The Bretton Woods System

The Bretton Woods system was a form of monetary administration that was established by the major industrial states of the world to manage financial and commercial relations between them to bring order to the chaotic and unfair trade practices that were considered ballistic at that time.

The Bretton Woods system was one of the first financial orders that were formulated by 44 allied nations who negotiated from the 1st of July 1944 up to the 22nd of July the same year before reaching an amicable solution that all 44 nations finally agreed upon dropping the gold standard while World War II was still raging in Europe. The 730 delegates from the 44 countries initiated an arrangement that was intended to rebuild the international economic system.

The delegates set up a set of rules and procedures that gave the international monetary system a structure that all nations had to comply by establishing the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) (currently World Bank Group). They were operational by the end of 1945 after most of the non allied countries of that time decided to ratify the agreement that was proposed by the 44 nations.

One of the primary features of the B.Woods criterion was the obligation for every nation under the agreement to maintain monetary an exchange rate (monetary policy) that was linked to the U.S. dollar which gave rise to competitive devaluation of their currencies. Basically according to the BW system the US Dollar was convertible to Gold at 35 $ for 1 Oz of gold. This gave most other nations the faith they needed to trade in US dollars due to the fact that the Dollar could be converted to gold as and when a nation decided to unload their dollars.

However, the ‘Nixon Shock ‘on the 15th of August 1971, brought about the termination of the convertibility of the US dollar to gold created which made the US Dollar a reserve currency automatically. Due to this many other currencies also became free floating FIAT currencies. The ensuing situation created a ‘pegged’ currency rate system whereby nations were required to establish parities and maintain exchange rates by influencing their domestic FOREX.

Regardless of the turmoil, smart individuals who were buying gold bullion for investment maintained its avenue as the tangible ‘value’ of the fiat currencies according to the amount of the reserve gold each country had in their coffers. Even up to the current time countries ‘stock’ up on gold more than they do on currencies. The reason behind this is simple – gold is tangible while currencies are intangible and this will continue to be so for a long time to come.

In essence according to many economic professionals, a 2nd ‘Bretton Woods’ system is in order whereby money will be again linked to convertibility of gold, this would naturally give paper currencies back the value they used to carry in a tangible manner.

Author: Robin Gupta