The Bretton Woods Monetary System (1944 – 1971) Explained in One Minute
After World War 2 it was clear that the world needed a new financial system. The gold standard was considered too rigid, but at the same time, economists were worried that countries would devalue their currency to boost exports. For this reason, 44 countries sent delegates to a conference held in Bretton Woods, New Hampshire on July 1st, 1944. The US, which held two-thirds of the world’s gold reserves after the war was obviously the most influential player and ultimately all currencies ended up linked to the dollar and the dollar was linked to gold. One important concern arose though if a country goes through an economic crisis, how can it get out of it without devaluing its currency. To address this issue, two institutions were created.
1. The International Monetary Fund which was supposed to lend money to countries that are in trouble and cannot attract financing from other sources.
2. The International Bank for Reconstruction and Development which is now called the World Bank and was supposed to help less developed countries.
Unfortunately, as good it may have sounded on paper, the Bretton Woods system did not survive, because the United States kept running deficits to fund various projects and therefore the amount of dollars in existence kept increasing while the gold reserves in the US kept shrinking, as more countries demanded gold in exchange for their dollars. As such on the 15th of the August 1971, Nixon officially announced that dollars would no longer be converted to gold, thereby putting the final nail in the coffin of the Bretton Woods system.
This post was originally published by EarnForex