What Is Meant By The Bretton Woods Agreement

The Bretton Woods system was put in place as a more stable replacement for the gold standard under which all currencies were converted to gold. Under the new agreement, the dollar was the standard for international transactions, which were valued at one ounce of gold. The fact that the United States held a large portion of the world`s gold reserves allowed the dollar to play its new role as a standard currency on which the stock markets were based. A devastated Britain had little choice. Two world wars had destroyed the country`s main industries, which paid for the import of half of the food and almost all of its raw materials except coal. The British had no choice but to ask for help. It was only when the United States signed a 4.4 billion pound British aid agreement on 6 December 1945 that the British Parliament ratified the Bretton Woods Agreements (which took place later in December 1945). [24] The agreement also facilitated the creation of considerably important structures in the world of finance: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now known as the World Bank. The IMF should provide loan advances to countries with balance-of-payments deficits. Short-term balance-of-payments difficulties would be overcome by IMF loans, which would facilitate exchange rate stability. This flexibility meant that a Member State did not have to cause depression to bring its national income down to such a low level that its imports would eventually fall within its capabilities.

This should avoid the need for countries to resort to conventional medicine, to embark on dramatic unemployment in the face of chronic balance-of-payments deficits. Before the Second World War, European nations – especially Britain – often used it. As part of the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar. If a country`s monetary value became too low against the dollar, the bank would buy its currency back on the foreign exchange markets.

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