note, however, that while the Bretton Woods agreement remained wedded to the concept of fixed exchange rates, there was one very important difference. Bretton Woods also provided for a cooperative mechanism in which the exchange rates were only partially fixed. These new partially fixed rates could be periodically adjested to reflect changes in currency values in a process know as adjusting the peg. The idea of this new partially fixed or adjustable peg exchange rate system was to provide both the stability of the gold standard's fixed rates. With the adaptability of flexible exchange rates. Through this adaptability, relative price changes across nations could be addressed through periodic and cooperative adjustments in exchange rates rather than through the painful deflations and recessions that have plagued the gold standard. For the first decade of its existence, the Bretton Woods system was a great success. Under the Marshall Plan created in 1947, the US lent large sums of dollars to Europe for its rebuilding. And these dollars flowed right back into the US for the purchase of machinery, equipment, and consumer goods. However, by the mid 1950s, the European economies had become increasingly self-sufficient. As US exports to Europe slowed, America's strong economy continued to attract foreign imports. At the same time U.S. deficits were further fueled by an overvalued currency, budget deficits to finance the Vietnam war and growing oversea investments by American firms. By the 1960s, with the U.S. trade deficits mounting a huge surplus of dollars began to pile up in foreign banks. As speculative concerns increased that the US would devalue the dollar, many foreign governments began to redeem their surplus dollars for US gold. As US gold reserves fell dramatically, the US government tried unsuccessfully to pressure these foreign governments into retaining their surplus dollars. A surplus that had grown from virtually nothing in 1945 to $50 billion by the early 1970s. Finally, in August of 1971, a reluctant Nixon Administration abandoned the dollar standard and Bretton Woods. No longer would dollars be redeemable for gold at $35 an ounce. And in the wake of that abandonment the dollar's value fell precipitously.
