The Bretton Woods Agreement refers to the outcomes of a three-week conference organized by the United Nations to establish a new monetary system at the conclusion of World War II. This meeting, officially known as the United Nations Monetary and Financial Conference, took place from July 1 to July 22, 1944, at Bretton Woods, New Hampshire, which is where the agreement got its name. The agreement is renowned for establishing a new exchange rate system.
The conference resulted in three major outcomes, two of which continue to play significant roles in the global financial system today. The first outcome was the Bretton Woods Agreement itself, which established a new foreign exchange system. Additionally, the United Nations sanctioned the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD).
The need for a new foreign exchange system arose in the aftermath of World War II, which had devastated the international economic system due to years of intense global conflict. Even before the war ended, the Allied nations recognized the necessity of creating a new currency system and a plan for rebuilding the war-torn nations and global economy.
The conference saw 730 delegates from 44 Allied countries convene at the Mount Washington Hotel, where they spent three weeks devising the new currency system and financial institutions. On July 22, the final day of the conference, they signed the Bretton Woods Agreement.
The new system was based on several key proposals, one of which involved currency convertibility, requiring all currencies to be convertible for trade and current account transactions. The United States, holding two-thirds of the world’s gold reserves, was in a strong position to propose a system in which foreign currencies were pegged to both gold and the U.S. dollar. The final agreement pegged currencies to gold, but over the following years, many countries began to add the U.S. dollar as the world’s new reserve currency.
Not all participants were satisfied with the outcomes of the agreement; Soviet Union representatives attended the conference but criticized the institutions created, accusing them of being extensions of Wall Street. Consequently, they refused to ratify the final agreements.
However, many nations, including those in Western Europe, South America, Canada, Australia, the U.S., and eventually post-war Japan, signed on to the agreements, and these new institutions became operational in 1945 after sufficient ratifications were achieved.
In the aftermath of the conference, countries began exchanging their currencies at rates based on their gold reserves. When imbalances in payments arose due to the artificially pegged currency system, the IMF was empowered to intervene and make necessary adjustments. This encouraged foreign trade and global economic growth, leading to expansion in most developed nations after the war.
Besides the IMF, the conference also established the International Bank for Reconstruction and Development, which later evolved into the World Bank. These two organizations continue to operate today, promoting financial stability, international trade, monetary cooperation, and sustainable economic growth. They also work to reduce poverty and boost employment.
With the support of these institutions, Europe and other war-damaged regions embarked on an extended period of reconstruction and development after the war. The Bretton Woods system itself was abandoned in 1971 when the U.S. unilaterally left the gold standard, leading to the adoption of the current free-floating currency exchange system.
