Bretton Woods Agreement And System

Economists and other planners understood in 1944 that the new system could only begin after a return to normal after the disruption of World War II. It was expected that the international economy would recover and the system would come into operation after a short transition period of at least five years. The architects of Bretton Woods had envisioned a system in which exchange rate stability was a priority. But in an era of more activist economic policy, governments did not seriously consider fixed interest rates, modeled on the classic nineteenth-century gold standard. Gold production has not even been enough to meet the demands of growing international trade and investment. In addition, much of the world-famous gold reserves were in the Soviet Union, which was later to become the United States and Western Europe as Cold War rivals. Although the Bretton Woods system collapsed with this change, the institutions it created are still an integral part of the international economy today. Powerful nations largely agreed that the lack of exchange rate coordination in the interwar period had exacerbated political tensions. This facilitated the decisions of the Bretton Woods conference.

Moreover, all the Bretton Woods participating Governments agreed that the monetary chaos of the interwar period had brought several valuable lessons. World War II devastated many nations, losing human lives and destroying infrastructure at a breathtaking speed. As the war continued, fiscal policy had to change to deal with the war`s impact on global economies. In June 1944, allied nations sent representatives to Bretton Woods, New Hampshire, to work on a new system of standardizing exchange rates between world currencies and the U.S. dollar. The agreement created the World Bank and the International Monetary Fund (IMF), U.S.-backed organizations to oversee the new system. All non-communist countries had a stable relationship between their currencies and the dollar, either directly or indirectly via the pound sterling. The U.S. dollar was at the heart of this system. With Britain having ended the gold convertibility of its currency, the US dollar was the only currency directly convertible into gold for official purposes. . .