In 1944, Bretton Woods Agreement was born. For a newbie trader who is interested in understanding the exchange rate systems, finding out more about the agreement may be the trick.

In 1944, an agreement that served as a landmark monetary system was introduced at the New Hampshire town of Bretton Woods; it was called the 1944 Bretton Woods Agreement. Since then, secure trading platforms, exchange rates, and reserve currencies came to light. For a newbie trader who is interested in understanding the (sometimes complex) nature of fixed and floating exchange rate systems, finding out more about the agreement may be the trick.

bretton woods 

Here are facts about the agreement:

  1. It states that a way to modify a flawed exchange system is by relating it to the US dollar; it is also a way of supplying post-war reconstruction and freeing international trade.
  2. It resulted to two important establishments: (1) the World Bank or the International Bank for Reconstruction & Development and (2) the International Monetary Fund or the IMF.
  3. It created an adjustable foreign exchange rate system; the members of the IMF were appointed to intervene if there was a faulty imbalance between payments.
  4. At the beginning, due to its obligation of monitoring exchange rates, countries’ monetary systems started to become stable.
  5. It allowed the US dollar to gain momentum as a global reserve currency in relation to the value of gold.
  6. In the 1960s, its supporters included American politicians, Lyndon B. Johnson and John F. Kennedy; they even assured the international market that, based on its concept, the US dollar was reliable. However, when President Richard Nixon was put into office in 1971, it came to an end, and was replaced by the “Nixon Shock”.
  7. One of its chief objectives is to allow countries with trade deficits to borrow money from other countries using reserve currencies; the goal is to play an instrumental part in helping a country gradually bounce back from a financial collapse.
  8. In 1971, when it suffered a major collapse, different countries issued orders to grant their currencies the opportunity to carry floating exchange rates. Consequently, rough periods were experienced; stock prices went sky-high, stock prices crashed, banks failed, and hyper-inflation was everywhere.
  9. One of its co-authors, John Meynard Keynes (a notable British economist) considered it “the gold standard’s exact opposite”; according to him, the negotiated and functioning monetary system depends on the controlling nations’ system design.