Bretton Woods System
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western Europe,Australasia and Japan in the mid-20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate (± 1 per cent) by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments. Also, there was a need to address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies as well.
Preparing to rebuild the international economic system while World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference. The delegates deliberated during 1–22 July 1944, and signed the Bretton Woods agreement on its final day. Setting up a system of rules, institutions, and procedures to regulate the international monetary system, these accords established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. The United States, which controlled two thirds of the world’s gold, insisted that the Bretton Woods system rest on both gold and the US dollar. Soviet representatives attended the conference but later declined to ratify the final agreements, charging that the institutions they had created were “branches of Wall Street.” These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.
On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency. This action, referred to as the Nixon shock, created the situation in which the US dollar became a reserve currency used by many states. At the same time, many fixed currencies (such as the pound sterling, for example) also became free-floating.
When the Bretton Woods international monetary system collapsed in 1973, the world is yet to have a new set of rules to regulate international trade and monetary relations. Instead, a new system began to emerge without formal agreement or sanction. It also remained nameless. Duncan (2005) made a reference in his popular book “The Dollar Crisis” to the current international monetary system which evolved out of the collapse of Bretton Woods as “dollar standard”, so named because US dollars have become the world’s core reserve (anchor) currency in place of gold, which had comprised the world’s reserve assets under the Bretton Woods system as well as under the classical gold standard of the 19th century.
- Duncan R, The Dollar Crisis: Causes, Consequences and Cures (John Wiley & Sons, Singapore 2005)