Author: BORAN SUEKINCI
Publication date: 10.09.2024
While the system which resulted from it has already ended, Bretton Woods Agreement still stands as a very important shifting point and therefore a very important event in economic history. It has changed the relationship between currency and gold for good. Furthermore, it made dollar the reserve money and the dominant currency for economic exchange, a position it still keeps. Through this article we aim to explain the Bretton Woods Agreement and the history behind it.
What Is the Bretton Woods Agreement
The Bretton Woods Agreement is an agreement that resulted in the creation of the monetary system called Bretton Woods System. It was signed in a summit in New Hampshire at 1944 by the delegates of 44 allied nations, making 730 people in total. World was going through some major economic problems at the time, in no small part due to the impact of World War 2 and the reason for this summit was to create a new economic system more fit for these economic problems.
As mentioned earlier, this new system was the Bretton Woods System. While the Bretton Woods System ended a long time ago, it still became a cornerstone that widened the interspace between monetary value and solid materials. This widening meant that the way economic value is determined has become a lot less rooted in universal, precisely calculable rules and a lot more volatile in the sense that it was reliant on subjective economic relations.
To explain it briefly, the monetary value of a country’s currency was determined by how much of a unit of that country’s money corresponded to gold before the Bretton Woods Agreement. It was decided in New Hampshire that instead of the gold reserve of a country directly determining the exchange value of that country’s money, America would keep a fixed dollar-gold exchange rate of 35$, and the value of a countries currency would be determined according to how a unit of that money corresponds to the dollar equivalent of gold. In other words, instead of gold directly determining the value of a country’s currency as the reserve, dollar (pegged to gold) became the reserve money which determined the exchange value of the other currencies. In theory, we can say that if gold in this system is like a computer, then dollar turned into the interface which makes that computer accessible to the average person.
Past of the Bretton Woods Agreement
The Bretton Woods Agreement wasn’t the first time countries started to move away from gold. Instead, it was the result of a longer process where gold standard (the system where monetary value is determined directly by gold) collapsed. In fact, while the Bretton Woods System was decided on New Hampshire at 1944, the preparations for it had already started five years earlier.
After the economic burden that came with World War One, many countries abandoned the gold standard because of their economic struggles after the war. While there were attempts to go back to gold standard afterwards including pegging gold to currencies like pound or dollar in a similar way to what was done in the Bretton Woods System, economy in general was still much less stable and more uncertain. The Bretton Woods Agreement was made after the collapse in the Great Depression and in a way determined a mutually agreed upon model that was more indirect towards gold.
End of the Bretton Woods System
The end of the Bretton Woods System came around the late 60s and early 70s. The gold reserves in America could no longer compensate for the circulating money and America stopped exchanging the currency from other countries with gold and no longer allowed the pegging of currencies to gold. Instead of gold, the currencies started to get pegged to other currencies.
In some ways we can say that the Bretton Woods System ended up as a transitional economic system in history which made the monetary system of the world, for better or for worse, shift to a more uncertain, fluid model with less grounding from a universal determinant such as gold. The decisions agreed upon at New Hampshire put dollar in the position of a determinant for monetary value. While dollar here was still taking credibility from gold, this relationship between gold and dollar ended with the end of Bretton Woods System, paving way for a model where the source of monetary value is much less precise.
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