The Bretton Woods System emerged as a response to the abandonment of the gold standard, functioning from 1944 to 1973. Named after the conference held in Bretton Woods, New Hampshire, this system established a fixed exchange rate framework where the United States committed to buying and selling gold at a set price of $35 per ounce. This fixed rate anchored the U.S. dollar to gold, while other countries pegged their currencies to the dollar, creating a network of fixed exchange rates among nations.
Unlike the previous gold standard, the Bretton Woods System restricted gold exchanges to central banks, meaning that only foreign central banks could convert U.S. dollars into gold. American citizens were prohibited from owning gold as an investment during this period, although they could possess jewelry or rare coins. This limitation on gold ownership underscored the system's reliance on the dollar as the primary reserve currency.
Countries participating in the Bretton Woods System maintained dollar reserves, which functioned similarly to gold reserves. The International Monetary Fund (IMF) was established to provide loans to central banks facing shortages of dollar reserves, ensuring liquidity in the global economy. However, the fixed exchange rates meant that supply and demand dynamics did not influence currency values. This could lead to imbalances, such as surpluses or shortages, depending on whether a currency was overvalued or undervalued relative to the fixed rate.
When discrepancies arose, the IMF would intervene to adjust the fixed exchange rates to restore balance. The system's rigidity often resulted in persistent economic pressures, ultimately contributing to its collapse in the early 1970s. The Bretton Woods System, while innovative, highlighted the challenges of maintaining fixed exchange rates in a dynamic global economy.