Bretton Woods System

The Bretton Woods system was the international monetary arrangement negotiated in July 1944 at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire, by delegates of 44 Allied nations. Under it, member countries fixed their currencies to the US dollar within narrow bands, and the United States undertook to convert dollars held by foreign monetary authorities into gold at US$35 per troy ounce. The conference also created the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, the core of today's World Bank.

The system governed exchange rates among the major Western economies for roughly a quarter of a century. It effectively ended in August 1971, when the United States suspended gold convertibility, and the last attempt to preserve fixed parities gave way to general floating in 1973.

The architects, chiefly John Maynard Keynes for the United Kingdom and Harry Dexter White for the United States, wanted to avoid the competitive devaluations, trade barriers and banking collapses of the 1930s while escaping the rigidity of the classical gold standard. Keynes proposed an international clearing union with its own unit of account; White's more modest stabilization fund, reflecting American creditor power, largely prevailed.

The resulting Articles of Agreement of the IMF set out the main features:

• Par values. Each member declared a par value for its currency in gold or US dollars and kept market rates within 1% of it, usually by buying and selling dollars.
• Adjustable peg. A country could change its par value to correct a fundamental disequilibrium in its balance of payments, a deliberately undefined term.
• Gold link. Only the dollar was tied directly to monetary gold, making it the system's anchor and principal reserve currency.
• Convertibility for trade. Members were expected to make their currencies convertible for current-account transactions, while remaining free to use capital controls.
• IMF lending. The Fund pooled members' quota subscriptions and lent to countries facing temporary payments deficits.

Full currency convertibility came slowly. Most Western European currencies became convertible for current transactions only at the end of 1958, so the system operated as designed for little more than a decade. Central banks held their foreign exchange reserves largely in dollars and intervened to keep rates inside the band. Capital controls were widespread, which allowed governments to run independent monetary policies alongside fixed rates, a combination the impossible trinity otherwise rules out.

Par value changes did occur. Sterling was devalued in 1949 and again in 1967, and France and West Germany adjusted their parities in 1969. Each devaluation tended to follow a period of speculative pressure, illustrating the difficulty of defending a currency peg once markets doubted it.

The system depended on a contradiction later named the Triffin dilemma, after the economist Robert Triffin. The world needed a growing supply of dollar reserves, which required the United States to run payments deficits; but the more dollars accumulated abroad, the less credible the promise to convert them into gold at $35. Offshore dollar markets such as the Eurodollar market grew outside US control. Remedies included the London Gold Pool (1961–1968), a two-tier gold market from 1968, and the creation of Special Drawing Rights (SDR) in 1969 as a supplementary reserve asset.

Rising US inflation and spending in the late 1960s deepened the imbalance. On 15 August 1971 President Richard Nixon closed the gold window, suspending dollar convertibility. The Smithsonian Agreement of December 1971 realigned parities and raised the official gold price to $38, but pressure resumed, and by March 1973 the major currencies were floating against the dollar.

The IMF and the World Bank survived the end of fixed parities and remain central institutions; for their profiles see the IMF industry body profile and the World Bank Group profile. The amended IMF Articles, in force from 1978, let members choose their own exchange arrangements, ranging from a floating exchange rate to hard pegs and currency boards. The dollar kept its dominant reserve role even after it became a pure fiat currency, an outcome sometimes described as a dollar standard. Money resting on state authority rather than metal was not new; medieval England's Exchequer had long relied on tally sticks to record credit and tax payments. Periodic calls for a new Bretton Woods agreement reflect continuing debate over how to organize international money.

• International Monetary Fund
• World Bank