What is the Bretton Woods Agreement?
The Bretton Woods Agreement, negotiated in July 1944, established a new international monetary system. It was developed by delegates from 44 countries at the United Nations Monetary and Financial Conference held that month in Bretton Woods, N.H. Under the agreement, other currencies were pegged to the value of the U.S. dollar, which, in turn, was pegged to the price of gold. The Bretton Woods system effectively came to an end in the early 1970s, when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency.
How the Bretton Woods Agreement Worked
When the 730 delegates representing 44 countries met in Bretton Woods in July 1944, their principal goals were to create an efficient foreign exchange system, prevent competitive devaluations of currencies, and promote international economic growth.
[Important: The Bretton Woods Agreement created two important organizations—the International Monetary Fund and the World Bank.]
Though the conference itself took place over just three weeks, the preparations for it had been going on for several years. The primary designers of the system were the famous British economist John Maynard Keynes and American Harry Dexter White, the chief international economist of the U.S. Treasury Department. Keynes’ hope was to establish a powerful global central bank to be called the Clearing Union and issue a new international reserve currency called the bancor. White’s plan envisioned a more modest lending fund and a greater role for the U.S. dollar, rather than the creation of a new currency. In the end, the adopted plan took ideas from both, leaning more toward White’s plan.
- The Bretton Woods Agreement created a new international monetary system that lasted from the mid-1940s to the early 1970s.
- The agreement pegged the value of other nations' currencies to the U.S. dollar, which, in turn, was pegged to the price of gold, fixed at $35 an ounce.
- With collapse of the Bretton Woods Agreement, countries could choose other ways to set the value of their currencies, including letting market forces decide.
It wasn't until 1958 that 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 set the price of gold at $35 an ounce. Keeping the price of gold fixed and adjusting the supply of dollars as needed was the responsibility of the United States.
The Bretton Woods Agreement also created two important institutions: the International Monetary Fund (IMF) and the World Bank Group, which were formally introduced in December 1945. The purpose of he IMF was to monitor exchange rates and lend reserve currency to nations that needed it to support their currencies and settle their debts. The World Bank Group, initially called the International Bank for Reconstruction and Development, was established to provide assistance to countries that had been physically and financially devastated by World War II.
In 1971, concerned that the U.S. gold supply was no longer adequate to cover the number of dollars in circulation, President Richard M. Nixon declared a temporary suspension of the dollar’s convertibility into gold. By 1973 the Bretton Woods system had collapsed. Countries were then free to choose any exchange arrangement for their currency, except pegging its value to the price of gold. They could, for example, link its value to another country's currency or a basket of currencies or simply let it float freely and allow market forces to determine its value relative to other countries' currencies.
The Bretton Woods Agreement remains a significant event in world financial history. Although it came to an end nearly half a century ago, the two organizations it created—the International Monetary Fund and the World Bank Group—continue to this day. Having helped rebuild Europe in the aftermath of World War II, the World Bank's work now focuses on reducing poverty and otherwise assisting developing countries around the world. Each of these organizations has grown to include 189 member countries.