Bretton Woods System
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What Is Bretton Woods System?
The Bretton Woods system was the post-World War II international monetary order that established fixed exchange rates among major economies. It was created at the Bretton Woods Conference in New Hampshire in 1944, which also founded the International Monetary Fund and the World Bank. Under the system, participating currencies were pegged to the U.S. dollar, which was itself convertible to gold at a fixed price. This arrangement made the dollar the anchor of global finance and the world's leading reserve currency. The system aimed to provide exchange-rate stability and rebuild international trade and cooperation after the disruptions of the Great Depression and the Second World War.
Why It Matters
The Bretton Woods system shaped the global economy for nearly three decades, but it contained a fundamental strain: the United States had to supply enough dollars to fuel world trade while maintaining their convertibility into a limited stock of gold. As dollars abroad piled up, confidence in that promise eroded. In 1971, in what became known as the 'Nixon shock,' the United States suspended the dollar's convertibility into gold, effectively ending the system. The world's major currencies then shifted toward the floating exchange rates that prevail today. Bretton Woods left a lasting legacy nonetheless: the IMF and World Bank still operate, and the U.S. dollar retains the central reserve role it acquired under the system.
Test Your Knowledge
Questions on this topic from the EconRecall fact bank:
- Which 1944 conference established the post-war fixed exchange rate system along with the IMF and the World Bank?
The Bretton Woods Conference in New Hampshire - Under the Bretton Woods system, participating currencies were pegged to which currency, which was itself convertible to gold at a fixed price?
The U.S. dollar - What action in 1971, often called the "Nixon shock," effectively ended the Bretton Woods system?
The United States suspended the dollar's convertibility into gold