The Bretton Woods Agreement is the landmark system for monetary and exchange rate management established in 1944. It was developed at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire, from July 1 to July 22, 1944. Under the agreement, currencies were pegged to the price of gold, and the U.S. dollar was seen as a reserve currency linked to the price of gold.
BREAKING DOWN Bretton Woods Agreement
The Bretton Woods Agreement remains an important part of world financial history. The creation of the International Monetary Fund (IMF) and valuation of gold and foreign exchange rates remain important to this day. The agreement also made currencies convertible for trade and other current account transactions. The strong value of the U.S. dollar eventually led to the collapse of this system after more than 20 years.
U.S. President Richard Nixon called for a suspension of the Bretton Woods Agreement in 1971 when it collapsed. The agreement was dissolved between 1968 and 1973. In 1973, the agreement officially ended.
Setting Up the Bretton Woods Agreement
Delegates from 44 countries met to create a new international monetary system. The main goals of the meeting of the 730 delegates were to ensure a foreign exchange rate system, prevent competitive devaluations and promote economic growth.
Preparation for this event took two years. The primary designers of the system were John Maynard Keynes, of the United Kingdom, and Harry Dexter White, the chief international economist of the Treasury Department. Keynes’ plan was to establish a global central bank called the Clearing Union. White’s plan limited the powers and resources of each country. In the end, the adopted plan took ideals from both, leaning more toward White’s plan.
In 1958, the Bretton Woods system became fully functional. This happened as currencies became convertible. In order to convert currencies, countries settled their international balances in dollars, while U.S. dollars were fully convertible to gold. The exchange rate applied at the time was $35/ounce. Keeping the price of gold fixed and adjusting the supply of dollars was the responsibility of the United States.
Creation of Two New Institutions
One of the major items that came about from the Bretton Woods Agreement was the creation of the IMF. It was created to monitor exchange rates and lend reserve currencies to nations. It was formally introduced in December 1945 when 29 members signed the Articles of Agreement. The Bretton Woods Agreement also created the World Bank Group, which was set up to provide financial assistance for countries during the reconstruction post World War I phase.
End of Bretton Woods Agreement
The Bretton Woods Agreement was dissolved between 1968 and 1973. An overvaluation of the U.S. dollar led to concerns over the exchange rates and their tie to the price of gold. President Richard Nixon called for a temporary suspension of the dollar’s convertibility. Countries were then free to choose any exchange agreement, except the price of gold. In 1973, foreign governments let currencies float, which put an end to the Bretton Woods system.