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What is the Bretton Woods Agreement?


The term 'Bretton Woods Agreement' is included in the Economics edition of the Financial Dictionary. It's available on mazon in Kindle or Paperback version. See more details here.

The Bretton Woods agreement represents the outcomes of a three week conference that the United Nations held to set up a new monetary system at the end of World War II. The U.N. organized this meeting called the United Nations Monetary and Financial Conference for July 1 to July 22 of 1944. They held it at Bretton Woods in New Jersey, which gave its name to the deal that ultimately resulted from the conference. The agreement itself proved to be a famed framework that set up a new exchange rate system.

Three significant outcomes resulted from this conference. Two of them are still a major part of the world financial system today. First the group agreed on the Bretton Woods Agreement which set up a new foreign exchange system. Besides this, the United Nations authorized forming the International Monetary Fund and also the International Bank for Reconstruction and Development.

A new foreign exchange system had been called for in the wake of World War II. The international economic system had been destroyed by the already more than five years of fierce global fighting. Allied nations decided even before they successfully concluded the war they needed to come up with a new currency and a plan to rebuild the devastated nations and world economy.

The conference saw 730 delegates attend from all of the 44 Allied countries. They met at the Mount Washington Hotel and spent three weeks coming up with the new currency system and financial institutions. On the last day of the conference on July 22, they signed the Bretton Woods agreement.

The new system rested on several key proposals. One of these involved currency convertibility. All currencies had to be converted for trade purposes and to settle current account transactions. The U.S. sat in a position of commanding strength as it controlled fully two thirds of all the gold in the world.

This gave it the basis to call for a new system of pegging foreign exchange to both gold and the U.S. Dollar. The final agreement had the currencies pegged to gold, but more countries added the U.S. dollar as it became clearer over the subsequent years that it was the world’s new reserve currency.

Naturally not everyone felt satisfied with these outcomes to the agreement. Soviet Union (Russia and surrounding republics) representatives came to the conference and participated. They accused the institutions that the conference had created of being mere branches of Wall Street.

As a result, they refused to ratify the final important agreements. Many nations including those of Western Europe, South America, Canada, Australia, the U.S., and eventually Japan after the war did sign on to the agreements and these new institutions began operating in 1945 after enough nations ratified them.

Meanwhile, countries began to exchange their currencies at rates based on the set quantity of gold they held. Whenever an imbalance of payments would occur as a result of the artificial currency pegging system, the International Monetary Fund had the powers to intervene and adjust as necessary. This encouraged foreign trade and global economic growth. It caused expansion in the majority of the developed world following the war.

Besides the International Monetary Fund, the conference also created the International Bank for Reconstruction and Development that eventually evolved into the World Bank. These two organizations still thrive today and promote financial stability and international trade. They encourage worldwide monetary cooperation and economic growth that is sustainable. They also help to reduce poverty and push for higher employment.

Europe and other damaged parts of the world engaged in a long era of rebuilding and development after the war ended with the aid of these institutions. The Bretton Woods system itself became abandoned in 1971 when the U.S. unilaterally left the gold standard. It was replaced by today’s free floating currency exchange system.

The term 'Bretton Woods Agreement' is included in the Economics edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.