GLOBAL FINANCE

subsequently provided aid for economic development, and the IMF
serves as a lender of last resort for central banks in countries that are
experiencing difficulties with exchange and balance of payments; its
principal purpose is to help keep the system relatively stable. During the
1990s, the IMF has played a significant role in assisting countries such as
Russia, Brazil, Mexico, Thailand, and South Korea during financial crises.

19451971

For nearly two decades, the dollar-based system worked well, as
countries worldwide struggled to rebuild their economies and world
trade grew rapidly.

If a country wished to change its exchange rate, it had to make a

formal announcement that it was revaluing, or devaluing, its currency.
In 1949, 28 countries devalued their currencies.

Bretton Woods set the stage for the rise of socialism. Countries

were able to pay for the huge cost of creating welfare states by issuing
bonds, which in turn encouraged inflation. As world trade mushroomed
and the economic balance between countries began to change, vast
funds grew up which were highly mobile and could be switched from
one country to another without the permission of governments. The
demand for gold was high, and the official price of $33 to an ounce
was undermined by the creation of secondary markets, where gold was
traded at much higher prices.

Large dollar funds developed outside the US, which created a lack

of confidence in the dollar/gold value. In 1971, the US gold reserves
were reduced by a third in the first seven months and President
Nixon suspended official gold transactions. This was, in effect, a
unilateral decision to abandon the Bretton Woods system and the
world's currencies were allowed to ``float'' in relation to the dollar.
By the end of the year, most of the major trading currencies had
appreciated against the dollar. A second dollar devaluation of the dollar
occurred in 1973 when it fell to $42.22 per ounce, a drop of 10%. By
June 1973 it had fallen by another 10%.

1973today

In a floating exchange rate system, no currency is formally linked to any
other, or to gold. The rate at which you can exchange one currency