Introduction to the

Bretton Woods System

The Bretton Woods system was an international monetary framework
established in 1944 to promote global economic stability and
cooperation following the devastation of World War II. It introduced a
fixed exchange rate system pegged to the U.S. dollar, which in turn was
convertible to gold.

RA by Rachna Gupta
Historical Context and
Motivations
The Bretton Woods system emerged in the aftermath of World War II,
when global economic cooperation was seen as crucial to preventing
another catastrophic conflict. Policymakers aimed to avoid the
protectionist trade policies and competitive currency devaluations that
had contributed to the Great Depression.
Key Institutions and Agreements
1 The Bretton Woods Conference
The Bretton Woods conference in 1944
established the key institutions and
agreements that would underpin the new
international monetary system.
3 The World Bank
The World Bank was established to
provide loans for post-war reconstruction
and development projects to promote
global economic growth.
2 The International Monetary Fund
(IMF)
The IMF was created to monitor exchange
rates, provide loans to countries in
balance of payments difficulties, and
promote monetary cooperation.
4 The General Agreement on Tariffs
and Trade (GATT)
GATT was an international agreement
aimed at promoting free trade by reducing
tariffs and other barriers to international
commerce.
The Gold Standard and Fixed Exchange Rates

The Gold Standard Fixed Exchange Rates Global Coordination

The Bretton Woods system
pegged currencies to the U.S.
dollar, which was convertible to
gold at a fixed rate, establishing
a global gold standard to
maintain stability.
Countries agreed to maintain
their currencies within a fixed
range of the U.S. dollar, limiting
fluctuations and promoting
predictable international trade
and investment.
The system required countries
to intervene in foreign
exchange markets to maintain
the fixed exchange rate,
fostering global economic
cooperation and stability.
The Role of the International Monetary Fund
(IMF)
Monitoring and Lending and Promoting Promoting
Oversight Assistance Cooperation Economic Growth

The IMF was tasked The IMF could The IMF fostered By maintaining
with monitoring the provide loans to international stability and assisting
exchange rate countries facing monetary countries in need,
policies of member balance of payments cooperation, the IMF aimed to
countries and difficulties, helping facilitating the promote global
providing them maintain fixed exchange of economic growth
surveillance to exchange rates and information and the and prosperity in the
ensure the stability avoid devaluations. coordination of post-war era.
of the global policies among
monetary system. member countries.
The World Bank and its Objectives
Post-War Reconstruction
The World Bank was established to provide
loans and financing for the reconstruction of
war-torn economies, supporting
infrastructure development and economic
recovery in the aftermath of World War II.
Capacity Building
The World Bank also offered technical
assistance and capacity-building programs to
help strengthen the institutional and
policymaking capabilities of its member
countries, enabling them to better manage
economic challenges.
Promoting Global Development
Beyond reconstruction, the World Bank's
mandate expanded to support economic
development projects in developing
countries, aiming to alleviate poverty and
promote sustainable growth worldwide.
Mobilizing Resources
The World Bank tapped into global capital
markets to raise funds, which it then
channeled as low-interest loans and grants to
support its development and reconstruction
initiatives around the world.
Advantages of the Bretton Woods System

Monetary Stability International Economic Economic Growth

The fixed exchange
Cooperation Development By promoting trade,
rate system promoted The Bretton Woods The World Bank's investment, and
global monetary framework fostered lending and technical financial stability, the
stability, reducing unprecedented levels assistance programs Bretton Woods system
exchange rate of global economic supported post-war was credited with
fluctuations and cooperation, with reconstruction and fueling the rapid
providing a predictable countries coordinating economic economic growth
environment for policies to maintain development in poorer experienced in the
international trade and the stability of the countries, contributing decades following
investment. monetary system. to global prosperity. World War II.
Criticisms and Limitations
Reliance on the Lack of Flexibility Deflationary Bias Unequal
U.S. Dollar Development
The fixed exchange The system's
The Bretton Woods rate regime limited emphasis on Critics argued that
system's dependence the ability of maintaining fixed the Bretton Woods
on the U.S. dollar as countries to exchange rates and institutions, such as
the global reserve independently adjust defending the U.S. the World Bank,
currency was seen as their monetary dollar's value against primarily benefited
problematic, as it policies to address gold created a the industrialized
gave the United domestic economic deflationary bias, nations, while doing
States outsized challenges, leading potentially little to address the
influence over the to calls for more constraining needs of developing
international flexible economic growth in economies.
monetary system. arrangements. some countries.
The Collapse of the Bretton Woods System

Mounting Pressures
1 Increasing trade deficits and capital outflows from the U.S. strained the fixed
exchange rate system.

Devaluation of the Dollar

2 In 1971, President Nixon suspended the dollar's convertibility
to gold, effectively ending the Bretton Woods system.

Floating Exchange Rates

Countries began adopting flexible exchange
3
rate regimes, ushering in a new era of global
finance.

The Bretton Woods system eventually unraveled due to a combination of factors, including the United
States' growing trade deficits, speculative attacks on the dollar, and the rising costs of defending its
fixed exchange rate. This led to the abandonment of the gold standard and the transition to a system of
floating exchange rates in the early 1970s, marking the end of the Bretton Woods era.
Lessons and Legacy of the Bretton Woods
Era
Importance of Coordination
The Bretton Woods system emphasized the
critical role of international coordination in
maintaining global economic stability, a
lesson still relevant today.
Evolving Institutions
The IMF and World Bank, created at Bretton
Woods, have adapted over time to address
new global economic issues, demonstrating
the need for flexibility in multilateral
organizations.
Limits of Fixed Regimes
The eventual collapse of the Bretton Woods
fixed exchange rate system underscored the
challenges of maintaining rigid monetary
arrangements in the face of evolving
economic realities.
Enduring Influence
While the specific Bretton Woods
agreements are no longer in place, its legacy
of promoting international cooperation and
development continues to shape global
economic governance.