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Difference between Bretton Woods System and Gold Standard
There are several different forms of currencies that have been used as legal tender in international trade, including fiat money, commodity money, commercial bank money, and fiduciary money. Money is a controlled good, yet it is nevertheless a delicate commodity since it may produce economic instability if not managed properly. Attempting to standardize the world's monetary system is an exciting new frontier.
Multiple international treaties attempting to standardize monetary systems have been signed into law. These pacts were struck to establish monetary order. In the next part, we'll examine the similarities and differences between the Bretton Woods system and the gold standard.
What is Bretton Wood Systems?
In July 1944, 703 delegates from 44 different countries met to negotiate this agreement. Bretton Woods, New Hampshire was the United Nations Monetary and Financial Conference venue. This is how the agreement got its now−famous name, the Bretton Woods Accord.
The United States dollar was based on this system of money. Currency values throughout the world tracked the US dollar's rise and fall. President Richard M. Nixon announced that the United States would no longer accept gold in exchange for U.S. currency in the early 1970s. The system, in existence since the early 1900s, was finally dismantled thanks to this discovery.
To prevent currency devaluations caused by competitive markets, the delegates met to debate methods to strengthen the international monetary system and stimulate global economic growth. As a result of the agreement, the World Bank and the International Monetary Fund were created (IMF). Even after the Bretton Woods system was destroyed, the World Bank and the International Monetary Fund (IMF) continued to play crucial roles in the international monetary system.
Once the agreement went into force, the value of the US dollar was guaranteed to remain fixed at the value of gold, while the value of all other currencies remained pegged to the value of the US dollar. At that time, $35 bought a buyer a single ounce of gold.
The advantages of participating in the Brett Woods agreement −
All 44 participating countries could communicate more easily as a result.
It was the driving force for the creation of the World Bank and the IMF.
The steady exchange rates made possible by currency pegs promoted commerce.
The wild fluctuations in exchange rates throughout the world were tamed by this.
The stability of the national exchange rate facilitated the World Bank's ability to make loans and grants to the country.
Despite its failure in 1973, it still significantly impacts global finance. The two brand−new organizations are still offering their services to government agencies across the world.
What is Gold Standard?
A gold standard monetary system was one in which the value of a country's currency was fixed to the price of gold. According to an international agreement, countries' currencies were pegged to a predetermined amount of gold. From then on, paper currency's worth was established by comparing it to the predetermined rate. Gold might be exchanged for local currency at a set rate. Furthermore, neither export nor import restrictions on gold were enforced.
In 1696 and 1812, the gold standard was formally established and expanded.
Governments throughout the world no longer use the gold standard in their currencies. The United Kingdom and the United States abandoned the currency in 1931 and 1933, respectively. After then, the system was replaced with fiat money, a currency kind that is required by law to be used.
The following are some benefits that come with using the gold standard −
Distribution of the various types of money was controlled because of the reliance on physical quantities of gold.
This made it easier for people to follow the rules, which ultimately led to a more stable economy.
Differences: Bretton Woods System and Gold Standard
Both had the support of major countries across the world. Both parties desired a monetary system in which exchange rates were stable and the expansion of international trade. The following table highlights the major differences between these two systems −
| Characteristics | Bretton Woods System | Gold Standard |
|---|---|---|
| Definition | In July 1944, 703 representatives representing 44 countries signed the Bretton Woods Accord. The agreement stipulated that the value of each currency would be pegged to that of the US dollar. | In monetary terms, the "gold standard" is a system in which a country pegs its currency's value to the price of gold. |
| Exchange rate system | Under the Bretton Woods accords, a system of fixed exchange rates was implemented. | The gold standard allowed for the currency rate to fluctuate freely. |
Conclusion
In July 1944, 703 representatives representing 44 countries signed the Bretton Woods Accord. The agreement stipulated that the value of each currency would be pegged to that of the US dollar. However, the term "gold standard" is used to describe a monetary system in which a country's currency was pegged to the price of gold.
As opposed to the fixed exchange rate used under the Bretton Woods system, the gold standard allowed for fluctuating exchange rates. Both parties wanted a stable currency rate system and the development of international trade, but they went about it in different ways.
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