The Bretton Woods system established fixed exchange rates postWorld War II from "summary" of International Financial Management, Abridged Edition by Jeff Madura
Following World War II, the Bretton Woods system was established to stabilize the global financial system. This system aimed to prevent the competitive devaluations and protectionist policies that had contributed to the Great Depression. One of the key features of the Bretton Woods system was the fixed exchange rates it put in place. Under this system, participating countries agreed to peg their currencies to the U. S. dollar, which was convertible to gold at a fixed rate. This fixed exchange rate regime provided stability and predictability in international trade and investment, as it eliminated the uncertainty associated with fluctuating exchange rates. The U. S. dollar was chosen as the anchor currency due to the economic strength of the United States at the time. Other countries pegged their currencies to the dollar, which in turn was tied to gold at $35 per ounce. This system effectively linked the value of currencies to a tangible asset, gold, which helped maintain confidence in the system. Central banks were responsible for maintaining the exchange rate within a narrow band around the agreed-upon par value. If a currency's value deviated too much from the fixed rate, central banks would intervene in the foreign exchange market to bring it back in line. This helped prevent rapid and destabilizing fluctuations in exchange rates. While the Bretton Woods system brought stability to the global economy in the post-war period, it eventually faced challenges due to economic imbalances and inflation in the United States. These pressures led to the collapse of the system in the early 1970s, as countries abandoned the fixed exchange rates in favor of floating exchange rates. This marked the end of an era in international monetary relations.
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