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The Bretton Woods System Explained

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Fixed exchange rate system

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Exchange rates were pegged to the US Dollar, which was then convertible to gold at a fixed rate, stabilizing currency values and promoting international trade.

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Creation of the International Monetary Fund (IMF)

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The IMF was established to monitor exchange rates and lend reserve currencies to nations with balance-of-payments deficits.

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Creation of the International Bank for Reconstruction and Development (IBRD)

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The IBRD, now part of the World Bank Group, was created to provide loans for the reconstruction of war-torn Europe and for development projects in poorer nations.

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Gold Standard

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Currencies were backed by gold, with the US Dollar as the central reserve currency, which contributed to the stability of the international monetary system.

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Adjustable peg system

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While exchange rates were fixed, they could be adjusted under fundamental disequilibrium, allowing for flexibility in response to economic conditions.

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Dollar Shortage

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In the initial post-war years, a scarcity of US Dollars in other countries led to limitations on currency convertibility and influenced the Marshall Plan for US aid.

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Non-dollar currencies were not convertible

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Initially, currencies were only convertible into US Dollars and not each other, which established the Dollar's central role in international trade.

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Bretton Woods Conference

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The conference held in 1944 laid down the foundation for the postwar global economic order and resulted in the creation of the IMF and the IBRD.

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End of the Bretton Woods System

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The system effectively ended in 1971 when President Nixon suspended the gold convertibility of the US Dollar, leading to a transition to floating exchange rates.

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Special Drawing Rights (SDR)

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Introduced by the IMF in 1969 as a supplementary international reserve asset, with a value based on a basket of major currencies.

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