Definition of Bretton Woods

Landmark agreement signed at an international conference in 1944 at Bretton Woods, New Hampshire, US, aimed at ensuring a stable monetary system after World World II, mainly through the use of fixed exchange rates. The agreement also established the World Bank and the International Monetary Fund (IMF). [1]

Bretton Woods refers to the international monetary arrangement, agreed upon by the allied nations in 1944 in Bretton Woods, US, that created the IMF and World Bank and that set up a system of fixed exchange rates with the US dollar as the international reserve currency. To provide credibility, the US agreed to exchange dollars for gold at a fixed price.

In the early 1970s the US printed large amounts of dollars, presumably to help finance the Vietnam War, which led to large reductions in its holdings of gold as the international community traded dollars for gold. In 1971 President Nixon terminated the convertibility of the dollar to gold, which ended Bretton Woods. Since then, though, the dollar has maintained its dominance as the international reserve currency.

Prior to Bretton Woods the international financial system suffered from currency manipulations as countries attempted to make their exports more competitive and from rising tariffs as countries attempted to protect their domestic industries following the Great Depression.

A major objective of Bretton Woods was to promote financial stability by eliminating exchange rate manipulations and to lay the foundation for free trade. [2]

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