Bretton Woods Agreement,
The Bretton Woods Agreement, set up in 1944, aimed at installing international monetary stability by preventing money from fleeing across nations, and restricting speculation in the world currencies Prior to the Agreement, the gold exchange standard prevailing between 1876 and World War I, dominated the international economic system. Under the gold currencies gained a new phase of stability as they were backed by the price of gold. It abolished the age old practice used by kings and rules of arbitrarily debasing money and triggering inflation.
But the gold standard didn’t lack faults. As an economy strengthened it would import heavily from abroad until it ran down its gold reserves required to back its money. As a result money supply would shrink interest rates rose and economic activity slowed to the extent of recession. Ultimately, prices of goods had hit bottom appearing attractive to other nations, which would rush into buying sprees that injected the economy with gold until it increased its money supply and drive down interest rates and recreate wealth into the economy. Such boom-bust patterns prevailed throughout the gold standard until the outbreak of World War I interrupted trade flows and the free movement of gold.
After the wars, the Bretton Woods Agreement was founded, where participating countries agreed to try and maintain the value of their currency with narrow margin against the dollar and a corresponding rate of gold as needed. Countries were prohibited from devaluing their currencies to their trade advantages and were only allowed to do so for devaluations of less than 10% . Into 1950’s the ever-expanding volume of international trade led to massive movements of capital generated by post-war construction. That destabilized Forex rates as set up in Bretton Woods
But the gold standard didn’t lack faults. As an economy strengthened it would import heavily from abroad until it ran down its gold reserves required to back its money. As a result money supply would shrink interest rates rose and economic activity slowed to the extent of recession. Ultimately, prices of goods had hit bottom appearing attractive to other nations, which would rush into buying sprees that injected the economy with gold until it increased its money supply and drive down interest rates and recreate wealth into the economy. Such boom-bust patterns prevailed throughout the gold standard until the outbreak of World War I interrupted trade flows and the free movement of gold.
After the wars, the Bretton Woods Agreement was founded, where participating countries agreed to try and maintain the value of their currency with narrow margin against the dollar and a corresponding rate of gold as needed. Countries were prohibited from devaluing their currencies to their trade advantages and were only allowed to do so for devaluations of less than 10% . Into 1950’s the ever-expanding volume of international trade led to massive movements of capital generated by post-war construction. That destabilized Forex rates as set up in Bretton Woods
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