Bretton Woods Agreement and the Institutions it Created, Explained

In 1944, the Bretton Woods Agreement established a monetary system that tied the U.S. dollar’s value to gold and pegged other currencies to the U.S. dollar. This system emerged after the second world war in an effort to stabilise volatile currency fluctuations, rebuild economies, and promote international trade. While it successfully supported economic growth and international trade, by 1971, the Bretton Woods system had ended.

In this blog, we discuss the history of the Bretton Woods Agreement, including what it is, why it was established, and how it collapsed.

What is the Bretton Woods Agreement?

The Bretton Woods Agreement was a new monetary system established in the aftermath of World War II. It was negotiated in July 1944 by 44 nations at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire.

The goal of the new monetary system was to promote international economic growth, prevent currency devaluations, and stabilise foreign exchange markets. Under the Bretton Woods Agreement, the U.S. dollar was pegged to gold at a fixed rate of $35 per ounce, with other currencies tied to the dollar’s value. This system effectively made the U.S. dollar the world’s reserve currency and backed its value by gold.

The Bretton Woods Agreement also established important institutions like the International Monetary Fund (IMF) and the World Bank. The Bretton Woods system ended in 1971 when President Richard Nixon announced that the U.S. would no longer exchange gold for U.S. currency.

What led to the Bretton Woods Agreement?

The Bretton Woods Agreement emerged as a response to the economic devastation and instability caused by World War II and the interwar period. The world economy was in disarray with nations struggling under the weight of war debts, hyperinflation, and the collapse of international trade.

During the interwar period, competitive currency devaluations had become widespread. This is where countries intentionally reduced the value of their currencies to make exports cheaper and enhance competitiveness in the global markets. In response, countries retaliated against each other with tariffs and barriers that reduced international trade. Without a stable monetary system, international economic cooperation was almost impossible.

Meanwhile, World War II left many countries in economic distress, particularly in Europe and Asia. These countries were facing massive debts, weakened currencies, and destroyed infrastructure that required rebuilding. Leaders recognised that rebuilding the global economy would require a unified global monetary system to prevent another economic collapse like the Great Depression.

At the same time, the United States had emerged as the world's strongest economy after WWII, with the world’s largest share of global gold reserves at nearly 70%. This made the U.S. dollar the natural choice to serve as the foundation of a new global monetary system.

Read More: What Countries Have the Largest Gold Reserves?

Who planned the Bretton Woods Agreement?

The preparations for the Bretton Woods Agreement had begun years before the conference itself was held. Two key economists shaped the vision of the new monetary system:

• John Maynard Keynes: Keynes was a famous British economist who advocated for a global central bank called the ‘Clearing Union’ and a new international reserve currency that he called the ‘bancor’. Keynes' plan was to promote global liquidity and prevent balance-of-payments crises, where a country is unable to meet its financial obligations due to an imbalance between foreign currency inflows and outflows.
• Harry Dexter White: White was the chief international economist of the U.S. Treasury Department. His goal was to establish a more modest lending fund and, instead of creating a new currency, place the U.S. dollar at the heart of the monetary system.

In the end, the Bretton Woods Agreement adopted ideas from both economists but leaned more heavily towards White’s vision by creating a system where the U.S. dollar was tied to gold and other currencies pegged to the dollar.

During the Bretton Woods Conference, approximately 730 delegates from 44 Allied nations came together to design a framework that would stabilise exchange rates, encourage international trade, and help promote economic growth. All 44 countries agreed to peg their currencies against the U.S. dollar with diversions of only 1% allowed. Each nation was required to monitor and manage their own currency pegs, mainly by using their currency to buy or sell U.S. dollars as needed.

The Bretton Woods Agreement was finalised in 1944 but the system only became fully operational in 1958.

Collapse of the Bretton Woods system

The Bretton Woods system began to show weaknesses by the 1960s. The United States was printing more dollars than its gold reserves could support, which reduced global confidence in the dollar’s convertibility. At the same time, countries like France started demanding gold in exchange for their gold reserves, which further depleted U.S. reserves.

By 1971, the U.S. could no longer guarantee the dollar’s convertibility into gold at the fixed rate of $35 per ounce as outlined in the Bretton Woods Agreement. In response, President Richard Nixon announced in 1971 that he would suspend the dollar’s convertibility into gold, effectively ending the Bretton Woods system. This was initially meant to be a temporary measure but it started the transition to a fiat currency system.

By 1973, the Bretton Woods system had officially collapsed. Countries were free to choose any method of exchanging their currency, whether that’s linking it to another currency’s value or allowing market forces to determine its value relative to other currencies.

See: Why Central Banks Buy Gold

What institutions did the Bretton Woods Agreement create?

The Bretton Woods Agreement didn’t just create the gold-dollar standard – it also established the International Monetary Fund (IMF) and the World Bank with the aim of stabilising the global economy and facilitating international trade.

The International Monetary Fund (IMF)

The IMF was created to oversee the fixed exchange rate system and identify countries that needed global monetary support. Its main role was to:

• Monitor exchange rates: The IMF maintained currency values to prevent the competitive devaluations that had been an issue during the interwar years.
• Provide financial assistance: Countries could borrow from the IMF to stabilise their economies and maintain their currency pegs.

The World Bank

The World Bank, initially known as the International Bank for Reconstruction and Development (IBRD), was established to help rebuild economies devastated by World War II.

The World Bank was first focused on funding infrastructure projects in war-torn Europe, however over time its mission expanded to include providing loans and assistance to developing countries with the aim of reducing poverty.

Why did they use gold for the Bretton Woods system?

The Bretton Woods system pegged the U.S. dollar’s value to gold because of its historical role as a universal store of value. Because gold had been used in trade and monetary systems long before Bretton Woods, it was seen as a stable and universally recognised asset that’s less susceptible to inflation or manipulation compared to fiat currencies.

After the economic chaos of the interwar period, countries wanted a system that could restore confidence in international trade and finance, and gold provided a sense of reliability and credibility as it’s a tangible and finite resource.

Additionally, the United States was already holding the largest gold reserves in the world with the U.S. dollar emerging as the dominant currency. Linking the USD to gold was seen as a way to provide a stable anchor for other currencies while still promoting international trade and investment.

Gold also provided a clear benchmark for exchange rates: countries pegged their currencies to the U.S. dollar and the dollar was convertible into gold. This created a simple and stable monetary framework that could support international trade.

Keep Reading: Is There a Correlation Between the US Dollar and Gold Prices?

What’s the difference between the gold standard and the Bretton Woods system?

The gold standard and Bretton Woods system both used gold in their monetary frameworks, however the two are different.

The gold standard was used before the Bretton Woods system. In this monetary framework, currencies were directly pegged to gold and a country’s monetary supply was linked to its gold reserves. Individuals could exchange currency for gold at a fixed rate and the price of gold was used to determine the currency’s value.

Because each country’s currency was backed by a specific amount of gold, the gold standard helped maintain stable exchange rates. However, it also limited monetary flexibility as governments could only issue money equivalent to their gold reserves.

Under the Bretton Woods system, only the U.S. dollar was pegged to gold at a fixed rate of $35 per ounce. Other currencies were then pegged to the U.S. dollar, creating a hierarchical system with the dollar serving as the central reserve currency. This meant that, instead of holding gold for international trade and reserves, other countries held U.S. dollars.

The Bretton Woods system was considered more flexible than the gold standard as countries could adjust their currency's value if they faced serious economic issues. It also didn’t need every country to hold gold reserves.

To summarise:

• Under the gold standard, all currencies were directly tied to gold.
• Under Bretton Woods, only the U.S. dollar is convertible to gold and other currencies are indirectly linked to gold through their peg to the U.S. dollar.

See More: What Drives the Price of Gold?

Gold’s role post-Bretton Woods

While gold is no longer the basis of the global monetary system, it’s still considered a safe-haven asset with intrinsic value. Central banks all over the world hold significant gold reserves and investors view gold as a way to preserve wealth and hedge against inflation and economic uncertainty.

If you’d like to own a piece of this precious metal, you’re in the right place. Browse our collection of gold bullion bars and gold coins and safeguard your wealth today.