Bretton Woods System

Bretton Woods System explained by professional forex trading experts the “ForexSQ” FX trading team, All you need to know about what is Bretton Woods Agreements System .

What is Bretton Woods Agreement

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western Europe, Australia, and Japan after the 1944 Bretton-Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate (± 1 percent) by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments. Also, there was a need to address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies as well.

Preparing to rebuild the international economic system while World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference. The delegates deliberated during 1–22 July 1944, and signed the Bretton Woods agreement on its final day. Setting up a system of rules, institutions, and procedures to regulate the international monetary system, these accords established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. The United States, which controlled two thirds of the world’s gold, insisted that the Bretton Woods system rest on both gold and the US dollar. Soviet representatives attended the conference but later declined to ratify the final agreements, charging that the institutions they had created were “branches of Wall Street”. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.

On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency. This action, referred to as the Nixon shock, created the situation in which the US dollar became a reserve currency used by many states. At the same time, many fixed currencies (such as the pound sterling, for example) also became free-floating.

What is Bretton Woods Systsem

The Bretton Woods system established a new monetary order. The name comes from the location of the meeting where the agreements were drawn up, Bretton Woods, New Hampshire. This meeting took place in July 1944. The Bretton Woods System was an attempt to avoid worldwide economic disasters, such as The Great Depression that began in 1929 and that continued for about ten years.

Bretton Woods and the Gold Standard

Bretton Woods also established the U.S. Dollar as the world’s reserve currency. From 1944 until 1971, all major world currencies were pegged to the dollar, while the dollar itself was pegged to gold, a relationship popularly known as “the Gold Standard.”

Alarmed by the outflows of gold from the U.S., however, Richard Nixon abandoned the Gold Standard in 1971. From that year forward, the world’s currencies were all floating, with no one currency having a fixed value — a circumstance that led to the establishment of foreign exchange markets: the forex.

In one obvious way, it ultimately did not: since the abandonment of the gold standard, all world currencies float against one another — a situation inherently less stable than the preeminence of the U.S. Dollar from 1944 until 1971.

Aside from the abandonment of the establishment of the Bretton Woods-initiated gold standard, there is no clear answer to the question.

Both the World Bank and the IMF exist today — itself a remarkable achievement in a volatile world — but they are widely criticized.

These criticisms center around the procedures and approaches taken by both institutions. The shared purpose of the IMF and the World Bank can be seen as helping the world’s weakest economies and lessening the gap between affluence and poverty worldwide. Few commentators object to these goals. But both institutions have been accused of operating in ways that not only do not achieve these goals, but that worsen the conditions of the economies they ostensibly aim to improve. The World Bank, for instance, has often attached conditions to the loans extended to countries in severe need of an economic helping hand that its critics maintain have increased unemployment and destabilized national economies. The economic prescriptions (and loan requirements) offered by both institutions have often been seen as for being insensitive to a debtor country’s individual social and economic circumstances. The relationship between the IMF and World Bank and Greece is one example often cited by the institutions’ critics. Whether the IMF and World Bank actually caused the increase in Greek poverty during the period beginning in 2008, there is little doubt that as of 2016, the economic situation in Greece has not improved.

There have been a systemic bank and business failures and unprecedented unemployment.

No doubt some of the criticism is deserved. Beyond that, however, is another even larger issue: is it morally defensible for the richest countries in the world to assume the right to arrange the affairs of smaller countries by effectively depriving them of their economic autonomy? That is a question floating above all others when examining the consequences of the Britton Woods Agreements and the institutions it inaugurated.