The Bretton Woods Agreement, signed in 1944, is an international agreement between the Allied powers at the end of World War II. Named after the location of the conference, Bretton Woods, New Hampshire, the agreement established the monetary order that would govern the global economy for the next several decades.
At its core, the Bretton Woods Agreement created a system of fixed exchange rates, where each country`s currency would be pegged to the US dollar. The US dollar, in turn, was fixed to the price of gold, at a rate of $35 per ounce. This system ensured stability in global trade, as it provided a fixed basis for exchange rates and eliminated the uncertainty associated with fluctuating currency valuations.
The agreement established two key institutions to oversee global financial stability: the International Monetary Fund (IMF) and the World Bank. The IMF was created to provide loans and assistance to countries experiencing financial difficulties, while the World Bank was established to fund development projects in developing countries. Both institutions are still very much active and play critical roles in maintaining global economic stability.
The Bretton Woods Agreement remained in effect until 1971, when the US government decided to end the convertibility of the US dollar to gold. This led to the collapse of the fixed exchange rate system and the adoption of a floating exchange rate system, where exchange rates are determined by market forces.
Despite its eventual demise, the Bretton Woods Agreement remains an important milestone in the history of global economics. It provided a framework for international cooperation and helped promote stability in a time of great turmoil and uncertainty. Its legacy lives on in the institutions it created, which continue to play important roles in the global economy.