The story of $$$... continued

The story of American Dollar..,,,, Continued:-

The Bretton Woods Agreement was created in a 1944 conference of all of the World War 2 Allied nations, 44 in number. It took place in Bretton Woods, New Hampshire. Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar.

How exactly would they do it?

If the currency of a country would became weak relative to the dollar, the bank would buy up its currency in foreign exchange markets. That would decrease the supply, which would raise the price. If the currency became too high, the bank would print more. That would increase the supply and lower the price.

All participating countries agreed to avoid any trade warfare. for example they wouldn't lower their currencies strictly to increase trade. 

But they could regulate their currencies under certain conditions. for example, they could take action if foreign direct investment began to destabilize their economies. They could also adjust their currency values to rebuild after a war. 

Before this, most of the countries would follow the gold standard. 

That meant each country guaranteed that it would redeem its currency for its value in gold. After Bretton Woods, each member agreed to redeem its currency for U.S Dollars, not gold. 

Why Dollars? As already discussed in my previous blog, The U.S held 3/4th of the world supply of gold. No other currency had enough gold to back it as a replacement. The value of a dollar was 1/35 of an ounce of gold. Bretton Woods allowed the world to slowly transit from a gold standard to a U.S. dollar standard.  

The Dollar had now become the substitute for gold. As a result, the value of the dollar began to increase relative to other currencies. There was more demand for dollar, even though its worth in gold remained the same. this discrepancy in value later planted the seed for the collapse of this system but till then Dollar had become the most powerful currency in the world.