Bretton Woods Agreement

What it is:

Under the Bretton Woods Agreement of 1944, the world's allied industrial countries established a fixed currency exchange rate based on the gold standard

How it works/Example:

 

The Bretton Woods Agreement also led to the creation of the International Bank for Reconstruction and Development (what is now the World Bank) and the International Monetary Fund (IMF).

The agreement's name comes from the New Hampshire site where the conference was held. In total, 730 delegates from all 44 allied nations attended.

When the Allied Powers came together for the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire in 1944, they wanted to address the currency exchange situation and the potential to maximize the benefits of global trade. The Bretton Woods Agreement and subsequent Bretton Woods System provided a framework for setting international currency exchange rates through the early 1970s.

In an effort to bring stability to an ailing international economy, exchange rates remained fixed at a rate determined by the IMF. Each country was responsible for maintaining this rate within a narrow margin. If economic circumstances warranted, a country could apply to the IMF for an adjustment of its rate.

Why it Matters:

Although it eventually fell apart in 1971, the Bretton Woods Agreement was a major turning point in monetary history. While the creation of the World Bank and the IMF are two notable results of the agreement, its major significance lay in its attempt to stabilize international trade by fixing exchange rates relative to gold, a universally recognized asset. As the global economy strengthened following World War II however, the economic circumstances of the industrialized world demanded a more free-market approach to currency valuation.

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