Bretton Woods System
The Bretton Woods system was the international monetary order agreed in 1944, under which currencies were fixed to the US dollar and the dollar was convertible into gold at US$35 an ounce. It created the IMF and the World Bank and ended in 1971.
Also called: Bretton Woods · Bretton Woods agreement · Bretton Woods Conference
Delegates from 44 Allied nations met at Bretton Woods, New Hampshire, in July 1944 to design a post-war system that would avoid the competitive devaluations and currency chaos of the 1930s. Member currencies were pegged to the dollar within narrow margins and could be adjusted only with the agreement of the newly created International Monetary Fund.
The design relied on the United States holding enough gold to honour the dollar's convertibility. As dollars accumulated abroad through the 1960s, foreign claims came to exceed US gold. The SDR was created in 1969 to relieve the pressure. In August 1971 the United States suspended gold convertibility, and by 1973 the major currencies were floating.
The institutions outlasted the system. The dollar remained the main reserve currency without a gold link, and the move to floating rates produced the modern foreign exchange market, with the settlement risks that came with it.
See also
- International Monetary FundThe International Monetary Fund (IMF) is the international organisation of more than 190 countries that monitors the global monetary system, lends to members that cannot meet their external payments, and issues the Special Drawing Right.
- Special Drawing RightThe Special Drawing Right (SDR) is an international reserve asset created by the IMF. It is not a currency and cannot be spent directly; it is a claim that a member country can exchange for US dollars, euros, yen, sterling or renminbi.
- Reserve CurrencyA reserve currency is a currency that central banks hold in large amounts as part of their foreign exchange reserves and that is widely used to price trade, issue debt and settle international payments. The US dollar is the dominant one.
- Currency PegA currency peg is a policy under which a central bank fixes its currency's exchange rate to another currency or a basket and stands ready to buy and sell at that rate. The peg lasts only as long as the reserves and credibility behind it.
- EurodollarA Eurodollar is a US dollar deposit held at a bank outside the United States, or at an offshore unit of a US bank. Eurodollars are created by bank lending abroad and sit largely beyond US banking regulation; they have nothing to do with the euro.