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What were the consequences of the Bretton Woods agreement?

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Quick Answer

The Bretton Woods agreement was the result of the 1944 United Nations Monetary and Financial Conference to establish a global economic framework after World War II. The agreement took the world off the gold standard and set the U.S. dollar as the global currency, establishing the United States as the dominant global economic power. It also created the International Monetary Fund and the World Bank.

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Full Answer

At the time of Bretton Woods, the United States held about three-quarters of the world's gold supply. The dollar was set at a fixed value relative to gold, which simplified moving the world to the dollar standard. Countries in the Bretton Woods system agreed to let their central banks maintain fixed exchange rates between their currencies and the dollar by purchasing currency in foreign exchange markets.

The IMF was set up to bail out countries that didn't have the funds to adjust their currencies when their value got too low. By letting these countries borrow from a central fund to fix their problems, it kept them from erecting trade barriers.

The World Bank was originally set up to help rebuild the European countries devastated by the war. Since then, its function has evolved to be a source of loans for development projects in emerging markets.

The Bretton Woods system collapsed in 1971 when inflation in the United States led it to abandon the fixed value of the dollar and allow it to float against other currencies.

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