The Bretton Woods agreement, signed by 44 nations in 1944, established an international monetary system that
- instituted the convertibility of the U.S. dollar to gold
- set fixed exchange rates with respect to the dollar
- and made the dollar the currency of reference.
The graph above shows the exchange rates for the United Kingdom, Germany, France, Italy, and Spain between 1950 and 2017 with respect to the U.S. dollar. (By the way, the data for the euro area countries are calculated in euros using the official conversion rate for the years before the euro.)
It’s easy to see that, during the Bretton Woods era (1950-1971), the exchange rates were fixed, with the exception of a few managed adjustments.
The dashed black line in 1971 marks the year President Nixon unilaterally terminated the convertibility of the U.S. dollar to gold, which signaled the decline of the Bretton Woods system. After the system ended in 1973, exchange rates became more volatile, but also started to converge, given European collaborative policies to prevent excessive variation in exchange rates.
As of 1995, countries planning to adopt the euro had to meet currency convergence criteria, which helped with the stabilization of their exchange rates. In the end, the graph shows the current euro/dollar exchange rate for these countries. Of course, the British pound has always retained its own distinct exchange rate.
How this graph was created: Search for and select “Exchange Rate (market+estimated) for United Kingdom.” From the “Edit Graph” menu, use the “Add Line” tab to search for other data series. To add the vertical line, refer to these instructions. The “Data start/end” of the vertical line is 1971-01-01.
Suggested by Praew Grittayaphong and Paulina Restrepo-Echavarria.
