Bretton Woods System

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Definition of the Bretton Woods System:

The Bretton Woods System was the first negotiated international agreement with the objective to bring stability to exchange rates. 

Detailed Explanation:

Between 1946 and 1971 most countries settled their international trade balances using the Bretton Woods System. The Bretton Woods System is part of the Bretton Woods Agreement. Forty-four allied countries met between July 1st and July 22nd, 1944 in Bretton Woods, New Hampshire. Economic instability contributed to the Great Depression, the rise of Hitler, and the onset of World War II. One objective of the Bretton Woods Agreement was to create a system to enhance economic growth by stabilizing the exchange rates between international currencies. Each country was required to peg its currency to the US dollar, which was tied to gold. Countries traded in dollars, but the US government promised to sell its gold to countries for $35 per ounce. In addition to the Bretton Woods System, the agreement established the International Monetary Fund, and the International Bank of Reconstruction and Development, which later became the World Bank. 

In the late 1960s and early 1970s the United States government was printing money to help finance many new social programs and the Vietnam War. The increase in the money supply diminished the value of the dollar relative to gold. Imports exceeded exports, so the trade deficit further depleted the gold reserves. Confidence in the dollar dropped and several international banks chose to purchase gold. In 1971, in an effort to stabilize the dollar, President Nixon declared that the United States would no longer honor the Bretton Woods Agreement. He said the move was temporary, but the US has never returned to the gold standard.

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