Bretton Woods Agreement

In July 1944, 44 countries of the world signed an agreement to build a new world monetary and financial system centered on the US dollar at the “United Nations Monetary and Financial Conference” held in Bretton Woods, New Hampshire.

The capitalist world monetary and financial system centered on US dollar built according to this agreement was called the “Bretton Woods system”. The key contents of the system include: the establishment of the International Monetary Fund to hold consultations on International Monetary Affairs, and providing financing support for the short-term balance of payments deficit of Member States; the US dollar was directly linked to gold, and currencies of various countries were linked to the US dollar, and it was begun to implement an adjustable fixed exchange rate system; the foreign exchange control of current account transactions were abolished, and as a result, the Bretton Woods system established two major international financial institutions, namely, the International Monetary Fund and the International Bank for Reconstruction and Development (hereinafter referred to as “World Bank”).

According to this agreement, the monetary and financial system of the capitalist world with the US dollar as the center was called the “Bretton Woods system”. The core contents of the system include: the establishment of the International Monetary Fund (IMF), consultation on International Monetary Affairs, financing support for the short-term balance of payments deficit of member countries; the direct link between the US dollar and gold, the link between national currencies and the US dollar, the implementation of adjustable fixed exchange rate system; the elimination of foreign exchange control of current account transactions, etc.

As a result, the Bretton Woods system established two major international financial institutions–the International Monetary Fund and the International Bank for Reconstruction and Development (the “World Bank”). The International Monetary Fund (IMF) was responsible for providing short-term funds to Member Countries to ensure the stability of the international monetary system; the World Bank would provide long-term bank credits to promote the recovery and development of the world economy, and these two institutions are still in operation so far.

The Bretton Woods system aimed to promote the stable development of international finance and provided favorable conditions for the expansion of international trade and the growth of world economy through the direct link between the US Dollar and gold and the fixed exchange rate system. However, the Bretton Woods system also had its inherent defects, which were mainly manifested in the contradiction between the international reserve status and the international liquidity of the US Dollar, the asymmetry of policy coordination between reserve currency issuing countries and non-reserve currency issuing countries, and the dilemma between the internal and external objectives under the fixed exchange rate system. The Bretton Woods Agreement laid the foundation for the financial hegemonism of the United States. With the development of the world economy, these inherent defects were gradually exposed. In the 1960s to 1970s, after many cases of Dollar crises, the US Dollar depreciated against gold marked by the “Smithsonian Agreement” in December 1971, and at the same time, the US refused to sell gold to foreign central banks, but the gold standard system under the Bretton Woods system was still carried on. In February 1973, the US Dollar further devalued, and the main currencies in the world were forced to implement the floating exchange rate system under the negative impact of money speculators, and the Bretton Woods system has completely collapsed, since then, the international financial situation became volatile. Until 1976, the international community reached the “Jamaica System” with the legalization of floating exchange rate and the non-monetization of gold as the main contents. However, the Jamaica System was not a set of strict institutional arrangements, but a kind of laissez-faire system which had neither any standard and moderate growth constraints, nor a balance of payments coordination mechanism, so as to be called as “a system without system”.