Bretton Woods system

Years of global economic instability starting from the industrial revolution in the mid 1800’s, resulted in numerous new rules and regulations in the financial system. Banking panics, asset price manipulation and commodity shortages are among a few factors that cause boom and bust cycles which at most times leading economic prosperity down to social revolutions. Although this cycle has been going on since the first bonds were issued triggering large scale speculations in finance, some people started to realize that a free market is after all, very irrational and it takes external intervention from a governing body to inject a little bit of sanity in the system. A plan for a postwar economic system starting in the summer of 1944 has the subject of gold in its very core. The Bretton Woods system backed by 44 Allied nations in July of 1944 was signed in Bretton Woods, New Hampshire which plans to reorganize world finance by partially taking gold out of the currency markets.

For centuries, planet finance looked at gold as money, a store of value. This metal would be the benchmark for valuating any goods or services between trading parties. However, money is not metal, and gold’s value always depended on what other people would give in exchange for it. The rampant hoarding of gold from one region to another always resulted in a shortage of this precious metal leaving a gold drained country susceptible for an economic contraction. The Bretton woods agreement intends to extinguish this global thirst for gold. Instead of each country trying to obtain as much gold as possible from another region to back its currency, The Bretton woods agreement fixed the value of other currencies to the US dollar which is at $35 an ounce. The only currency that would be backed by gold is that of the United States’, the rest of the world’s currency would simply base the value of their own relative to the US dollar. However, in August 15 1971, after years of significant US dollar devaluation against gold, US President Richard Nixon suspended the US Dollar’s convertibility to gold and allowed to let it float against other currencies.

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