The Bretton Woods conference is one of the most important events in recent financial history. It was at this conference that the United States dollar originally became the world’s reserve currency. On July 1st – 22nd of 1944, 44 nations met in Bretton Woods, NH to create the new rulebook for the post World War II international monetary system. This meeting is officially known as the United Nations Monetary and Financial Conference; however, I have pretty much only heard it referred to as Bretton Woods.
Preparation
As you can imagine, a conference that would change the international monetary system in such a fundamental way requires a lot of preparation. Preparation for the conference began years in advance with many meetings between various groups of the constituent 44 nations to arrive on common ground.
Possibly gaining some wisdom from the causes of the world war that had just ended, it was decided that international economic cooperation not only brought prosperity, but also peace. The cause I am referring to is the massive restrictions and reparations forced on Germany by to the Treaty of Versailles. This led to Germany planting the seeds for their hyperinflation in the early 1920s. This hyperinflation led to the depression that eventually led to the rise of Hitler, and I hope you know the rest of the story from there.
Design
British economist John Maynard Keynes and American Chief International Economist of the U.S. Treasury Harry Dexter White are credited for being the primary designers of the Bretton Woods system. As a side note, has anyone else noticed that it is always the Americans that have the long titles with colorful language that do not say much?
Both men had similar but not identical ideas on how this new system should run. They came up with their own plans on creating an efficient foreign exchange system that would prevent competitive devaluations of currencies. The hope was this would promote international economic growth, prosperity, and peace.
The battle of ideas
Keynes wanted to have a powerful global central bank. This bank would have an international reserve currency called the bancor. This bancor would be used to settle international accounts and the member nations would pay a membership fee that was proportional to their gross domestic product (GDP).
Each country would receive a limited line a credit to prevent a deficit with the global central bank. If a country had a surplus, they would have to pay back the excess bancor, and this would discourage trade surpluses for those countries.
White on the other hand wanted an international fund that was much more modest and would lend to countries. This system would have a greater role for the U.S dollar. At the time, countries bought primarily American made goods, so White was concerned that this would cause the United States to have most of the bancor if Keynes’s plan were to be implemented.
Instead, White’s fund would consist of a finite pool of various national currencies and gold of about $5 million to limit the supply of reserve credit.
Actual plan
The actual system that was implemented was a hybrid of the two plans. Basically, the United States was on a gold exchange standard and the other currencies were pegged to the dollar. The dollar was “as good as gold”, at least for foreign countries, as they could exchange their dollars for gold at $35 an ounce. To maintain the currency pegs, other countries had to buy and sell dollars with their currency. This created a continuous demand for the United States dollar and made it a necessity in global trade.
At the conclusion of the conference, delegates signed the Final Act of the United Nations Monetary and Financial Conference. This included the above system as well as outlined the purpose and mechanisms for the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF).
IMF
The IMF’s original purpose was to maintain the fixed exchange rate system that was implemented at Bretton Woods. All the exchange rates were centered on the U.S. dollar as it was itself centered on gold. They no longer do this, since today we have a floating exchange rate system. If a country needed long-term financial assistance the IMF could help by modifying that country’s exchange rate.
These modifications are the same as the “competitive devaluations of currencies” that the system was designed to prevent. However, since it was a central agency that oversaw all the exchange rates and not each individual country, this could be done to help the struggling country and not specifically hurt another country.
IRBD
The IRBD was designed to finance the reconstruction of the aftermath of World War II by giving loans or grants the governments of the countries. As with the IMF, its purpose today is different than when it was first chartered. It has since merged with the International Development Association (IDA) to alleviate the world of poverty.
Congress passed the Bretton Woods Agreement Act in July 1945, which caused the United States to enter the IMF and IRBD. The two entities did not officially come into existence until December 27th, 1945.
Collapse
The Bretton Woods system endured until the early 1970s when Nixon took the dollar off the gold standard in August 1971. Since international trade had to be settled in dollars at this time, persistent U.S. trade deficits caused the amount of foreign-held dollars to exceed the U.S. gold stock. Therefore, foreign nations realized that the U.S. could not fulfill its obligation for gold redemption.
I have seen some arguments that the Foreign held dollars exceeding the U.S. gold supply situation was going on for quite some time before Nixon closed the gold window on August 15th, 1971. Foreign countries were apparently none the wiser until French leader Charles De Gaulle called the U.S.’s bluff and started to exchange significant amounts of dollars for gold. Similar to a run on the banks causes the banks to close, the run on the imminent run on the U.S. gold stock would be a good reason to close the gold window.
Even the fixed foreign exchange rate system failed in early 1973 and floating exchange rates became the norm.
Conclusions
As I have noted in a previous post, to amass financial wealth, you must know history. The Bretton Woods conference set the rulebook for the global monetary stage for almost 30 years. Probably one to the biggest economic booms in history happened under this system. Whether this growth was due to the system itself or the necessary growth to recover from a catastrophe of that magnitude is still argued today.
The Bretton Woods conference was the last fundamental change in the global monetary arena, and if you find merit in the cycles of history and pay attention to what happens in the big picture macro-view of the global system, we are probably overdue for another conference to do the same thing.
To your wealth and future,
James Forsythe
References
https://2001-2009.state.gov/r/pa/ho/time/wwii/98681.htm – U.S. Department of State Archive
https://www.investopedia.com/terms/b/brettonwoodsagreement.asp
https://www.federalreservehistory.org/essays/bretton-woods-created
For more important financial history
