What was the Bretton Woods system?
Bretton Woods was an international monetary system that emerged after the end of World War II. To cope with a post-war global economy, a fixed exchange rate regime was established in which the US dollar was pegged to the price of gold.
A brief history of Bretton Woods
As Allied forces believed the war was coming to an end, representatives from the United States and 43 other nations met at a hotel in Bretton Woods, New Hampshire in July 1944 to create an international monetary system that would provide stability. of the world economy in the aftermath of the war. The meeting was officially known as the United Nations Monetary and Financial Conference.
Since 1941, the United States and the United Kingdom had developed a plan to strengthen economic cooperation and promote trade between nations, learning from their experiences during the Great Depressionduring which some nations had implemented high tariffs and some currencies had devalued.
The agreements reached at Bretton Woods paved the way for the creation of organizations that would pave the way for global financial and economic cooperation. The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) – which later became the World Bank – were established in 1945 and shortly thereafter were commissioned for post-war activities. The General Agreement on Tariffs and Trade (GATT), which later paved the way for the creation of the World Trade Organization (WTO), was created in 1947 to reduce tariffs and trade barriers.
The IMF has helped oversee the fixed exchange rate regime and bolster countries’ reserves in the event of a deficit.
How did the Bretton Woods system change the world?
One of the initiatives of the meeting was to fix fixed exchange rates as a means of avoiding disparities and disruptions in world trade. The US dollar was pegged to gold – convertible at $35 an ounce – and other countries had fixed, but adjustable, exchange rates against the dollar.
This restored what is known as the gold standard, in which a currency is backed by and can be converted into gold. The gold standard had been halted as the Great Depression set in.
The system introduced a new world economic order, with Western nations leading and the US dollar becoming the world’s reserve currency. In the early 1960s, the United States inflation and unemployment rates were below post-war levels.
The world economy adapted to this new monetary system, but it limited a country’s ability to expand monetary policiesincluding increasing the money supply, which could lead to further growth in its economy.
How did the Bretton Woods system end?
The idea behind Bretton Woods was to promote economic prosperity around the world, and although the world economy stabilized in the early 1960s, the system began to break down in the late 1960s when the Inflation began to climb in the United States, in part due to the rising costs of social welfare programs and the war in Vietnam. The US government began to run into budget and trade deficits, leading to speculation that the value of the dollar was worth less than its fixed rate and that the nation did not have enough gold to back the currency.
In 1971, President Nixon suspended the peg of the dollar to gold (a move that would later become permanent) and the currency was soon devalued. This effectively paved the way for the end of the Bretton Woods system and allowed the dollar and other currencies to trade freely against each other. A floating exchange rate system was adopted in 1973 and the IMF formally recognized floating rates in 1976, ending the Bretton Woods system.
What is the legacy of Bretton Woods?
The end of the Bretton Woods system brought about a new monetary system in which a floating market is the norm, and the United States and other countries operate with fiat currencies. With the elimination of the gold standard, the dollar became the currency of choice for the international reserves of many central banks.
Years after its creation, the IMF has served as a lender of last resort for nations in need of help after their economies have failed. The IBRD first served to rebuild the economies of post-war Europe, and later, as a World Bank, it helped developing countries with their economies.