How Bretton Woods Introduced a New World Order

Bretton Woods System and 1944 Agreement

How Bretton Woods Introduced a New World Order

By Kimberly Amadeo Reviewed By Thomas J. Brock

Thomas Brock is a well-rounded financial professional, with over 20 years of experience in investments, corporate finance, and accounting.

Article Reviewed and Updated September 03, 2020

Read The Balance's Financial Review Board

The Bretton Woods agreement of 1944 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.1

The agreement created the World Bank and the International Monetary Fund (IMF), U.S.-backed organizations that would monitor the new system.2

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.2 If a country's currency value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange markets.3

Note:  Purchasing currency would lower the supply of the currency and raise its price. If a currency's price became too high, the central bank would print more. This printing production would increase the supply and lower the currency's price. This method is a monetary policy often used by central banks to control inflation.

Members of the Bretton Woods system agreed to avoid trade wars.4 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.

Replacing the Gold Standard

Before Bretton Woods, most countries followed the gold standard.5 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? The United States held three-fourths of the world's supply of gold. No other currency had enough gold to back it as a replacement. The dollar's value was 1/35 of an ounce of gold. Bretton Woods allowed the world to slowly transition from a gold standard to a U.S. dollar standard.6

To continue reading, please go to the original article here:

https://www.thebalance.com/bretton-woods-system-and-1944-agreement-3306133