Foreign Exchange rates and Bretton Woods.

Tata Motors, on the second of February, posted a surprising loss of Rs. 263 Crore of which an amount of 226 Crore is being attributed to notional foreign exchange losses.
When the price of crude oil was USD 120 per barrel, there was a considerable demand from the PSU oil majors for the increase in the price of petrol, diesel and LPG. The government followed suit by increasing the prices thereby fuelling inflation. But when the price of crude nosedived to USD 44, it took some time for the government before announcing a cut in the price of petrol and diesel. This delay is again attributed to the volatile nature of the currency market in terms of the USD.
When the rupee was going strong against the USD reaching an exchange rate of 39-40 Rs per dollar, there was again a cry from the industry, and this time it was the blue eyed boys of the Indian IT industry who were in the line of fire.
The impact of the fluctuations in US dollar and its impact on the common man, gave rise to a very fundamental question in my mind. Out of all the currencies in the world, why the USD was chosen as the base currency for trade. I looked at the economic history of the world and came across this interesting agreement, which changed the economic course of the world called Bretton Woods Agreement.
To understand where it all started, we have to go back to the 1930’s, yes the time of The Great Depression, when the countries where separated into different blocs and were following a policy called as “Beggar thy Neighbor” policy. The policy was simple, devaluate your currency so that your exports can increase than that of your neighbor thereby improving the balance of payments. Most importantly during this period gold was used as the base for the trade augmented by British pound so you devaluate your currency with respect to gold or British pound.
This policy improved the balance of payments at the cost of the local demand leading to a deflationary spiral for the countries trying to reduce their money supply. This spiral and the cost of war lead to the origin of the Bretton Woods system. Delegation from 44 countries, took part in deciding on the important aspects of the agreement leading to the formation of the IBRD (World Bank) and IMF.
It was also decided that all the currency rates will be fixed on par with that of Gold augmented by US dollar. In turn US dollar was fixed in parity with gold (35 Ounce per US Dollar) and it was agreed that dollars can be exchanged for gold anytime by the international community.
It was also decided that room for a maximum of 1% volatility in the currency rates will be considered nominal. Any sudden volatile movements in the currency rates will be financed by the IMF thereby holding the exchange rates more or less constant.

So the basic reasons on how USD was chosen as the base currency and the failure of the Bretton-Woods are:
1) US was emerging as the supreme economic power, after the second world war ravished much of the European superpowers like Britain and France. US also provided a loan of 3.8 Billion and 1 Billion dollars to Britain and France respectively resulting in the super powers holding dollar reserves.
2) US also promised an anytime return of gold in return to the Dollar reserves which are being held by France, Britain and the other countries. (At a rate of 35 ounce per dollar).
3) The production of gold was minimal to support the international trade with gold as the base currency. And most importantly much of the world’s Gold produce was from Soviet Russia. So if gold is used as the base currency Russia will be the beneficiary. So most of the war torn countries were given dollar aids further making them hold dollar reserves
4) In 1971, when it was announced that US will not trade gold for dollars, the other countries were left with no option other than to hold on with the dollar reserves thereby becoming a victim of the dollar fluctuations.
5) Bretton woods system in terms of fixed foreign exchange rates, ceased to exist in the backdrop of the US refusal on the exchange of gold.

So the next time you pay extra money for a liter of petrol, or lose some money due to the falling Tata motor prices, it is due to the failure of the Bretton Woods system and also the insistence of the usage of USD for foreign commercial transactions.
Everyone was happy as long as US economy was doing well without much currency fluctuations. But the situation now demands some basic questions on the various aspects of the economic transactions and also a CHANGE is required to avoid the spiraling down of the world economy due to its dependence on the USD.