History and Functionality of the Bretton Woods Agreement

As mentioned above, 44 allied nations met in Bretton Woods, NH in 1944

for the United Nations Monetary and Financial Conference. At that time, the
world economy was very shaky, and the allied nations sought to meet to
discuss and find a solution for the prevailing issues that plagued currency
exchange.

The summit was also looking for policies and regulations that would
maximize the potential benefits and profits that could be derived from the
global trading system. What resulted from the conference were the Bretton
Woods Agreement and the Bretton Woods System.

The  Bretton Woods System is a set of unified rules and policies that
provided the framework necessary to create fixed international currency
exchange rates. Essentially, the agreement called for the newly created IMF
to determine the fixed rate of exchange for currencies around the world.

Every represented country assumed the responsibility of upholding the

exchange rate, with incredibly narrow margins above and below. Countries
struggling to stay within the window of the fixed exchange rate could
petition the IMF for a rate adjustment, which all allied countries would then
be responsible for following.

The system was depended on and was used heavily until the beginning of
the 1970s.

The Collapse of the Bretton Woods System

Backing currency by the gold standard started to become a serious

problem throughout the late 1960s. By 1971, the issue was so bad that US
President Richard Nixon gave notification that the ability to convert the
dollar to gold was being suspended “temporarily.” The move was inevitably
the final straw for the system and the agreement that outlined it.

Still, there were several attempts by representatives, financial leaders, and

governmental bodies to revive the system and keep the currency exchange
rate fixed. However, by 1973, nearly all major currencies had begun to float
relatively toward one another, and the entire system eventually collapsed.

Significance of the Bretton Woods Agreement

Despite falling apart, the Bretton Woods summit and agreement are
responsible for a number of notably important aspects in the financial
world. First and foremost is the creation of the IMF and the World Bank.
Both institutions remain vital to the global economy to this day.

On a larger scale, however, the agreement unified 44 nations from around

the world, bringing them together to solve a growing global financial crisis.
It helped to strengthen the overall world economy and maximize
international trade profit.