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Bretton Woods

Posted By: TradersLog

Bretton Woods AccordThe Bretton Woods Accord was established in 1944, towards the end of World War II. The United Nations Monetary Fund convened in Bretton Woods, New Hampshire, with representatives from the United States, Great Britain and France. The Bretton Woods Accord established the policy of pegging currencies against the U.S. dollar in order to stabilise the global economy. It set fixed exchange rates for major currencies and subsequently established the International Monetary Fund (IMF).

Up until WWII, the British Pound was the the dominant world currency by which most currencies were compared. However, during World War II the Nazis undertook a major counterfeiting effort against the British Pound, and thus damaged it’s standing. In contrast, WWII transformed the U.S. dollar from a failed currency after the stock market crash of 1929 to benchmark currency by which most other international currencies were compared. The U.S. economy was thriving, and the United States emerged as a world economic power. The first element of the Bretton Woods Accord was to peg the U.S. dollar to the price of gold at $35.00 an ounce, using the Gold Standard. With this benchmark anchoring the U.S. dollar, other major currencies were pegged to it and allowed to fluctuate no more than 1% on either side of the set standard. When a currency’s exchange rate would approach the limit on either side of this standard the respective nation’s central bank would intervene to bring the exchange rate back into the accepted range. The Bretton Woods Accord governed currency relationships until the early 1970’s when a floating exchange rate system was adopted.

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International Monetary Fund (IMF) The IMF is an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.

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