||Bretton Woods is the name given to the deal that spared the International Monetary System for 25 years after World War II, and set up the International Monetary Fund (IMF) and the World Bank. In 1944, officials from 45 non-Communist nations met at Bretton Woods in New Hampshire, USA, and agreed on a system of international liquidity and exchange rate management, to be administered by the IMF. This was the first time that a formal world agreement had laid down rules for the international monetary system.
Under Bretton Woods, exchange rates of IMF members were fixed in terms of gold, or the dollar; only the dollar was actually convertible into gold, at a fixed price of $35 an ounce. Members guaranteed to maintain their currencies\' value (by buying and selling them) within 1% either side of parity, and were required to inform the IMF of any parity changes; they needed IMF permission for changes of more than 10%. The IMF rules required that changes should be made only if a country\'s balance of payments was in â€˜fundamental disequilibriumâ€™.
For governments in payments difficulty, the Bretton Woods agreement envisaged two kinds of international reserves:
(1) Holdings at the IMF These were (and still are) relatively small. IMF members deposit a â€˜quotaâ€™ of national currency (and also, until 1976, gold) with the IMF, the quota being set according to the country\'s perceived â€˜importanceâ€™. The IMF then uses these deposits to lend to countries experiencing balance of payments difficulties. It can also use its holdings of special drawing rights.
(2) National currencies Principally the dollar though, for large parts of the old British empire, also sterling. Because of the dollar\'s convertibility into gold, it had all the qualities that money requires: a stable value, convenience and widespread acceptability for transactions.
At first, the dollar\'s foreign obligations were fully backed by gold, but during the 1960s America\'s debt overtook its gold stocks. The stability of international money then depended on faith in the dollar itself. In August 1971 this faith was shattered: America\'s domestic economic troubles and problems paying for the Vietnam War led President Nixon to devalue the dollar against gold (to $38 an ounce) and hence against other major currencies. At a stroke, reserves of the central banks were reduced in value. After several months of instability, confusion and American arm-twisting, the leading industrial countries agreed in December 1971 to a new set of exchange rate parities under the Smithsonian Agreement, and by 1973 all the main currencies were floating. TF