Bretton Woods Agreement

The Bretton Woods Agreement was an economic agreement that outlined the international financial system set up after 1944.
They were signed on July 22, 1944 at Bretton Woods (USA) after three weeks of debate between 730 delegates representing all 44 Allied nations.
The Breton Woods conference led to the organization of a world monetary system based on the US dollar, but with a nominal peg to gold.

The Bretton Woods monetary system

The Gold Standard

Since the Industrial Revolution, the international monetary system has been essentially based on gold. Not all currencies are convertible, but given the spheres of influence and the determining role of sterling, thegold standard has enabled international trade and commerce to develop without major crisis.

This gold standard ensured confidence in banknotes until the two World Wars, which led to massive state financing through central bank money creation, or "printing money", creating inflation and thus mistrust of banknotes. In the extreme cases of the early 20th century, gold-bill parity was abandoned, leading to hyperinflation.

The objectives of the Bretton Woods conference

The conference was commissioned by the United States, which took advantage of its position of strength after the Second World War to consolidate its economic power.
Their main objective was to revive the world economy, set up a world monetary organization and promote the reconstruction and economic development of countries affected by the Second World War. Finally, this would avoid both the international monetary upheavals that had followed the First World War and the mistakes that had turned the economic crisis of 1929 into the Great Depression.

The Bretton Woods monetary system

The Bretton Woods agreements set up a system of exchange-gold standards: the value of the US dollar was directly indexed to gold (at 35 dollars per ounce of gold), while other currencies were indexed to the dollar. Central bank reserves must therefore be made up of foreign currencies rather than gold. The US government guarantees the value of the dollar, but is not obliged to have a gold counterparty to the dollars issued.

The birth of two global organizations

Two organizations were created at the Bretton Woods conference and are still active today:

• The International Bank for Reconstruction and Development (IBRD), now known as the World Bank, is made up of four other institutions: the International Development Association (IDA), created to combat poverty by providing aid, financing and advice to countries in difficulty; the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency (MIGA); and the International Centre for Settlement of Investment Disputes (ICSID).
• the International Monetary Fund (IMF).

An organization to regulate international trade was also to be created, but the States were unable to agree on its exact definition. This desire to regulate trade gave rise to a series of agreements: the General Agreement on Tariffs and Trade (GATT), formalized in 1947 and subsequently modified in cycles. Under the Marrakesh Agreement of January 1, 1995, the GATT was given an official legal personality: the World Trade Organization (WTO).

The 44 countries that signed at Bretton Woods

• Australia (Leslie Melville)
• South Africa
• Belgium
• Bolivia
• Brazil
• Canada
• Chile
• China (Kong Xiangxi)
• Colombia
• Costa Rica
• Cuba
• Czechoslovakia
• Dominican Republic
• Ecuador
• Egypt
• United States (Harry Dexter White)
• Ethiopia
• France (Pierre Mendès France)
• Greece
• Guatemala
• Haiti
• Honduras
• Iceland
• India (British Raj)
• Iran
• Iraq
• Liberia
• Luxembourg
• Mexico (Víctor Urquidi)
• New Zealand
• Nicaragua
• Norway
• Panama
• Paraguay
• Netherlands
• Peru
• Philippines
• Poland
• United Kingdom (John Maynard Keynes)
• Salvador
• Soviet Union (Mikhail Stepanov)
• Uruguay
• Venezuela
• Yugoslavia

The end of the Bretton Woods Agreement

The decline of the US dollar

Since the Bretton Woods Agreement did not establish any controls on the quantity of US dollars issued, the United States was able to default on its commitments to foreign accounts. If there were too few dollars until 1958, the situation then turned around.
Dollar inflation was caused in particular by the huge expenses of the Vietnam War and the space race. The countries that exported the most to the United States accumulated immense dollar reserves, which gave rise to just as many issues in their own currency, fuelling increasingly worrying inflation.

The collapse of the Bretton Woods Agreement

Technically, it was the Federal Republic of Germany that put an end to the Bretton Woods Agreement by ceasing to implement its provisions. Demands for repayment of surplus dollars in gold began. The United States did not want to see its gold holdings disappear. They suspended the convertibility of the dollar into gold on August 15, 1971. The system of fixed exchange rates collapsed definitively in March 1973 with the adoption of the floating exchange rate regime, i.e., exchange rates are set according to market forces. On January 8, 1976, the Jamaica accords officially confirmed the abandonment of gold's international legal role. There was no longer an organized international monetary system.
This marked the end of the international monetary system established under the Bretton Woods Agreement.