Bretton Woods System and 1944 Agreement

Bretton Woods System and 1944 Agreement

How Bretton Woods Introduced a New World Order

By Kimberly Amadeo Updated December 07, 2019

The 1944 Bretton Woods agreement established a new global monetary system. It replaced the gold standard with the U.S. dollar as the global currency. By so doing, it established America as the dominant power in the world economy. After the agreement was signed, America was the only country with the ability to print dollars.

The agreement created the World Bank and the International Monetary Fund (IMF). These U.S.-backed organizations would monitor the new system.

The Bretton Woods Agreement

The Bretton Woods agreement was created in a 1944 conference of all of the World War II Allied nations. It took place in Bretton Woods, New Hampshire.

Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar. How exactly would they do this? If a country's currency value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange markets.

That would lower the currency's supply and raise its price. If its currency became too high, the bank would print more. That would increase the supply and lower its price.

Members of the Bretton Woods system agreed to avoid trade wars.1 For example, they wouldn't lower their currencies strictly to increase trade. But they could regulate their currencies under certain conditions. For example, they could take action if foreign direct investment began to destabilize their economies. They could also adjust their currency values to rebuild after a war.

How It Replaced the Gold Standard

Before Bretton Woods, most countries followed the gold standard. That meant each country guaranteed that it would redeem its currency for its value in gold. After Bretton Woods, each member agreed to redeem its currency for U.S. dollars, not gold. Why dollars?

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