Impact of Coronavirus to the Capital Withdrawals

Introduction
The fixed exchange rate is a method used by the central bank or the national treasury to
convert money to gold or gold to money of the same value. This method is used to maintain the
range of the country's money withing a fine band. Fixed exchange rates provide good offers for
exporters and importers and help a country prevent inflation, and in the long run, the country will
be able to boost trade using investments. In the early 1970s, some major industrialized countries
adopted this method of using fixed exchange rates, and countries like the US and the UK used
the Bretton Woods and the Gold Standard systems, respectively. The current price of the system
also impacted the price or amount of money to be used in the legal exchange (Majaski 2004).
The UK led gold standard system was a financial system where the monetary economic unit is
exchanged by a fixed quantity of gold. On the other hand, the US-led Bretton Woods was a
financial system that was based on the dollar and converted all currencies related to the dollar
into gold as the US dollar was a global currency.
According to Boughton and Moggridge (2002), when World War II ended, the US
introduced the Bretton Woods system, where the US dollar would be exchanged for a price of
gold of the same value. When the US post-war equilibrium of payments extra crooked to a debit
in the 1950s and 1960s, the seasonal conversion proportion changes legalized under the contract
eventually verified inadequate (Fujiki 2003). The European countries also implemented the fixed
exchange rate system by presenting a Monetary Union-European Exchange Rate Mechanism
(ERM) which was being used by countries like Belgium, Germany, Italy, France, Spain, and the
Netherlands and they all agreed to uphold their currency rates around a plus or minus 2.25 of a
vital position. The novel associates of the euro exchanged from their native monies at their then-
current ERM vital proportion as of January 1, 1999. The euro personally compares

Fixed Exchange Rate Systems 5
spontaneously contrary to other major currencies, whereas the currencies of nations wanting to
be affiliated with trade-in an accomplished float acknowledged as ERM II (Keynes et al. 1971).

Literature Review
UK-Led Gold Standard System

According to Lioudis (2008), in the 19 th century, the UK was the leading in economic
power globally and used the Gold System, which was underpinned by the sterling pound. The
superiority of the economic infrastructure of the UK saw a gradual decrease during the 20 th
century, especially in the manufacturing industry. During this period, gold had replaced money,
and people used to tip for goods and services using gold instead of money. The high rise of
import of goods from other nations led to the rise of the need for notes and coins; however, the
gold standard system was a way to change the use of money and increase the value of money as
money could not appreciate its value but gold's value used to appreciate. The gold system led to
a stabilized economy because governments would not print excessive notes, which would cause
inflation. The exchange rates had been stabilized, and currencies from other countries would not
lose value during the gold system, and it improved international trade.
In 1816, the UK left the use of cash and implemented the gold standard system, which
researchers questioned why it took so long before it was established. It was used to retain the
value of coins to prevent inflation in case there would be a large circulation of money at a
specific time. During the gold standard era, the silver espionage was also being used to
differentiate different denominations of currency. The Bank of England decided to give gold and
silver different values because people were still using silver for currency exchange. In 1831, the
Bank of England started rejecting silver coins, and during this time, the value for silver coins
reduced to 10% less than the previous value. This reduction in value was influenced by the wear

Fixed Exchange Rate Systems 6
and tear characteristic of the silver coins, and its weight reduced in time, resulting in a reduction
in value. The wear and tear conditions were discovered by the mint of England as new coins had
different weight compared to the old coins. When the mint gave out new coins, the value they
possessed was 1 million euros, but upon returning to the bank, they noticed that the coins had
depreciated to 600,000 euros (Redish 1990).

US-Led Bretton Woods System

The 1944 Articles of Agreement were used to form the Bretton Woods system during an
international meeting prearranged by the US Treasury at the Mount Washington Hotel in Bretton
Woods, New Hampshire, at the elevation of WWII. This agreement was structured and
implemented by the Bretton Woods Committee, and every year since the founding of the gold
standard in the US, the committee has had anniversaries (Goldenweiser, and Bourneuf, 1944). In
some of these anniversaries, they have discussed on how to bring back the gold standard in the
current international market (Bretton Woods Project 2020). It was recognized to project a novel
global financial command for the post-war, and to evade the apparent difficulties of the old war
in the region: protection, blackjack reductions, capital flows, and unbalanced conversion rates. It
also wanted to deliver a list of financial and monetary constancy to substitute global economic
development and the development of international business.

The scheme was a concession among the fixed exchange rates of the gold standard,
understood as favorable to transforming the system of international business and economics, and
the superior elasticity to which nations had reported in the 1930s to reinstate and uphold local
commercial and monetary constancy. The Articles signified cooperation among the American
plan of Harry Dexter White and the British plan of John Maynard Keynes. The cooperation

Fixed Exchange Rate Systems 7
shaped a modifiable fastener scheme founded on the US dollar exchangeable into gold at $35 per
ounce together with money controls. The IMF, founded on the code of a recognition blending,
whereby associates can draw extra than their novel gold allocations, was recognized to deliver
liberation for provisional present account deficits (Chen 2003).

Based on a report by Bordo (2017), the commercial break down of the Bretton Woods
system had been predicted because the stable development of authorized and sequestered liquid
dollar privileges in the needles of immigrants and the decrease in authorized gold assets, and
particularly US gold assets, persuaded legislators that, excluding some change, the scheme was
on a route headed in the direction of failure. In the early 1960s, exertions to cover apparent
insufficiencies in the process of the scheme presumed the method of finalizing involvements in
the sequestered gold business via the association of the Gold Pool and the founding of numerous
official cash collective methods-the General Arrangements to Borrow (GAB), exchange trades
between dominant banks, and Special Drawing Rights (SDRs) (Garber 1993).

Summary

The introduction of fixed exchange rates in the US and the UK was as a result of
improving trade operations and helped boost the economic infrastructure of the two countries.
This was as a result of recovering the excessive notes that had been printed during WWII, which
was used to pay those who participated in the war (Economic Help 2009). There was an
excessive circulation of money in the market, and the economies of the countries were facing
inflation. Therefore, the governments saw it necessary to retrieve the money by wiser means and
introduced the Gold Standard and Bretton Woods systems in the UK and the US, respectively.
Money was exchanged with the gold of similar value, and foreigners had an easy task of trading
using gold coins as they were the default currencies being used. International trade was also

Fixed Exchange Rate Systems 8
impacted by the use of fixed exchange rates and was the most direct beneficiary of the system.
The Bretton Woods Committee hoped for a better gold standard system that would be taken care
of rules implemented by the current central banks and the World Bank. There were hopes of
creating a more stable system that would make the system the international currency instead of
using the US dollar as the global currency.

The Collapse of the UK-Led Gold Standard System

According to Konkel (2018), during WWI, most of the European countries affiliated to
the gold system had borrowed money from the US and they were forced to payback using cash
instead of using gold. This resulted in a slowing economy in Europe giving birth to the stock
market crash which happened in 1929. After the stock market crash, in 1931, the UK dropped the
system and the sponsoring nation-states also went for the idea. Mass mining of gold was stalled
in 476 AD after the collapse of the Roman Empire. The economic infrastructure of the Gold
Standard System was categorized by the supply of gold in the country. To increase the quantity
of gold, the country was obliged to mine or purchase more gold thus the stability of the economy
was dependent on the supply of gold. The balance of payments caused deficits which resulted in
the outflowing of gold, in that, gold production became limited leading to the inability of the
country to control the supply of money. Consequently, the deficits in the balance of payments
paved the way for deflation. The need for gold increased gold production which in the short run
affected the domestic economy causing a rise in the domestic prices. Consequently, it becomes
difficult to insulate the local economy (Chernyshoff et al. 2009).

The Collapse of the US-Led Bretton Woods System

According to Gavranić and Milеtić (2015, the Bretton Woods system started to face some
problems in the early 1970s where the US faced more deficits as it had to import more as it was

Fixed Exchange Rate Systems 9
exporting. One of the key explanations for the collapse of the Bretton Woods System was
because the US had very few golds which would be used to exchange all the US dollars across
the world. some countries imposed an open-market money policy where the government would
be involved in the buying and selling of economic actors to increase their monetary status which
in turn increases the demand and supply of the currency. During the Vietnam War, the US and its
sponsoring nation-states spent a lot of US dollars. Not enough gold would have been used to
exchange all the dollars with gold and in turn, the Nixon Shock, economic measures used by the
US President, Richard Nixon which would increase inflation, was experienced in 1971. The
sponsoring nation-states later agreed on a Smithsonian Agreement. This agreement resulted in
the devaluing of the US dollar which in turn amplified the worth of supplementary currencies
bringing them closer to the dollar. In 1973, the sponsoring nation-states withdrew from the
Bretton Woods System and the it collapsed in 1973 (Carpenter and Dunung 2012).

Plans Associated with the Renewal of Bretton Woods System
According to IMF, it was obligated to play a role in promoting international monetary
cooperation which would, as a result, lead to facilitating and contributing to employment,
international trade, and economic growth. The IMF would provide loans to the sponsoring
nation-states to allow them to make adjustments to their economic policies and as a result, they
can accommodate the new Bretton Woods System. The main agenda of the new Bretton Woods
system was to improve the economy, challenge climate change, and modify the diverse
economic representations across the sponsoring nation-states. Monetary labor would be divided
among the IMF, World Bank, and the central banks of sponsoring nation-states which would in
turn reform the global aid planning. The financial background of the associated parties is to be
reviewed to establish the constancy of the economy of the sponsoring nation-states. The

Fixed Exchange Rate Systems 10
efficiency of the system is determined by economic management. Consequently, the economic
authority needs to be reformed for improved stability in the fixed exchange rate system (Pickford
2019).

Flaws and Strengths Associated with the Renewal of the Bretton Woods System
Renewing the system is a risky process that would result in much greater consequences in
the economy. The economy of sponsoring nation-states varies from country to country and most
of the countries are unable to level up their economic stability thus failure of the system. The US
would be challenged on how superior their currency is to other currencies in the sponsoring
nation-states. The emerging markets and economies would be thrown down the gauntlet to take
more accountability in improving their economic policies that would suit the requirements of the
World Bank and IMF (Meier 1970). Incremental modifications would be unnecessary for the
sponsoring nation-states, in that, the system would be eroded if the change in management is not
supported by the economic growth. The economic structure in both the IMF, World Bank, and
sponsoring nation-states have to be redefined and restructured. Through this, the current
economic state would divert to an incrementing state as there would be cooperation in improving
and stabilizing the economic infrastructure (Pickford 2019).

Bretton Woods Committee

According to Herold (2016), the Bretton Woods Committee was responsible for
introducing the gold standard in the US. Still, it failed after a financial crisis, and they had to
abandon the gold standard system. Other countries in the European region also left the gold
standard system and went back to using liquid cash. In 2014, Paul Volcker-Chairman of the Fed
passed a motion for restoring the system. In 1944, the Bretton Woods agreement wanted to brand
the US dollar a global currency as it had a straight connection to the worth of gold (Conway,

Fixed Exchange Rate Systems 11
2015). Consequently, Volcker remembered the consequences of the previous gold system and
how it brought unprecedented stability in the exchange rates market. Before pushing on approval
and implementation of the motion, he went and observed how the 2008 global financial crisis
affected the global market, which was as a result of a 35 years currency crisis.
After his observation, Volcker argued that if the gold standard system had been restored,
it would have been more stable since other currencies from central banks across the world would
have supported the motion. Thus, the system would have been more stable, improving the global
market. The renewal of the system would be so strict as a rule governing the system would be
implemented, thus helping the stability of the system. Volcker insisted that the new system
would also take the US dollar from being the global currency and would promote equilibrium in
the global market and promoting a balance of payments; thus, countries would maintain the
reserved sufficient exchange rates (Krause 1970). Volcker also motioned a suggestion that it
would be possible to preserve the constancy of the system if the World Bank and other central
banks would integrate with support of the system. During the Bretton Wood anniversary in 1983,
the former US Treasury officials discussed ways on how to improve the International Financial
Institutions (IFI).
For sustainable development, global challenges need to be controlled effectively.
Reforming the US-led Bretton Woods and the UK led gold systems may serve an important
purpose in controlling global challenges especially dealing with climate change. Climate change
is majorly associated with pollution and several measures have to be put in place to help deal
with issues related to climate change. In the precaution measures, funds have to be set aside to
help in funding projects that will aid in controlling climate change. The Bretton Woods and the
UK led gold standard systems can partner with environmental agencies and organizations and

Fixed Exchange Rate Systems 12
offer financial assistance for starting new projects. For example, to aid in reducing pollution,
companies that recycle household materials can be funded by the two financial systems in the
purchase of new equipment that will increase the efficiency in controlling climate change
(Tamirisa 2008).

Impact of Coronavirus to the Capital Withdrawals

The novel pandemic, coronavirus (COVID-19), has shaken the stability of the
international market has affected the global economy. COVID-19 has also amplified financial
delicateness suggesting the possibility for a debt predicament even a bigger financial breakdown
(Bretton Woods 2020). If the pandemic will be cured anytime soon, the supply chains will be
reinstated and the business environment will be restored, however, the economic level will take
time to improve because of the global debt crisis. According to an analysis conducted by the
United Nations Conference on Trade (UNCT), the debts will cause a major problem in the global
economy and the current financial system. Being the epicenter of COVID-19, the Chinese
economy was highly affected and became vulnerable to the international market. Countries
which trade with china were also affected as some of them suspended imports from china
limiting the supply of goods and services in the nation. The suspension affected the global
economy (Ghosh, 2020).

Conclusion

The fixed exchange rate system proved to be a successful way of promoting trade and
investments for business people; however, it had its losses, which were not predicted. If the US
had cooperated with the European countries that were using the gold standard system, maybe the
system would have succeeded and would not have been affected by the economic crisis. The
mint of England was supposed to make profits using the system; however, greater losses were

Fixed Exchange Rate Systems 13
experienced, thus deteriorating the economic infrastructure of the country. The system only had
greater economic success in the International Market but was of no Good if it would not have
helped the local market.
The excessive printed money after WWII also promoted the failure of the system because
it took a lot of time to recuperate all the money from the people who had participated in the
WWII (Block 1977). The US dollar rose in value and was used as the global currency and had a
greater impact on the currencies of other countries since it had various exchange rates in
different countries across the world. The current state of the central bank from different countries
and the state of the World Bank could have helped the stability of the fixed exchange rate
system; however, it would have taken a lot of changes in the international market even after
being predicted it would be a success in the current market.

Fixed Exchange Rate Systems 14

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