Bretton Woods Agreement 1971

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But, it had become apparent immediately that there was going to be a longer transition period than anticipated – the British were unsuccessful in their attempt to restore convertibility in 1947. The major industrial countries achieved some limited current account convertibility in 1958. Under the deal reached in July 1944, countries would set their currency to the U.S. dollar at a fixed, but adjustable rate, while the dollar would then be pegged to gold at a rate of $35 per ounce. Pegging the dollar to gold provided assurances that the U.S. would keep its economic house in order; central banks in other countries could convert their dollars into gold if they lost confidence in the U.S. dollar. And the countries that escaped contagion were those with floating currencies, like South Africa and Mexico. Ergo, countries should go to one or other of the two extreme regimes, either a currency board or a floating exchange rate.


Triffin believes that one requirement of the of USD would necessarily result in trade deficit of USD, that is, an outflow of dollars with an aim of increasing other country’s foreign reserves. The other requirement, an inflow of dollars, would result in trade surplus, stabilizing the dollar as the central currency. A possible variant on the BBC regime would be a system of mutual pegging among the East Asian currencies similar to the European snake and ERM prior to evolution of the euro, instead of common pegging to a basket. There would seem to be several obstacles to East Asia taking that alternative route.

We looked at output in our counterfactuals, which are basically experiments where we assume that Bretton Woods did not exist. And within our model, we can run a counterfactual where we say, well, let’s imagine for a second that Bretton Woods did not exist. And what we find is that actually output would have been higher in level over time. So there’s a difference in the level of output that is pretty much constant over time.

Further research could focus on mathematical simulations of the effect of different factors on the rates, which clearly shows the significance of each factor. Figure 4 shows the change in exchange rate of Euro to USD from 1953 to 1971, which includes the latter period of the Bretton Woods system when problems began to appear and the three Dollar Crisis of the United States. As labeled in the graph, during the first dollar crisis in 1960, the exchange rate dropped rapidly from around 0.99 to around 0.95.

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For before a nation can have a monetary system of integrity, it must end all policies of inflationary finance. After 1957, and to this day, the foreign banks have been obliged to continue to take in dollars that were neither intended for imports nor needed for liquidity. Despite falling apart, the Bretton Woods summit and agreement are responsible for a number of notably important aspects in the financial world.


The policies had been decided prior to the famed Camp David summit, although once there, Nixon wavered about suspending gold convertibility, but ultimately decided to implement the entire plan. Nixon announced his new economic policies to an unsuspecting world on Sunday, August 15, 1971. The U.S. satisfied the demand for foreign exchange by inflating its currency and extending loans and gifts to Europe. These gifts and loans were used almost entirely to import goods from the U.S. However, the demand for reserve liquidity and replenishment was met by continuing U.S. deficits that led to European “stockpiling” of dollars in the form of interest-bearing notes and demand deposit accounts.

Bretton Woods System – Explained

A second example of central bank coordination in reserve policies is the Central Bank Gold Agreement. A number of central banks – especially in industrial countries – aim for getting rid of their large reserve holdings in the form of gold. Knowing that a simultaneous sale of gold decreases its price, they agreed to coordinate their sales of gold. The first Central Bank Gold Agreement was signed in 1999 by 14 European central banks for the purpose of limiting the amount of gold to be sold in the following 5 years. The essence of the agreements was that the IMF would provide assistance to member countries to manage balance of payments in a manner consistent with stable exchange rates and would supply credit where needed. The principal obligation of members was to allow free convertibility for current account transactions, while capital account controls were permitted.

  • There were three elements to a “crawling band” regime, as Jacob Frenkel termed it in 1992 when he added a crawl to the wide band that Israel had already worked its way to, so as to avoid the periodic crises that had been erupting whenever a parity change was anticipated.
  • Meanwhile, the pressure on government reserves was intensified by the new international currency markets, with their vast pools of speculative capital moving around in search of quick profits.
  • Inflation in the United States rose from less than 2 percent in early 1965 to 6 percent by the end of 1969.
  • The IMF sought to provide for occasional discontinuous exchange-rate adjustments (changing a member’s par value) by international agreement.

But Britain couldn’t devalue, or the Empire surplus would leave its banking system. There was a high level of agreement among the powerful nations that failure to coordinate exchange rates during the interwar period had exacerbated political tensions. Furthermore, all the participating governments at Bretton Woods agreed that the monetary chaos of the interwar period had yielded several valuable lessons. Under the Bretton Woods System, every currency involved in the agreement had a known value in U.S. dollars or gold.

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Operationalists put forward another management flaw by arguing that other countries failed to comply with the adjustment of exchange rate assigned in the Article of Agreement. In the agreement, there was a term called “fundamental disequilibrium”, which means that countries had rights to adjust their exchange rate at the range of 1% when outward and inward payments did not balance. “Although exchange rates can be altered in case of “fundamental disequilibrium”, countries were reluctant to alter their currency values, since “ that would indicate the weakness of the currency” .

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There were three elements to a “crawling band”, as Jacob Frenkel termed it in 1992 when he added a crawl to the wide band that Israel had already worked its way to, so as to avoid the periodic crises that had been erupting whenever a parity change was anticipated. The first was use of a basket of currencies as the unit in terms of which to define the country’s exchange rate target, and therefore band. The third element was the crawl of the parity, which was envisaged as allowing the authorities to keep the band realistic in the face of real shocks, differential inflation, and Balassa-Samuelson productivity bias. The extent to which the future crawl was pre-determined and pre-announced varied a lot, with some countries announcing a virtual tablita, others announcing a formula , others predetermining but not announcing, and others following a more discretionary policy.

In the aftermath of the subprime mortgage crisis, several European countries that had been connected to the US crisis or which had bank credit-driven house price booms, engaged in expensive bond financed bank bailouts. These bailouts and economic collapse increased the fiscal deficit leading to debt surges. The bailouts across Europe followed in some respects the example of Ireland which in September 2008 guaranteed its entire financial system.


Governments intervened in foreign exchange markets in order to preserve their unrealistic exchange rates, by accumulating massive amounts of unwanted weak currencies. At the Smithsonian meeting, countries also agreed to future talks on broader reforms of the international monetary system. Issues that would be discussed included the central role of the dollar, shared responsibility for exchange-rate stability, the future role of gold, a means for easing exchange-rate adjustment, and measures to deal with volatile financial flows.

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The Secret White House Tapes reveal Nixon’s preference for open capital flows and a very expansionary monetary policy. With advisors who strongly advocated floating, the US drift toward floating exchange rates was inevitable. Flows of speculative international finance were curtailed by shunting them through and limiting them via central banks. This meant that international flows of investment went into foreign direct investment —i.e., construction of factories overseas, rather than international currency manipulation or bond markets. Although the national experts disagreed to some degree on the specific implementation of this system, all agreed on the need for tight controls. The other innovation among developing countries in the 1990s was to experiment with arrangements similar to the target zones that Fred Bergsten and I had advocated for the main industrial countries in the 1980s.

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The gold standard makes it difficult or impossible for governments to adjust the value of their currency based on their country’s economic needs and forces central banks to hold vast reserves of the metal. In August 1971, Richard Nixon declared that they were abandoning the gold-back dollar as well as fixed exchange rates—the cornerstone of the Bretton Woods international economic system. As a result, the Japanese yen experienced a drastic continuous drop against the US dollar. Also emphasize the key role of government guarantees in explaining the Asian crisis.

With up to 50% of world manufacturing inside the USA, and the dollar as the prime currency of international exchange, US capitalism was in prime position to lead a new cycle of capital accumulation. In 1960, with its balance of trade in surplus, the GDP of the USA accounted for 40% of total world output. It was a boom in which its allies soon caught up — thanks in part to the US running a budget deficit to finance the Korean war , and the regeneration of Japan. It’s worth reminding readers today how much that upsurge in production, born out of the destruction of world war which allowed for a new round of capital accumulation, changed working class lives. Meanwhile, working class children were now entitled to secondary education and a small minority began to enter the ivory towers of university academia (subject to a means-tested grant for a living allowance), giving rise to theories about the ‘rise of the meritocracy’. Of fixed exchange rates in which countries pegged their currencies to the US dollar.

One of the unknowns that were to materialize quite quickly at the end of the war was the extent of the threat of communism. (The Soviet Union had attended the Bretton Woods conference, though it was plainly unlikely to be a participant in the resulting arrangements.) The urgency of containing communism was what prompted Washington to support recovery programs in many countries. Recovery in Europe, and particularly in Germany, was viewed as essential, and so the United States gave extensive loans to European countries. When the worst harvest of the century and the most severe winter followed one another in 1946 and 1947, problems were exacerbated. In Europe, foreign exchange reserves had been nearly exhausted and a desperate shortage of dollars and gold developed.

  • International and domestic issues are even more joined today than they were then.
  • The agreement was reached by 730 delegates, who were the representatives of the 44 allied nations that attended the summit.
  • In addition, the IMF was based in Washington, D.C., and staffed mainly by U.S. economists.
  • For these reasons I am doubtful that the bipolarity thesis will end the debate on choice of exchange rate regime.
  • Since “In the Bretton Woods regime currencies were pegged to the dollar, which in turn was tied to gold”, “capital mobility was limited” .

Instead, the novel captured Japan’s sense of vulnerability after the Nixon Shocks and the oil crisis. Hyperinflation caused the value of money to fall so dramatically that, in some cases, people needed wheelbarrows full of cash just to buy a loaf of bread. Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive.

Between 1946 and 1971 most countries settled their international trade balances using the Bretton Woods System. Forty-four allied countries met between July 1st and July 22nd, 1944 in Bretton Woods, New Hampshire. Economic instability contributed to the Great Depression, the rise of Hitler, and the onset of World War II. One objective of the Bretton Woods Agreement was to create a system to enhance economic growth by stabilizing the exchange rates between international currencies. Each country was required to peg its currency to the US dollar, which was tied to gold.