Bretton Woods Agreement
The Bretton Woods Agreement had important implications for the gold market. It emerged from an economic conference held in Bretton Woods, New Hampshire in the United States, during the first three weeks of July 1944.
The conference was attended by delegates from forty-four allied countries and developed a landmark system for monetary and exchange rate management. The agreement was the first example of a fully negotiated monetary order intended to govern monetary relations between independent nation states. The agreement finally became operational in 1959 when the European currencies became convertible.
The basis for the creation of the Bretton Woods Agreement was the confluence of several key conditions including the shared experience due to the Great Depression and the presence of a dominant global power which was willing and able to assume a leadership role in monetary affairs.
The seminal ideas behind the conference were the establishment of open markets and the joint management of the western political / economic order. The agreement allowed the synthesis of Britain’s desire for full employment and economic stability and the United States desire for free trade.
The conference established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development which became operational in 1946. To complement these two organizations, the conference also proposed the establishment of an International Trade Organization (ITO) to establish the rules of international trade. Although a Charter for the ITO was agreed in Havana, Cuba in 1948, it was never ratified by the United States Senate and so, never came into being. IT is argued that today’s World Trade Organization (WTO) functions as the ITO was intended to operate.
The Bretton Woods Agreement and Gold
However, its most important element was the development of an adjustable pegged foreign exchange rate system. International currencies were pegged to the value of gold and the International Monetary Fund was given the power to intervene when an imbalance of payments arose. Each signatory to the agreement was obliged to adopt a monetary policy that maintained the exchange rate of its currency within one percent of a fixed value.
In the face of increasing strain the system collapsed in 1971 when the United States government suspended the convertibility of United States Dollars to gold. This action then made the United States Dollar the reserve currency of the member states.
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