Understanding Economic Equilibrium

CHAPTER 34

The Dollar Versus Everything Else

In July 1944, as World War II raged on, 730 delegates representing all

44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire. Following 22 days of deliberation, they agreed to a system of rules that would govern their currency exchange rates. The Bretton Woods Agreement essentially fixed the exchange rate for each of the 44 countries, limiting deviations to 1 percent and tying those exchange rates to the U.S. dollar in recognition of the United States as the world’s leading economic power. As the “reserve currency,” the dollar would be fixed to gold. The United States would be on the gold standard; all other Allied nations, on a dollar standard.

The Allies next set ...