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Bretton Woods Agreement

The creation of a fixed currency exchange rate pegged to the gold standard

What is the Bretton Woods Agreement?

The Bretton Woods Agreement was reached in a 1944 summit held in New Hampshire, USA on a site by the same name. The agreement was reached by 730 delegates, who were the representatives of the 44 allied nations that attended the summit. The delegates, within the agreement, used the gold standard to create a fixed currency exchange rate.

 

Bretton Woods Agreement

 

The agreement also facilitated the creation of immensely important structures in the financial world: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which is known today as the World Bank.

 

Summary: 

  • The Bretton Woods Agreement established a system through which a fixed currency exchange rate could be created using gold as the universal standard.
  • The agreement involved representatives from 44 nations and brought about the creation of the International Monetary Fund (IMF) and the World Bank.
  • The fixed currency exchange rate system eventually failed; however, it provided much-needed stability at the time of its creation.

 

History and Functionality of the Bretton Woods Agreement

As mentioned above, 44 allied nations met in Bretton Woods, NH in 1944 for the United Nations Monetary and Financial Conference. At that time, the world economy was failing, and the allied nations sought to meet to discuss and find a solution for the prevailing issues that plagued currency exchange. The summit was also looking for policies and regulations that would maximize the potential benefits and profit that could be derived from the global trading system. What transpired at the conference were the Bretton Woods Agreement and the Bretton Woods System.

The  Bretton Woods System is a set of unified rules and policies that provided the framework necessary to create fixed international currency exchange rates. Essentially, the agreement called for the newly created IMF to determine the fixed rate of exchange for currencies around the world. Every represented country assumed the responsibility of upholding the exchange rate, with incredibly narrow margins above and below. Countries struggling to stay within the window of the fixed exchange rate could petition the IMF for a rate adjustment, which all allied countries would then be responsible for following.

The system was depended on and was used heavily until the beginning of the 1970s.

 

The Collapse of the Bretton Woods System

Backing currency by the gold standard started to become a serious problem throughout the late 1960s. By 1971, the issue was so bad, then-US President Richard Nixon gave notification that the ability to convert the dollar to gold was being suspended “temporarily.” The move was inevitably the final straw for the system and the agreement that outlined it.

Still, there were several attempts by representatives, financial leaders, and governmental bodies to revive the system and keep the currency exchange rate fixed. However, by 1973, nearly all major currencies had begun to float contradictorily towards one another, and the entire system eventually collapsed.

 

Significance of the Bretton Woods Agreement

Despite falling apart, the Bretton Woods summit and agreement are responsible for a number of notably important aspects in the financial world. First and foremost is the creation of the IMF and the World Bank. Both institutions remain vital to the global economy to this day.

On a larger scale, however, the agreement unified 44 nations from around the world, bringing them together to solve a growing global crisis. It helped to strengthen the overall economy and maximize international trade profit.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • 5-Step Guide to Winning Forex Trading
  • Fixed vs. Pegged Currency Rates
  • Trade-Weighted Exchange Rate
  • USD/CAD Currency Cross

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