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Bretton Woods agreement

The Bretton Woods agreement was a new monetary system created by world leaders after World War II. It changed the global economic outlook and financial system for much of the 20th century, shaping the modern world.

Following the Second World War, the Bretton Woods Resort – more commonly referred to as the Mount Washington Hotel – was the location for the United Nations Monetary and Financial Conference. The conference was held at the hotel in Bretton Woods, New Hampshire, in the United States. With representatives from 44 allied nations, the 1944 conference is now referred to as the Bretton Woods Conference.

The conference established the Bretton Woods System. This post-war international monetary agreement governed financial relations between nations of North America, Western Europe, Australia and Japan. It was a system that dominated trade in the western world for nearly the next thirty years.

The Soviet Union did not attend the Bretton Woods meeting, as it believed the conference would not succeed. Consequently, the Soviet Union went on to form its own system, and this was applied to the communist block of nations under its control.

Background to Bretton Woods

Even before the defeat of Nazi Germany and Japan, the British and US began planning for a new post-war world. In August 1941, US President Franklin D. Roosevelt and British Prime Minister Winston Churchill met onboard a ship in the North Atlantic. There they signed the Atlantic Charter, which paved the way for the 1944 Bretton Woods Conference.

Delegates to the conference believed the Second World War was caused by economic failures following the First World War. These failures resulted in international economic depression, which fostered discontent throughout the world. The failures themselves were the result of post-war reparations, and the resulting trade protectionism.

The aim of the Bretton Woods conference was therefore to foster free trade in foreign exchange, and build international economic stability.

A map showing the location of Bretton Woods, where the financial system was agreed.

Before the First World War, international trade had been conducted on a gold standard. Under this system a nation’s wealth and its currencies were fixed to the price of gold. Essentially, the international exchange market was conducted in gold.

Following WW1, several nations attempted to reintroduce the gold standard. It soon became apparent however that debts created from the war, reparation costs and the resulting trade wars made this unsustainable, and the world entered a period of economic depression. Trade wars turned into military struggle and the world went to war again in 1939.

Bretton Woods system

The aim of the conference was to avoid the failures made following World War One, by producing an international monetary system acceptable to all nations which would encourage fair and free global trade. Though the aims and objectives were the same, two rival systems were advocated.

At one extreme; US delegates, led by Harry Dexter White, wanted a return to some form of gold standard. The other extreme, favoured by Britain, was for a new international currency controlled by a world bank. The British delegation was led by famed economist, John Maynard Keynes.

Harry White and John Maynard Keynes two of the leading figures at the Bretton Woods conference.

Leader of the US delegation, Harry Dexter White, and leader of the British delegation, John Maynard Keynes, at Bretton Woods. Picture courtesy of the International Monetary Fund.

Keynes saw great need for international controls, regulations and fixed exchange rates. Dexter's opposing vision favoured a more self-regulated system.

The eventual agreement was a compromise agreed by both extremes, but leaning towards the US’ demands. John Maynard Keynes’ proposal for an international currency, which he called the 'bancor,' was rejected. He did however succeed in establishing an international bank – the International Bank for Reconstruction and Development (IBRD). Further international control was brought in through the International Monetary Fund (IMF) working with central banks.

Harry Dexter White achieved something close to his wish, with Bretton Woods adopting a pseudo-gold standard. He succeeded by making the US dollar an international 'reserve currency.' This meant that the Dollar became convertible to gold at a rate of $35 per ounce. In theory, America guaranteed a gold exchange for US Dollars – a gold standard centred around a national currency.

The financial system agreed under the Bretton Woods system.

Why did the Bretton Wood system collapse?

The US held huge gold reserves and international demand for US reserve currency naturally increased. Despite this, the cost of the Vietnam war was a huge drain on the US economy, and caused it to weaken significantly in the 1960s and 70s. The eventual economic downturn meant the US was unable to guarantee the commitments it made under the Bretton Woods agreement.

The French government of Charles De Gaulle led demands from many nations for the US to exchange dollars for physical gold. The Bretton Wood system began to truly collapse in 1971, when President Richard Nixon’s administration was forced to devalue the US dollar to $38 to an ounce of gold.

In 1973, a further 10% devaluation was announced. Finally, in 1976, the Jamaica Accord formally ended the agreement, and completed the collapse of the Bretton Woods system. By 1980, all major currencies were left with on a floating exchange rate international currency market – the fiat monetary system used to this day.

The legacy of Bretton Woods

Despite its eventual collapse, the Bretton Woods system delivered nearly 30 years of stable international trade. Immediate recession following the economic struggle of the Second World War was broadly averted. The International Monetary Fund, based on John Maynard Keynes' vision, continues to play a vital role in international economic relations today.