Bretton Woods System
Under the agreement at Bretton Woods:
— Countries were to maintain an exchange rate in which the values of their currencies could fluctuate only within a narrow range around a fixed value based on gold. Gold’s value was set in terms of the U.S. dollar.
— Two organizations were set up to help govern the international monetary system: the International Monetary Fund, which would address temporary imbalances of payments, and the International Bank for Reconstruction and Development, which is now the chief agency of the World Bank Group.
The Bretton Woods system was far from perfect, but it essentially held together until the 1960’s. By the Nixon administration, which started in January 1969, the costs of the Vietnam war had fueled inflation, and trade and budget deficits had piled up. The country’s gold reserves had fallen, while the government was all but printing money. Faith in the dollar deteriorated. On Aug. 15, 1971, President Nixon unhitched the value of the dollar from the gold standard. His decision was called the “Nixon shock” because he made it without consulting any of the other Bretton Woods signatories. The change opened the era of floating currencies.