Bretton Woods Agreement

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The Bretton Woods agreement of 1944 established a new global monetary system. It replaced the gold standard with the United States dollar as the global currency. By so doing, it established the U.S.A. as the dominant power in the world economy. After the agreement was signed, the U.S.A. was the only country with the ability to print dollars.

The 1944 conference consisted of all of the World War II Allied nations and took place in Bretton Woods, New Hampshire, United States of America. Under the agreement, all countries promised that their central banks would maintain fixed exchange rates between their currencies and the U.S. 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.

The IMF and World Bank

The agreement also created the World Bank and the International Monetary Fund (IMF), both United States-backed organizations which would be based in that country, and which would monitor the new system.

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. The American-led conference convinced the attendees they needed some 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 attendees nevertheless 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.

The World Bank was set up to lend to the European countries devastated by World War II. The purpose of the World Bank later changed to loaning money for economic development projects in emerging market countries.

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