Bretton Woods system

• 1. The Mount Washington Gathering

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  Delegates from 44 Allied countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. They deliberated from 1 to the 22nd of July 1944, and signed the Bretton Woods agreement on its final day. The planners hoped to avoid a repetition of the Treaty of Versailles after World War I, which had created enough economic and political tension to lead to WWII. After World War I, Britain owed the U.S. substantial sums, which Britain could not repay because it had used the funds to support allies such as France during the War. The Allies could not pay back Britain, so Britain could not pay back the U.S. The solution at Versailles for the French, British, and Americans seemed to entail ultimately charging Germany for the debts. If the demands on Germany were unrealistic, then it was unrealistic for France to pay back Britain, and for Britain to pay back the US. John Maynard Keynes wrote about this in Economic Consequences of the Peace published by MacMillan in 1920. Thus, many assets on bank balance sheets internationally were actually unrecoverable loans, which culminated in the 1931 banking crisis. Intransigence by creditor countries for the repayment of Allied war debts and reparations, combined with an inclination to isolationism, led to a breakdown of the international financial system and a worldwide economic depression.

• 2. The White Plan And Keynes Vision

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  As the chief international economist at the U.S. Treasury in 1942, 44, Harry Dexter White drafted the U.S. blueprint for international access to liquidity. This plan competed with the one drafted for the British Treasury by John Maynard Keynes. Overall, White's scheme tended to favor incentives designed to create price stability within the world's economies, while Keynes wanted a system that encouraged economic growth. White basically wanted a fund to reverse destabilizing flows of financial capital automatically. White proposed a new monetary institution called the Stabilization Fund that would be funded with a finite pool of national currencies and gold. That effectively limited the supply of reserve credit. Keynes wanted incentives for the U.S. to help Britain and the rest of Europe rebuild after WWII. Outlining the difficulty of creating a system that every nation could accept in his speech at the closing plenary session of the Bretton Woods conference on the 22nd of July 1944, Keynes stated: Countries with payment surpluses should increase their imports from the deficit countries, build factories in debtor countries, or donate to them. Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary. But the United States, as a likely creditor nation, and eager to take on the role of the world's economic powerhouse, used White's plan but targeted many of Keynes's concerns.

• 3. The Dollar As World Currency

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  The only currency strong enough to meet the rising demands for international currency transactions was the U.S. dollar. The strength of the U.S. economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold. At this rate, foreign governments and central banks could exchange dollars for gold. Bretton Woods established a system of payments based on the dollar, which defined all currencies in relation to the dollar, itself convertible into gold, and above all, as good as gold for trade. U.S. currency was now effectively the world currency, the standard to which every other currency was pegged. The U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Additionally, all European states that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States, a fact that contributed to the supremacy of the United States. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system.

• 4. The Triffin Contradiction

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  In 1960 Robert Triffin, a Belgian-American economist, noticed that holding dollars was more valuable than gold because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. What would later come to be known as Triffin's Dilemma was predicted when Triffin noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world's economic growth, and, thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability. In 1950, the U.S. balance of payments swung negative. The first U.S. response to the crisis was in the late 1950s when the Eisenhower administration placed import quotas on oil and other restrictions on trade outflows. More drastic measures were proposed, but not acted upon. However, with a mounting recession that began in 1958, this response alone was not sustainable. In 1960, with Kennedy's election, a decade-long effort to maintain the Bretton Woods System at the $35/ounce price began.

• 5. The Nixon Shock And End

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  In the first six months of 1971, assets for $22 billion fled the U.S. In response, on the 15th of August 1971, Nixon issued pursuant to the Economic Stabilization Act of 1970, unilaterally imposing 90-day wage and price controls, a 10% import surcharge, and most importantly closed the gold window, making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department and was soon dubbed the Nixon Shock. The August shock was followed by efforts under U.S. leadership to reform the international monetary system. Throughout the fall of 1971, a series of multilateral and bilateral negotiations between the Group of Ten countries took place, seeking to redesign the exchange rate regime. Meeting in December 1971 at the Smithsonian Institution in Washington, D.C., the Group of Ten signed the Smithsonian Agreement. The U.S. pledged to peg the dollar at $38/ounce with 2.25% trading bands, and other countries agreed to appreciate their currencies versus the dollar. The agreement failed to encourage discipline by the Federal Reserve or the United States government.

• 6. Legacy And Modern Echoes

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  The end of Bretton Woods was formally ratified by the Jamaica Accords in 1976. By the early 1980s, all industrialised states were using floating currencies. During the 2008 financial crisis, some policymakers, such as James Chace and others called for a new international monetary system that some of them also dub Bretton Woods II. On the 26th of September 2008, French President Nicolas Sarkozy said: we must rethink the financial system from scratch, as at Bretton Woods. In March 2010, Prime Minister Papandreou of Greece wrote an op-ed in the International Herald Tribune, in which he said: Democratic governments worldwide must establish a new global financial architecture, as bold in its own way as Bretton Woods, as bold as the creation of the European Community and European Monetary Union. And we need it fast. Following the 2020 Economic Recession, the managing director of the IMF announced the emergence of A New Bretton Woods Moment which outlines the need for coordinated fiscal response on the part of central banks around the world to address the ongoing economic crisis.