Bretton Woods System Definition Explained Collapse Features

Bretton Woods System Definition

It aimed to bring uniformity to global exchange rates. It was based on the gold standard. This system regulated international trade between 44 countries and remained in practice from 1945 to 1973. The system collapsed because the US dollar could not hold its value.

Key Takeaways

The Bretton Woods system was an international monetary arrangement. Currencies belonging to allied nations were ascertained against the value of the US dollar. The US dollar value was fixed against gold prices.Exchange rate stability and regulation of global payment and settlement post-World War II were the objectives of the Bretton Woods agreement.On July 01, 1944, 730 delegates from 44 countries attended the United Nations Monetary and Financial Conference. It was held in Bretton Woods, New Hampshire.The Bretton Woods Agreement led to the formation of the Bretton Woods Institutions—The World Bank and the International Monetary Fund (IMF).

Bretton Woods System & Agreement Explained

The Bretton Woods system was developed as an international monetary exchange arrangement. The system fixed currencies belonging to 44 countries against the value of the US dollar. The US dollar itself was pegged against the price of gold. Initially, one ounce of gold was worth $35. This system was followed between 1945 and 1973.

On July 01, 1944, 730 representatives from 44 countries attended the United Nations Monetary and Financial Conference. The conference was held at Bretton Woods, New Hampshire. Providing consent to a new international monetary system was the purpose of this conference. It was a collective strategy to recover from the impact of World War II.

The representatives wanted to revitalize international trade by standardizing exchange rates across the globe. The allied countries duly accepted the Bretton Woods Agreement. Canada, Mexico, Russia, Brazil, China, India, Netherlands, Poland, Belgium, Chile, and Czechoslovakia were the active member nations.

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In December 1945, the Bretton Woods Agreement led to the formation of two Bretton Woods Institutions—The International Bank for Reconstruction and Development and The International Monetary Fund (IMF). The International Bank for Reconstruction and Development is the lending arm of the World Bank. These organizations hold great significance on the global front—they facilitate international trade and finance nations.

The World Bank was established to help nations recover from World War II. The International Monetary Fund regulates global exchange rates. The IMF also facilitates economic cooperation internationally.

Features

Bretton Woods aimed to fix problems of the standardized monetary valuation. Characteristics of Bretton Woods are as follows:

Stabilizing international exchange rates was the primary objective of Bretton Woods.It was an attempt to help nations recover economically post-World War II.Bretton Woods was adopted by 44 countries—they agreed to peg their currencies against the USD.The US Dollar was pegged against the price of gold—fixed at $35 per ounce of gold.The US Dollar was considered—an international reserve currency.It provided a fixed exchange rate. However, this rate was adjustable.It standardized international monetary payments—by facilitating currency conversion. Post Bretton Woods, allied countries did not have any control over the international payment and settlement system.

Collapse of Bretton Woods

Between 1968 to 1973, Bretton Woods was on its way out. US President Richard M. Nixon ceased USD-gold convertibility. In the 1960s, the US dollar struggled to hold its value.

Nixon noticed that the US was short on gold. US’s Gold reserves could not meet the value of dollars in circulation. Economists’ attempts to revitalize Bretton Woods failed. In 1973, the Bretton Woods agreement collapsed—it ceased to exist.

The Bretton Woods arrangement failed due to the following reasons

The system depleted US gold reserves—as more and more US dollars were issued to meet international demand.In the 1960s post-Vietnam War, the US struggled with inflation. Its current account balance was low; thus, the government decided to call off this system.Moreover, this system lacked a proper adjustment mechanism for the balance of payments.There was a deficit balance of payment in the US. Meanwhile, there was a huge demand for the US dollar worldwide, resulting in liquidity issues.The US dollar was the international reserve currency. This caused seigniorage issues for many other nations. Other nations believed that this system provided an undue advantage to the US. USD yielded a higher rate of return when sold internationally and lesser when sold domestically.Finally, in response to inflation and the current account balance deficit, the government declared restrictions on gold-dollar conversions.

Post Bretton Woods breakdown, countries did not need to peg currencies against USD or gold prices. The coins were free to float and fluctuated with the market demand. Central banks regulated the supply of money in their respective countries.

However, as a consequence of the Bretton Woods collapse, the world witnessed oil shocks. Countries absorbed expensive oil prices with flexible exchange rates.