Bretton Woods Agreement and Gold Standard

Bretton Woods agreement

In summer 1944 WW II started to evolve into closing stage and allied countries began seriousely deliberating financial shape of postwar world. All leading economies except for the USA were worn out and on the decline. Up to the end of the war, the most part of gold reserves was accumulated in the USA whereas winning and lost countries both were badly in need of oil, row materials, food and equipment.

To prevent further global conflict for resources, Bretton Woods agreement was concluded, which was named after the New Hampshire town where the agreement was reached.

How did it impact rates of the world currency: euro  exchange rate, us exchange rate?

 

According to Bretton Woods agreement, International Bank for Reconstruction and Development (IBRD) and International Monetary Fund (IMF) were established. Participants countries contributed money funds (the largest contribution was from the USA) and every country could lend from those funds to support its currency. For the currency leading by that moment – US dollar (us exchange rate) – so called Gold Standard was created and was equal to $35 for gold ounce.

 

 

Bretton Woods system had been successfully operating in the world till the end of sixties when high demand for American dollar persisted by other countries and IMF resources were enough for maintaining sharp system of stability of currency rates. But gradually foreign (non-US) banks accumulated excessive reserves of US dollars buying back dollars for gold. US government rapidly wasted its gold reserves.

USA tried to prevent to the last the upcoming threat of devaluation of its national currency, but in the beginning of 70-s economic troubles for country grew like an avalanche. Finally US government decided to refuse from the fixed rate of US dollar against gold. Bretton Woods currency system was terminated, major currencies started fix their rate by market method of demand and supply.

A sharp turnabout in gold price occurred (up to 750$ per troy ounce) whereas US dollar dropped down to its after-war level. Despite collapse of Bretton Woods system, it is noteworthy that it managed to achieve its main goal in the part of recovering of global after-war trading.