Download bretton woods agreement and more Assignments Economics in PDF only on Docsity! The Bretton Woods agreement was created in a 1944 conference of all of the World War II Allied nations. It took place in Bretton Woods, New Hampshire. Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar. How exactly would they do this? If a country's currency value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange markets. That would lower the currency's supply and raise its price. If its currency became too high, the bank would print more. That would increase the supply and lower its price. Members of the Bretton Woods system agreed to avoid trade wars.1 For example, they wouldn't lower their currencies strictly to increase trade. But they could regulate their currencies under certain conditions. For example, they could take action if foreign direct investment began to destabilize their economies. They could also adjust their currency values to rebuild after a war. The Bretton Woods system gave nations more flexibility than a strict adherence to the gold standard. It also provided less volatility than a currency system with no standard at all. A member country still retained the ability to alter its currency's value if needed to correct a "fundamental disequilibrium" in its current account balance. Role of the IMF and World Bank The Bretton Woods system could not have worked without the IMF.2 Member countries needed it to bail them out if their currency values got too low. They'd need a kind of global central bank they could borrow from in case 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 Bretton Woods countries decided against giving the IMF the power of a global central bank. This power involved printing money as needed. Instead, they agreed to contribute to a fixed pool of national currencies and gold to be held by the IMF. Each member 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.
