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Stock Market Operations

Notes military projects. The financial burden of these projects was so substantial that there was not
enough gold at the time to exchange for all the excess currency that the governments were
printing off.

!
Caution Although the gold standard would make a small comeback during the inter-war
years, most countries had dropped it again by the onset of World War II. However, gold
never ceased being the ultimate form of monetary value.

Bretton Woods System

Before the end of World War II, the Allied nations believed that there would be a need to set up
a monetary system in order to fill the void that was left behind when the gold standard system
was abandoned. In July 1944, more than 700 representatives from the Allies convened at Bretton
Woods, New Hampshire, to deliberate over what would be called the Bretton Woods system of
international monetary management.

To simplify, Bretton Woods led to the formation of the following:
1. A method of fixed exchange rates;
2. The U.S. dollar replacing the gold standard to become a primary reserve currency; and
3. The creation of three international agencies to oversee economic activity: the International
Monetary Fund (IMF), International Bank for Reconstruction and Development, and the
General Agreement on Tariffs and Trade (GATT).

One of the main features of Bretton Woods is that the U.S. dollar replaced gold as the main
standard of convertibility for the world’s currencies; and furthermore, the U.S. dollar became
the only currency that would be backed by gold. (This turned out to be the primary reason that
Bretton Woods eventually failed.)
Over the next 25 or so years, the U.S. had to run a series of balance of payment deficits in order
to be the world’s reserved currency. By the early 1970s, U.S. gold reserves were so depleted that
the U.S. treasury did not have enough gold to cover all the U.S. dollars that foreign central banks
had in reserve.
Finally, on August 15, 1971, U.S. President Richard Nixon closed the gold window, and the U.S.
announced to the world that it would no longer exchange gold for the U.S. dollars that were held
in foreign reserves. This event marked the end of Bretton Woods.
Even though Bretton Woods didn’t last, it left an important legacy that still has a significant
effect on today’s international economic climate. This legacy exists in the form of the three
international agencies created in the 1940s: the IMF, the International Bank for Reconstruction
and Development (now part of the World Bank) and GATT, the precursor to the World Trade
Organization.

Current Exchange System

After the Bretton Woods system broke down, the world finally accepted the use of floating
foreign exchange rates during the Jamaica agreement of 1976. This meant that the use of the gold
standard would be permanently abolished. However, this is not to say that governments adopted
a pure free-floating exchange rate system. Most governments employ one of the following three
exchange rate systems that are still used today:

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