How did the Bretton Woods system operate, and what caused its collapse?

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Karyth Cara eNotes educator| Certified Educator

The Bretton Wood agreement--developed at the same time as the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, now known as the World Bank--operated by pegging the various world currencies to the U.S. Dollar and, through the USD, to the price of gold. What this means is that, while the USD was backed by gold bullion stored in Fort Knox, the USD had a price that was fixed within a certain range: the USD could never go lower than the price of the gold that Dollars substituted for (Dollars weigh less in a person's pocket than gold does).

Other nation's currencies, being tied to the USD that was stabilized by gold, would retain a value within a range close to the USD. Therefore all the world currencies were stabilized within an acceptable range of variability, which stabilized inflation and deflation.

Bretton Wood ended when there was a rush on gold during Nixon's presidency to which Nixon responded by releasing the USD from the gold standard stabilization: the USD and all other world currencies were back only by the word of the respective governments after that.