US & World Economies Economic Theory Bretton Woods System and 1944 Agreement How Bretton Woods Introduced a New International Monetary System By Kimberly Amadeo Updated on May 26, 2022 Reviewed by Robert C. Kelly Reviewed by Robert C. Kelly Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital. learn about our financial review board Fact checked by J.R. Duren In This Article View All In This Article The Bretton Woods Agreement Replacing the Gold Standard Why the Agreement Was Needed Role of the IMF and World Bank Collapse of the Bretton Woods System Frequently Asked Questions (FAQs) Photo: Bettmann / Getty Images The Bretton Woods agreement of 1944 established a new international monetary system. It replaced the gold standard with the U.S. dollar as the global currency. By so doing, it established America as the dominant power in the world economy. After the agreement was signed, America was the only country with the ability to print dollars. The agreement created the World Bank and the International Monetary Fund (IMF), U.S.-backed organizations that would monitor the new system. Key Takeaways The creation of Bretton Woods resulted in countries pegging their currencies to the U.S. dollar. In turn, the dollar was pegged to the price of gold, and the U.S. became dominant in the world economy. The U.S. was the only nation that could print the globally accepted currency, and countries had more flexibility than they did with the old gold standard.When the dollar ceased to be pegged to the price of gold, it became the monetary standard with other currencies pegging their currencies to it. The Bretton Woods Agreement The Bretton Woods agreement was created in a 1944 conference of all of the World War II Allied nations. It took place in Bretton Woods, New Hampshire. Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar. If a country's currency value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange markets. Note Purchasing currency would lower the supply of the currency and raise its price. If a currency's price became too high, the central bank would print more. This printing production would increase the supply and lower the currency's price. Members of the Bretton Woods system agreed to avoid trade wars. For example, they wouldn't lower their currencies strictly to increase trade. But they could regulate their currencies under certain conditions. For example, they could take action if foreign direct investment began to destabilize their economies. They could also adjust their currency values to rebuild after a war. Replacing the Gold Standard Before Bretton Woods, most countries followed the gold standard. That meant each country guaranteed that it would redeem its currency for its value in gold. After Bretton Woods, each member agreed to redeem its currency for U.S. dollars, not gold. Why dollars? The United States held three-fourths of the world's supply of gold. No other currency had enough gold to back it as a replacement. The dollar's value was 1/35 of an ounce of gold. Bretton Woods allowed the world to slowly transition from a gold standard to a U.S. dollar standard. Note Over time, the dollar became a substitute for gold. As a result, the value of the dollar began to increase relative to other currencies. The transition created more demand for dollars, even though its worth in gold remained the same. This discrepancy in value planted the seed for the collapse of the Bretton Woods system three decades later. Why the Agreement Was Needed Until World War I, most countries were on the gold standard. However, they cut the tie to gold so they could print the currency needed to pay for their war costs. This inflow of currency caused hyperinflation, as the supply of money overwhelmed the demand. After the war, countries returned to the safety of the gold standard. Note Hyperinflation caused the value of money to fall so dramatically that, in some cases, people needed wheelbarrows full of cash just to buy a loaf of bread. All went well until the Great Depression. After the 1929 stock market crash, investors switched to commodities trading. It drove up the price of gold, resulting in people redeeming their dollars for gold. The Federal Reserve made things worse by defending the nation's gold reserve by raising interest rates. The Bretton Woods system gave nations more flexibility than strict adherence to the gold standard. It also provided less volatility than a currency system with no standard at all. A member country still retained the ability to alter its currency's value, if needed, to correct a "fundamental disequilibrium" in its current account balance, the Federal Reserve noted. Role of the IMF and World Bank The Bretton Woods system could not have worked without the IMF. Member countries needed it to bail them out if their currency values got too low. They'd need a kind of global central bank they could borrow from if they needed to adjust their currency's value and didn't have the funds themselves. Otherwise, they would just slap on trade barriers or raise interest rates. The Bretton Woods countries decided against giving the IMF the power of a global central bank. Instead, they agreed to contribute to a fixed pool of national currencies and gold to be held by the IMF. Each member country of the Bretton Woods system was then entitled to borrow what it needed, within the limits of its contributions. The IMF was also responsible for enforcing the Bretton Woods agreement. Note The IMF was not designed to print money and influence economies with monetary policies. The World Bank, despite its name, was not the world's central bank. At the time of the Bretton Woods agreement, the World Bank was set up to lend to the European countries devastated by World War II. The purpose of the World Bank changed to loaning money to economic development projects in emerging market countries. The Collapse of the Bretton Woods System In 1971, the United States suffered from massive stagflation—a combination of inflation and recession, which causes unemployment and low economic growth. In response to a dangerous dip in value caused by too much currency in circulation, President Nixon started to deflate the dollar's value in gold. Nixon devalued the dollar to 1/38 of an ounce of gold, and then to 1/42 of an ounce. The devaluation plan backfired. It created a run on the U.S. gold reserves at Fort Knox as people redeemed their quickly devaluing dollars for gold. In 1971, Nixon unhooked the value of the dollar from gold altogether. Without price controls, gold quickly shot up to $120 per ounce in the free market, ending the Bretton Woods system. Frequently Asked Questions (FAQs) What was the Bretton Woods Agreement? The Bretton Woods Agreement was a 1944 meeting of the Allied nations, in which the nations agreed to peg their currencies to the dollar while the dollar was pegged to gold. The agreement went into effect in 1958 but lasted less than 20 years. What is the gold standard? The gold standard was a currency measurement system in place in the United States up until the 1970s in which the value of the dollar was tied to gold. At the time of the Bretton Woods Agreement, one dollar was worth 1/35 of an ounce of gold. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Federal Reserve History. "Launch of the Bretton Woods System." Federal Reserve History. "Creation of the Bretton Woods System." Federal Reserve Bank of St. Louis. "Joint Statement by Experts on the Establishment of an International Monetary Fund," Pages 2-3. U.S. Department of State. "The Bretton Woods Conference, 1944." International Monetary Fund. "Book Reviews: A New Global System." IMF eLibrary. "Lessons From the Gold Standard and Bretton Woods." Federal Reserve History. "Nixon Ends Convertibility of US Dollars to Gold and Announces Wage/Price Controls." 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