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Europe

Background: Bretton Woods Set World Finance Order in 1944

European leaders have been calling for a new "Bretton Woods" agreement to rescue the world economy from the current crisis in the global finance system. But what exactly is Bretton Woods?

A plenary session of the United Nations Monetary Conference in Bretton Woods, New Hampshire on July 4, 1944. Delegates from 44 countries are seated at the long tables.

At Bretton Woods, currencies were pegged to the US dollar

They hope that Saturday's summit in Washington of 20 leading economies will lay the basis for a new international finance order, similar to the 1944 agreement in the New Hampshire resort town of Bretton Woods.

World War II was still raging when delegates from 44 Allied nations met for the first three weeks of July, 1944, to set up a new system of rules and institutions that would regulate the international monetary system.

It was clear that European currencies would not be able to meet rising demands for international liquidity, so the delegates agreed to peg the currencies of industrialized countries at a fixed rate to the US dollar.

In the wake of the Great Depression

The goal was to avoid the sort of problems of currency fluctuations that plagued the international monetary system during the 1930s as the world recovered from the Great Depression.

In 1944, the US currency was still backed by gold, to the tune of $35 to the ounce, and was seen as the strongest currency in the world.

"At bottom, the Bretton Woods system rested on one simple assumption -- that economic policy in the United States would be stabilizing," writes Benjamin Cohen, a professor of international political economy at the University of California in Santa Barbara.

The Bretton Woods agreement also set up the International Monetary Fund (IMF) and the predecessor of the World Bank to carry out the agreement and regulate the international monetary system.

While the IMF and World Bank continue to operate, the fixed currency system fell apart as the US increased its deficit spending during the Vietnam War and Great Society years of social outlays of the 1960s.

It became ever clearer that the US could no longer back the dollar with gold, and Washington suspended the gold standard in 1971 to allow it to float to its own level. By 1973, industrialized countries agreed to let their currencies also float free.

The Bretton Woods agreement was formally signed on Dec. 27, 1945, after Germany conceded victory to the Allies.

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