Bretton Woods Agreement

Definition

The term Bretton Woods Agreement refers to the creation of a system for managing exchange rates and conducting monetary policy.  Developed in 1944, the Bretton Woods Agreement was a product of the 44 Allied nations of World War II.

Explanation

From July 1 through July 22, 1944, delegates from the Allied nations gathered at Bretton Woods, New Hampshire to discuss rebuilding their economies following World War II.  This would be achieved through the creation of a foreign exchange system, while attempting to prevent currency devaluation and promoting economic growth.

The agreement would eventually establish a system of rules and procedures these 44 nations would use to regulate their monetary systems. The agreement obligated each country to maintain an exchange rate by tying its currency to gold.  The system was built on a standard which included not only gold but also the United States Dollar (USD), which was fixed at $35 per ounce.

The agreement established the International Monetary Fund (IMF) to step in when temporary imbalances of payments occurred between nations.  The International Bank for Reconstruction and Development (now part of World Bank Group) was also established to provide financing to reconstruct European nations destroyed during World War II.

The agreement remained in place until 1971, when then President Nixon devalued the dollar, thereby removing the fixed exchange rate for currencies worldwide.  The move was a result of exchange rate concerns stemming from the relative strength of the USD.

Related Terms

cash market, cash commodity, carrying charge