Bretton Woods Conference

Conference held in Bretton Woods, New Hampshire, to create a stable post–World War II international monetary system. The conference resulted in the establishment of shared international financial policies and institutions such as the International Monetary Fund and World Bank.

Economic nationalism, uncontrolled currency fluctuations, and competitive currency devaluation in the period between World Wars I and II made the international monetary system of the time highly unstable. Desperate to avoid trade deficits, nations frequently reduced the value of their currencies in order to make their goods cheaper to export to other countries. To avoid unfavorable changes in exchange rates, many countries responded by trading only with nations with whom they shared a common currency. The result was significantly slowed international trade that worsened the effects of the Great Depression of the 1930s.

During World War II, economic experts and world leaders identified this lack of international monetary cooperation as a source of political instability that contributed significantly to the outbreak of war. As the war progressed and defeat of the Axis powers grew imminent, the victors were eager to develop a cooperative “new world order” that would avoid the economic mistakes of the past. From June 1 until June 22, 1944, delegates from 44 countries participated in a meeting that became known as the Bretton Woods Conference, for the New Hampshire town in which it took place. The officials met to institute “the ground rules for international trade and finance” and to create an economic system that would promote worldwide peace and prosperity. Most of the policies adopted at the conference had been discussed and largely agreed on prior to the meeting. The proceedings that took place at Bretton Woods did little more than formalize the outcomes of discussions and debates that took place in the years preceding the end of the war.

The goal of the Bretton Woods agreements was to “combine an international system with the maximum of national monetary independence.” The participants were keen to establish a single currency with a fixed value as the standard against which all currencies could be valued. Since the United States was the overwhelmingly dominant economic power at the war's end, the dollar was chosen to be the international currency standard. The U.S. government agreed to fix the value of the dollar relative to gold at $35 per ounce of gold. Other nations would be allowed to vary the value of their currency relative to the dollar, but only within a limited range. The participants hoped these changes would lead to a more stable international monetary system that would encourage trade and reduce political tensions arising from economic rivalries.

To enforce restrictions on changes in currency values, the Bretton Woods participants created a currency stabilization mechanism called the International Monetary Fund, or IMF. Under the agreement, no nation could change the value of its currency without IMF approval. The IMF was thus designed to prevent the wild fluctuations in the value of currencies that were common between the wars. The IMF also functioned as a financial adviser that helped nations manage their national debt and avoid the need to devalue their currencies to offset trade deficits.

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