When Nixon explained the temporary end of convertibility, followed by the total collapse of the link between the dollar and gold, the free market became the determinant of gold prices that rose rapidly. The monetary conversion elements of the Bretton Woods system were now complete, although the IMF and the World Bank still existed. In 1971, the United States suffered from massive stagflation – a combination of inflation and recession that causes unemployment and weak economic growth. It took place in Bretton Woods, New Hampshire. Below is a brief summary of why global economies were part of the Bretton Woods system, how the system worked, why it failed, and what impact the agreement had on the development of the international monetary system. Modern economists can draw a perspective and insight from the discovery of their profession`s past. In order to ensure economic stability and political peace, states have agreed to cooperate to accurately regulate the production of their currencies, maintain fixed exchange rates between countries and facilitate international trade more easily. This was the basis of the post-war American vision of global free trade, which included reducing tariffs and, among other things, maintaining a trade balance on fixed exchange rates, which would be favourable to the capitalist system. As part of the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar. If a country`s monetary value became too low against the dollar, the bank would buy its currency back on the foreign exchange markets. which provided for a fixed exchange rate system.
The rules also aimed to promote an open system by requiring members to convert their respective currencies into other currencies and to make free trade.