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CandleFocus Glossary Editor
The Bretton Woods Agreement and System was a groundbreaking international financial agreement that was determined in July 1944 during the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire. It created a coalition of 44 allied nations with the aim of establishing an international monetary system to foster global economic stabilization after World War II.
Under the Agreement, each participant nation agreed to peg their currency to the U.S. dollar, which was in turn pegged to the price of gold. This created a “hard” currency with a fixed exchange rate, which prevented the risks associated with fluctuating exchange rates that hindered international trade and investment. By linking the value of currencies to the U.S. currency, the Bretton Woods System managed to restore some much-needed faith in the post-war global economy.
The Bretton Woods Agreement also established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (now known as the World Bank) to monitor and stabilize the global economy through a managed international exchange system, as well as provide loans for poverty alleviation and development.
Although the Bretton Woods System started to show signs of stress in the 1960s, it did not collapse until 1971 when President Richard Nixon and the U.S. delinked the value of the U.S. dollar from the price of gold, a move known as the ‘Nixon Shock’. The aftermath of this move saw a collapse of the Bretton Woods System and the emergence of the current ‘floating exchange rate’ system.
Despite the collapse of the Bretton Woods System, its legacy remains evident in the contemporary international finance and economics system. The nature of the Agreement, while no longer enforced, supported the development of the International Monetary Fund and World Bank, who still maintain today’s international currency exchange and financial stability. The Bretton Woods Agreement can therefore be seen as the precursor of the global financial architecture which dominates global economics today.
Under the Agreement, each participant nation agreed to peg their currency to the U.S. dollar, which was in turn pegged to the price of gold. This created a “hard” currency with a fixed exchange rate, which prevented the risks associated with fluctuating exchange rates that hindered international trade and investment. By linking the value of currencies to the U.S. currency, the Bretton Woods System managed to restore some much-needed faith in the post-war global economy.
The Bretton Woods Agreement also established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (now known as the World Bank) to monitor and stabilize the global economy through a managed international exchange system, as well as provide loans for poverty alleviation and development.
Although the Bretton Woods System started to show signs of stress in the 1960s, it did not collapse until 1971 when President Richard Nixon and the U.S. delinked the value of the U.S. dollar from the price of gold, a move known as the ‘Nixon Shock’. The aftermath of this move saw a collapse of the Bretton Woods System and the emergence of the current ‘floating exchange rate’ system.
Despite the collapse of the Bretton Woods System, its legacy remains evident in the contemporary international finance and economics system. The nature of the Agreement, while no longer enforced, supported the development of the International Monetary Fund and World Bank, who still maintain today’s international currency exchange and financial stability. The Bretton Woods Agreement can therefore be seen as the precursor of the global financial architecture which dominates global economics today.