The Bretton Woods System: Recovering From World War II

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War can have disastrous effects on a population. This is not only apparent in the amount of death and human suffering. War can also be devastating to economies. Towards the end of World War II governments around the world realized that there would be a long period of reconstruction required. They knew that major economic recovery would have to play an essential role in rebuilding. A new currency exchange system, the Bretton Woods System, was created in response to this need.

Meeting of the Minds: Formation of a New Currency Exchange System

The new currency exchange system was formed when the Allied nations met in July 1944 at Bretton Woods, New Hampshire. The purpose of the meeting was to deliberate over the formation of a new international monetary management system. The new currency exchange system would eventually be called the Bretton Woods System.

Basics of the Bretton Woods System

The Bretton Woods Agreement negotiated a method for fixed currency exchange rates between the various currencies of participating governments. Instead of using the gold standard, the new system utilized the U.S. dollar as the primary reserve currency. Also, the agreement created three new agencies designed to oversee international economic activity. These newly created agencies were the International Monetary Fund (IMF), the General Agreement on Tariffs and Trade (GATT) and the International Bank for Reconstruction and Development.

End of the Bretton Woods System

The Bretton Woods System had replaced gold with the U.S. dollar as the standard reserve currency for exchanging various currencies internationally. This resulted in the U.S. being the only currency backed by physical gold reserves. In order to fulfill the role of the world’s reserve currency provider, the U.S. was forced to operate under balance of payment deficits.

This continued for the next 25 years or so until the U.S. treasury’s gold reserves were severely depleted to the point of not being able to cover all of the U.S. dollars held in reserve by foreign central banks. Finally in 1971, under the direction of U.S. President Nixon, the United States announced that it would no longer be exchanging gold for the U.S. dollar. This put an end to the Bretton Woods system.

Writer Bio

LeBach PhamLe Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.

Sources:

  • http://www.investopedia.com/university/forexmarket/forex4.asp
  • http://www.investopedia.com/terms/b/brettonwoodsagreement.asp

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