The Bretton Woods System and what predated it...

Ok let’s start with the Bretton Woods System.

After the Second World War and in the jaws of the great depression a conference was convened in rural Bretton Woods, New Hampshire in the summer of 1944. Delegates from 44 countries gathered to reshape the world’s international financial system.

The two main players US President Franklin D Roosevelt and UK Prime Minister Winston Churchill were determined to push through post war prosperity by working more closely together. This also would help lessen the risk of economic conflicts between countries such as happened in the 1930's which contributed to the push to war.

They focused on two areas: finding a stable system of exchange rates and how to pay for the rebuilding of Europe.

Both the International Monetary Fund (IMF) and The World Bank (officially IBRD) were born.

As the US were the dominant power willing and able to take on the leading role in the new global affairs, and as it gave the most money to start both of the above institutions it gained the most voting rights. Taking its name from the site of the conference they also gave birth to the Bretton Woods System.

The participating countries did not agree on much but because of the pre-war economic chaos and because of the great depression that had gripped the world economy, all the planners at Bretton Woods favoured a regulated system with tight controls on the value of currencies.

Before the introduction of the Bretton Woods System there were not such tight controls which would let a country devalue its own currency to make itself more competitive in the export market. Such an approach was only ever best in the short term and over time lead to a shrinking economy with mass unemployment. With the ever ballooning supply of paper money and the lack of gold to cover such large amounts only led to huge inflationary pressures and political unrest

In the early 20th and 19th centuries the gold standard was used to prop up currencies. This fixed a countries currency value and reduced the risk when trading with other countries, but as international trade grow it became clear there was not enough gold production to meet the growing demand.

The introduction of paper money, in the form of governmental IOUs (I owe you) gained acceptance in the middle ages, in some countries. Whereas before it was the coins minted from a countries preferred precious metal which paid for trade. Initially though right back where it all began the value of one man’s goods where expressed by the value of another mans. In other words one side would barter with the other in order to trade goods.

Return from Bretton Woods System to Forex Explained

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