On This Day In Finance: July 20 - Congress Approves The Bretton Woods Agreement

By Investopedia Staff | July 16, 2009 AAA

On July 20, 1945, the United States Congress approved the signing of the Bretton Woods Agreement. The approval by Congress was the final step in America's inclusion in what was one of the first examples of completely negotiated monetary policy designed to govern such relations between the world's nations.

With World War II still under way, delegates from all the members of the Allied Nations met in Bretton Woods, New Hampshire to devise a system to help unify the world's monetary system while aiding in the re-building of Europe and Asia as a result of the war. During those meetings the planners implemented a pegged exchange rate system, in which all participating nations would peg their currency to the gold standard and maintain that exchange rate within 1% of parity.

The pegged system, known as the Bretton Woods System, was designed to take advantage of both fixed and floating exchange rates while attempting to eliminate the disadvantages of both policies. The system used the U.S. dollar as the reserve currency that would peg its value to gold, and all other currencies would peg their value to the dollar.

The Bretton Woods Agreement also led to the establishment of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is a part of the World Bank Group. The mandate of these organizations was to help rebuild the world's monetary systems and the monetary systems of individual countries in the wake of the damage caused by World War II.

Over the next 25 years, the system began to deteriorate due to many factors, including the decline of the U.S. dollar, an increased global presence by Japan and many European nations, and the Vietnam War. The Bretton Woods system eventually broke down in the early 1970s when President Richard Nixon unilaterally imposed wage and price controls, import surcharges, and made the dollar inconvertible to gold. These actions led to outrage in the global currency market and marked the beginning of the end for the Bretton Woods System due to what is now known as "Nixon shock". (To learn more on this topic, see What was the Gold Reserve Act? and What Is The International Monetary Fund?)

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