Bretton Woods Agreement and System

Definition

The Bretton Woods Agreement (July 1944) established an international monetary system in which the U.S. dollar was pegged to gold and other currencies were pegged to the dollar. It created fixed exchange-rate rules and founded two lasting institutions: the International Monetary Fund (IMF) and the World Bank.

Historical background

Delegates from 44 countries met in Bretton Woods, New Hampshire, to design a stable post–World War II monetary order. The main goals were to:
* Create an efficient foreign-exchange system
* Prevent competitive currency devaluations
* Promote international trade and economic growth

Key designers included John Maynard Keynes (who proposed a global clearing union and a new reserve currency, the bancor) and Harry Dexter White (who favored a system built around the U.S. dollar). The adopted framework leaned toward White’s vision.

How the system worked

• The U.S. dollar was convertible into gold at a fixed rate ($35 per ounce).
• Other participating currencies were fixed (pegged) to the dollar, with limited permitted fluctuations (typically within 1%).
• Countries maintained their pegs by buying or selling dollars and intervening in foreign-exchange markets.
• The IMF provided oversight and short-term financial assistance to help countries maintain exchange-rate stability.
• The World Bank (initially the International Bank for Reconstruction and Development) provided longer-term loans and grants for reconstruction and development.

Full operational implementation evolved through the late 1940s and into the 1950s.

Benefits

• Reduced exchange-rate volatility, which facilitated international trade and investment.
• Greater predictability for cross-border loans and grants, aiding postwar reconstruction and development.
• Creation of multilateral institutions (IMF and World Bank) to monitor and support the international financial system.

The IMF and World Bank

• IMF: Monitors exchange rates, provides short-term financial support, and promotes international monetary cooperation.
• World Bank: Finances reconstruction and development projects through loans and grants to governments.

Both institutions outlasted the Bretton Woods fixed-rate system and continue to play central roles in global finance.

Collapse of the Bretton Woods system

By the 1960s, rising U.S. dollar liabilities and persistent balance-of-payments deficits undermined confidence in the dollar–gold link. In August 1971, facing runs on U.S. gold reserves, the U.S. suspended dollar convertibility into gold (the “Nixon shock”). The fixed-exchange-rate system effectively ended by 1973, when major currencies moved to floating or alternative exchange arrangements.

After the collapse, countries could:
* Float their currencies and let market forces determine rates
* Peg to another currency or a basket of currencies
* Adopt other managed exchange-rate regimes

Key distinctions

• Gold standard vs. Bretton Woods: The gold standard ties currencies directly to gold. Bretton Woods tied the dollar to gold and other currencies to the dollar—an indirect gold link mediated by the U.S. dollar.
• What backs the U.S. dollar today: Modern fiat dollars are not backed by gold; their value rests on government authority and economic fundamentals.

Legacy and significance

Although the fixed-rate Bretton Woods system lasted only a few decades, it had lasting effects:
* Established the IMF and World Bank, which remain central to international finance.
* Created a period of relatively stable exchange rates that supported postwar growth and reconstruction.
* Influenced later debates on international monetary cooperation and exchange-rate regimes.

Bottom line

Bretton Woods created a U.S.-dollar-centered international monetary order and two enduring institutions (IMF and World Bank). The system provided stability and aided postwar recovery but collapsed in the early 1970s when the dollar–gold convertibility became unsustainable. Its institutional legacy continues to shape global finance.