Homepage / Bullion Investment Basics: Bullion Glossary / B - Bretton Woods

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Bretton Woods
System of Monetary Management

The Bretton Woods System created an exchange for pegging international currencies to the U.S. dollar, which was pegged to the price of gold at $35.00 a troy ounce. 

Bretton Woods is the name of a resort town in New Hampshire, where the International Monetary Conference was held in July of 1944.

The conference consisted of 730 delegates from all 44 WWII Allied nations for the United Nations Monetary and Financial Conference. 

The delegates deliberated from July 1st through the 22nd in 1944 and signed the Agreement on its final day.

The result of the Bretton Wood Conference is that it officially linked the US Dollar to gold at $35 per troy ounce, its gold parity since 1934.

All other currencies were linked to the Dollar at fixed exchange rates, which meant that they were linked to gold as well. The Japanese Yen was 360 per Dollar, year after year. (360*35=12,600 per ounce.)

The planners hoped to avoid a repeat of the debacle of the 1930s, when the United States, as a creditor nation, insisted on repayment of allied war debts from World War I.

Combined with the threat of isolationism, this led to a breakdown of the international financial system and a worldwide economic depression.

Governments of the 1930s used currency devaluation policies to increase the competitiveness of a country's exported goods.

They did this to reduce their growing deficits; instead, it worsened other nations' monetary systems, which caused plummeting national incomes, shrinking demand, mass unemployment, and an overall decline in world trade.

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II.

The system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nations.

Those attending the conference set up a system of rules, institutions, and procedures to regulate the international monetary system, establishing the International Monetary Fund (IMF) and the World Bank.

After ratification in 1945, these organizations became operational.

The chief feature of the system was an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar's value to the price of gold.

The IMF was established to bridge temporary imbalances of payments.

By the early 1960s, the value of the U.S. dollar was overvalued against gold and the system of fixed exchange rates.

In the 60's, there was a sizable increase in U.S. domestic spending from the Vietnam War and President Lyndon B. Johnson's "Great Society" programs of Medicare, Medicaid, and LBJ's "War on Poverty."

These policies gradually decreased the value of the U.S. Dollar against gold, causing currency markets to become greatly unbalanced.

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The End of the Bretton Woods System

On August 15, 1971, President Nixon unilaterally announced a temporary suspension on the convertibility of the dollar to gold.

An attempt to revive the fixed exchange rates failed, and by March 1973, the major currencies began to float against each other.

As a result, the Bretton Woods system officially ended, and the U.S. dollar became a 'fiat currency,' backed by nothing but the guarantee of the government of the United States.

The 1971 event is known as the "Nixon shock" and the official end of the gold standard, which made the United States dollar the reserve currency for the member states.

Since the collapse of the "Gold Standard," IMF members have been free to choose any form of exchange arrangement they wish except when governments peg their currency to gold.

This allows currencies to float freely, pegging one currency to another or a basket of currencies adopting the currency of another country participating in a currency bloc, or forming part of a monetary union.

Examples of the last sentence would be equal to the European Union and the future wishes of the BRICs economic union.

Sources: Bretton Woods System

Library of Economics & Liberty - AUDIO: Benn Steil on the Battle of Bretton Wood

Creation of the Bretton Woods System - Federal Reserve History

Daily Reckoning - The Dollar Will Die with a Whimper, Not a Bang
- by James Rickards

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