What is Bretton Woods system?

The agreement that connected currency to the price of gold and set up the U.S dollar as the reserve currency in 1944. The agreement ended in 1973 when the U.S dollar was overvalued over gold. Countries were then free to choose any exchange agreement except the price of gold. The system was dissolved in the 1970s.

The Bretton Woods system was established after the 1944 Breton Woods Agreement. It a novel internationally agreed-upon monetary arrangement intended to manage financial relationships among independent nation-states. It created the rules for financial and commercial relationships between the following countries:

  • Canada
  • Western European countries
  • Canada
  • The United States
  • Japan
  • Australia

In July 1944 in Bretton Woods, New Hampshire, 730 delegates representing 44 countries to create a new and efficient foreign exchange program that aimed to end competitive devaluations of currencies and encourage international economic growth. The primary purpose of the Bretton Woods accord was an obligation for each country to implement a financial policy that maintains exchange rates within one percent by tying the currency to gold. The Bretton Woods system was a novel internationally agreed-upon monetary arrangement intended to manage financial relationships among independent states.

Two critical international organizations were born from this agreement–the International Monetary Fund and the World Bank, first known as the International Bank for Reconstruction and Development. The intended role of the IMF was to identify nations that would need global financial support and to monitor exchange rates. The purpose of the World Bank was to oversee funds that were to be available to countries that had been devastated by World Word II.

In August 1971 the U.S. stopped tying its currency to gold, effectively ending the Bretton Woods agreement. This decision trickled through other member nation-states creating a global trend of fiat currencies.

What people ask…

How did Bretton Woods system work?
Why did the Bretton Wood system collapse?
What were the main objectives of the Bretton Woods system?
Was the Bretton Woods system successful?

See Also…

World Bank Group, International Monetary Fund (IMF), Commodity Money, Nixon Shock

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