Step-by-step: What happened with Bretton Woods Part 1

The setup (1941–1944) 

Following the Great Depression and the currency wars in the 1930s, to keep exchange rates and trade stable, countries demanded a post WW2 system. On one hand, Sir John Maynard Keynes suggested a global clearing union with a new currency (“bancor”). Bancor was managed by a world central bank he called the International Clearing Union. By keeping the Bancor exclusive to cenntral banks, he aimed to limit speculation. Unlike the U.S. plan, which made the dollar the world’s anchor, Keynes’ idea aimed to stop any single country from dominating and to prevent long-term imbalances. On the other hand, Harry Dexter White suggested a dollar centred system that was fixed to gold. On the conference that happened on between the first and 22^nd of July, delegates from 44 nations met in Bretton Woods, New Hampshire. The plan of Harry Dexter largely won.

What they created (1944–1946) 

After the conference, two important institutions were formed. The IMF and the IBRD. The main purposse of the IMF was to keep currencies stable.  They achieved this by giving short term loans to countries with BOP problems. International Bank for Reconstruction and Development (IBRD) was focused on long term development and rebuilding war torn economies. In 1946, the exchange rate system that Harry Dexter suggested was implemented. The US dollar was fixed to gold at $35 per ounce and other countries fix their currencies to the dollar. 

Under the Bretton Woods system, countries could only change their currency’s value if they faced a serious, lasting economic problem, and they usually needed approval from the IMF. To give governments more control, the system also allowed them to limit the flow of money across borders, which helped protect their economies from sudden shocks and gave them space to run their own policies. 

Launch and early adjustments (1946–1958) 

The planned International Trade Organization collapsed, but GATT (a simpler agreement) stepped in. This gave countries basic rules for lowering tariffs and expanding trade, which was essential for Bretton Woods’ goal of stability and growth.  

Postwar Britain struggled with shortages and couldn’t keep the pound fixed at its old, strong level. As a result, the UK cut the pound’s value by ~30% (from $4.03 to $2.80). This made British exports cheaper and more competitive, helping recovery. Many other countries followed with similar adjustments, showing that fixed exchange rates were stable but flexible when necessary. After years, Europe had stronger economies and more stable currencies. Major Western European currencies became convertible for trade,  people could finally exchange them freely to buy goods and services abroad. This marked a turning point: the Bretton Woods system was working as intended, trade was flowing, and economies were recovering from WWII. 

At part 2, we will cover how the Bretton Woods has failed.