The international monetary system established in 1944 that pegged currencies to the U.S. dollar, which was convertible to gold at $35 per ounce. Its collapse in 1971 created the modern floating exchange rate system used in forex today.
The Bretton Woods Agreement
In July 1944, delegates from 44 nations met in Bretton Woods, New Hampshire, to design a new international monetary order for the post-World War II era. The agreement established fixed exchange rates with all currencies pegged to the U.S. Dollar (USD), and the dollar pegged to gold at $35 per ounce. The International Monetary Fund (IMF) and World Bank were created to manage the system.
How Bretton Woods Worked
Under the system, countries maintained their exchange rates within a 1% band around the dollar peg. Central banks intervened in forex markets to defend these pegs. If a country faced a persistent Balance of Payments (BOP) imbalance, it could request permission from the IMF to adjust its peg. The system provided exchange rate stability that facilitated post-war trade and economic growth.
The system came under strain in the 1960s as U.S. spending on Vietnam and domestic programs led to inflation and growing doubt about the dollar's gold backing. On August 15, 1971, President Nixon suspended dollar-gold convertibility, effectively ending Bretton Woods.
Legacy
The U.S. Dollar (USD) retained its reserve currency status after Bretton Woods, supported by the Petrodollars system and deep U.S. capital markets. The IMF and World Bank continue to operate, though their roles have evolved significantly.
Related Terms
International Monetary Fund (IMF)
An international organization of 190 member countries that promotes global monetary cooperation, financial stability, and economic growth. The IMF provides loans to countries in financial distress and monitors global exchange rate policies.
World Bank
An international financial institution providing loans and grants to developing countries for capital projects. While less directly connected to forex than the IMF, World Bank programs and reports influence economic development and currency stability.
U.S. Dollar (USD)
The official currency of the United States and the world's primary reserve currency. The USD is involved in approximately 88% of all forex transactions and serves as the benchmark against which all other currencies are measured.
Currency Peg
A fixed exchange rate policy where a country's central bank maintains its currency at a set rate against another currency (usually USD or EUR) through active intervention and reserve management.
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