Following the urgent demand to rebuild the international economic system, 730 delegates from 44 Allied Nations decided to convene the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. This meeting has resulted in signing the Bretton Woods agreement in July 1944. By establishing a system of rules and procedures for the international monetary system's regulation, planners at Bretton Woods founded the International Monetary Fund and the International Bank for Reconstruction and Development that is currently one of five World Bank Group's institutions. Both organizations started their operations in 1946 after the agreement has been ratified by a sufficient number of countries.
The major feature of the Bretton Woods system was the obligation for each country to adopt monetary policy maintaining its currency's exchange rate within a fixed value in terms of gold. Until the 1970s, the system of Bretton Woods was effective in achieving common goals of the states which had established it, particularly the United States. However, it collapsed
The political bases of the Bretton Woods system were determined by a number of conditions, including the power concentration in few states, the shared experiences of the Great Depression and presence of a dominant power able to become a leader in global monetary affairs. The liberal economic system was in need of vehicle for payments, investment and trade. However, unlike national economies, the international economy is characterized by lack of central government which is able to issue and manage currency.
In the past the problem has been resolved through gold standards, yet the founders of the Bretton Woods system didn't consider this solution quite suitable for the post-war political economy. As a result, a system of fixed exchange rates was introduced, managed by a number of newly established international institutions that used the US dollar as a reserve currency.
The Bretton Woods system aimed at securing advantages of the gold standard eliminating its disadvantages. So, the architects of the system sought a compromise between polar alternatives of either irrevocably fixed or freely floating rates. This arrangement was believed to gain advantages of both, without experiencing disadvantages of either. The result of these actions was the emergence of pegged rate currency regime, according to which members had to establish parity of their national currencies in terms of gold, as well as to maintain exchange rates by interfering in their foreign exchange markets.
As the principal reserve currency was the US dollar, this generally meant other countries were required to peg their currencies to it, and sell and buy US dollars in order to keep market exchange rates within parity. In the 1980s, the US dollar assumed the role that gold played under gold standards in the international financial system. In the years following the Cold War monetary independence was increasing at much faster pace as compared to international management.
This led to the Bretton Woods system's collapse in the 1970s.