Definition – What does Bretton Woods Agreement mean?
The Bretton Woods Agreement was an early monetary system that was in force from the mid 1940s to the early 1970s. The Bretton Woods Agreement was made between the major industrial nations in 1944 and named after the New Hampshire town in which it was created. Bretton Woods essentially served as an exchange rate mechanism with major currencies tradable for U.S. dollars. U.S. dollars were, in turn, convertible to gold at a set rate.
ForexTerms explains Bretton Woods Agreement
The intentions behind Bretton Woods were to create an efficient system for exchanging currencies, thus making international trade much easier. However, by setting one currency as the reserve currency and making it convertible to gold, the Bretton Woods system created a pseudo-gold standard. The system was doomed as soon as the float of U.S. dollars exceeded the actual gold holdings. Realizing this, nations began to demand trade payments from the U.S. in gold rather than U.S. dollars. President Nixon cancelled the Bretton Woods Agreement in 1971 to stop the gold drain. Since then, the currencies of most nations have been allowed to float freely against one another.