Bretton Woods System

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Definition of the Bretton Woods System:

The Bretton Woods System was the first negotiated international agreement that tried to stabilize exchange rates using gold as the universal standard.

Detailed Explanation:

Between 1946 and 1971, most countries balanced their international trade using the Bretton Woods System, an integral component of the Bretton Woods Agreement. In a meeting held between July 1st and July 22nd, 1944, in Bretton Woods, New Hampshire, forty-four allied nations convened. The backdrop for this gathering was the economic instability that fueled the Great Depression, the ascent of Hitler, and the outbreak of World War II.

A central aim of the Bretton Woods Agreement was to establish a framework that would foster economic growth by stabilizing exchange rates between global currencies. Under this arrangement, each country pegged its currency to the US dollar, which, in turn, was tied to gold. While international transactions were conducted in dollars, the US government committed to selling gold to other nations at $35 per ounce. Alongside the Bretton Woods System, the agreement also gave rise to the International Monetary Fund and the International Bank for Reconstruction and Development, later known as the World Bank.

However, in the late 1960s and early 1970s, the United States government began printing money to finance numerous social programs and the Vietnam War. This surge in the money supply eroded the dollar’s value relative to gold. A trade deficit, fueled by imports surpassing exports, further depleted gold reserves. Confidence in the dollar waned, prompting several international banks to opt for gold purchases. In 1971, in an attempt to stabilize the dollar, President Nixon declared that the United States would cease honoring the Bretton Woods Agreement. Although initially deemed temporary, the US has never returned to the gold standard since then.

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