Bretton Woods Convention Reorganizes World Economy
July 22, 1944. Meeting in the resort town of Bretton Woods, New Hampshire, representatives of forty-one nations established conditions for international economic linkages. The conference created two new institutions, the International Monetary Fund and the World Bank. The centerpiece, however, was agreement on a system of fixed exchange rates specifically designed to avoid repeating the mistakes of the interwar period.
Given perceived problems with flexible exchange rates before the war, negotiators were determined to gain the stability of fixed exchange rates without reverting to the permanently fixed rates of a gold standard. The result was system of adjustable pegged exchange rates with the U.S. dollar assuming the primary role as a reserve asset for central banks. The IMF was established to provide a mechanism similar in spirit to a world central bank, but without the ability to create reserves, relying instead on subscription payments into the IMF by the member countries.
The period until about 1958 was marked by a world willingness to accumulate dollars as reserve assets. This allowed the U.S. to run trade deficits without an exchange rate adjustment, which would have been impossible in any case because the dollar was the one currency with a fixed gold value.
After 1958, persistent U.S. trade deficits became a greater problem as the external dollar money supply grew rapidly, creating a world-side inflation problem and exposing the disequilibrium inherent in the system.
On August 15, 1971, the U.S. suspended the convertibility of dollars into gold, effectively ending the Bretton Woods system of pegged exchange rates. In February 1973, the Smithsonian Agreement formally ended the Bretton Woods system, leaving the world with officially floating exchange rates.