What Is Meant By Bretton Woods Agreement

The Bretton Woods Agreement was reached in 1944 at a summit in New Hampshire, USA, at a venue of the same name. The agreement was reached by 730 delegates who were representatives of the 44 allied nations who attended the summit. Delegates used the gold standard as part of the agreement, in the simplest terms, the gold standard is a system used to understand the value of money, and this means that a currency is compared to how much it is worth in gold and at what rate it can be exchanged for gold. to create a fixed exchange rate. The Bretton Woods system was implemented to replace more stably the gold standard, according to which all currencies were convertible into gold. Under the new agreement, the dollar was the norm for international transactions, the value of which was set at 1/35 of an ounce of gold. The fact that the United States held the majority of the world`s gold reserves allowed the dollar to assume its new role as the default currency on which trade was based. The agreement created the World Bank and the International Monetary Fund (IMF), U.S.-backed organizations that would oversee the new system. The Bretton Woods system is a set of uniform rules and guidelines that provide the framework for the establishment of fixed international exchange rates. Essentially, the agreement required the newly created IMF to set the fixed exchange rate for currencies around the world.

Each country represented took responsibility for maintaining the exchange rate, with incredibly tight margins above and below. Countries that have difficulty staying within the fixed exchange rate window could ask the IMF for an interest rate adjustment, which would then be the responsibility of all allied countries. The agreement also created extremely important structures in the financial world: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now known as the World Bank. The Bretton Woods planners established a system of rules, institutions and procedures to regulate the international monetary system. They founded the International Bank for Reconstruction and Development (IBRD) (now one of the five institutions of the World Bank Group) and the International Monetary Fund (IMF). These organizations became active in 1946 after enough countries ratified the agreement. The Bretton Woods Agreement was created in 1944 at a conference of all allied nations of World War II. It took place in Bretton Woods, New Hampshire.

The support of money by the gold standard became a serious problem in the late 1960s. In 1971, the problem was so serious that US President Richard Nixon announced that the possibility of converting the dollar into gold would be “temporarily” suspended. This decision was inevitably the straw that broke the camel`s back for the system and the agreement it described. The IMF was designed to lend to countries with balance of payments deficits. Short-term balance of payments difficulties would be overcome by IMF loans, which would facilitate exchange rate stability.

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