Bretton Woods system

What is the Bretton Woods system

The Bretton Woods system was the post-war international monetary order in which currencies were fixed to the US dollar and the dollar was fixed to gold.

The name comes from the Bretton Woods agreement, signed by Allied countries at a conference in Bretton Woods, New Hampshire, towards the end of the war. The same agreement created the International Monetary Fund (IMF) and the bank that later became part of the World Bank Group.

Formal definition

For experienced readers, the precise version is this:

• Gold exchange standard. The US committed to convert dollars into gold at an official price. Only foreign central banks and governments could convert, not private holders.
• Adjustable peg. Each member declared a par value, an official rate against the dollar or gold. Its central bank had to keep the market rate inside a narrow band around that parity by buying or selling reserves.
• Parity changes. A member could change its par value only to correct a "fundamental disequilibrium", a lasting balance-of-payments problem, and in principle in consultation with the IMF.
• IMF role. The Fund lent reserves to members facing temporary payment deficits so they could defend the peg without an immediate devaluation.
• Capital controls. Members were allowed to restrict capital flows, which made the fixed rates easier to hold.

Worked example (hypothetical)

Suppose Country A fixes its currency at a set number of units per US dollar and must keep the rate within a narrow band around that parity.

1. Imports rise faster than exports, so more people sell Country A's currency to buy dollars.
2. The rate drifts to the weak edge of the band. To stop it falling further, Country A's central bank sells dollars from its reserves and buys its own currency.
3. If reserves run low, Country A borrows from the IMF.
4. If the deficit does not go away, Country A devalues. It declares a new parity with more units per dollar.

On a chart this looks like a nearly flat line for a long time, followed by a sudden step when the parity changes. See devaluation and revaluation.

Why it ended

The system depended on other countries holding dollars as reserves. As those holdings grew larger than US gold stocks, confidence that dollars could really be converted weakened. This tension is known as the Triffin dilemma. The US suspended gold convertibility, an event often called the "Nixon shock". A short-lived attempt to reset the parities followed, and major currencies then moved to floating rates backed by fiat money.

Where the term appears

• News and IMF reports. Writers use "Bretton Woods institutions" to mean the IMF and the World Bank. In Pakistan the phrase often comes up in coverage of IMF programmes.
• Debates on the dollar. Articles on the dollar's reserve role, dollarization or a "new Bretton Woods" refer back to this system.
• Gold commentary. Analysts cite the end of the dollar-gold link when discussing the long-run history of gold prices.
• Trading platforms. The term does not appear as a setting on MT4 or MT5. It is background for the fundamental analysis of currency pairs.

Leveraged forex and CFD trading on floating rates can lose money fast. Today's exchange rates are not held in place by the arrangements described here.

Related terms

• Crawling peg
• Currency board
• Currency risk
• Capital and financial account
• Covered interest parity
• Dollar smile theory
• Trading glossary

Frequent questions

What does Bretton Woods mean?

It is the name of the town where the agreement was signed. It also refers to the fixed-rate monetary system that the agreement set up.

Was Bretton Woods a gold standard?

Only partly. It was a gold exchange standard. Gold backed the dollar directly, and other currencies were linked to gold only through their peg to the dollar.

How is the IMF related to Bretton Woods?

The IMF was created by the Bretton Woods agreement to oversee the par values and to lend to members with payment deficits. It still exists after the fixed-rate system ended.

Could private people swap dollars for gold?

No. Only official holders such as central banks and governments could convert dollars into gold.

Are any currencies still pegged today?

Yes. Some countries use pegs, crawling pegs or currency boards. These are national choices, not part of a single global system like Bretton Woods.