A History of the Collapsed Bretton Woods System
Economic, social, and geopolitical issues governed the interwar period, from the end of World War I to the start of World War II. In July 1944, 730 delegates from forty-four allied nations met in Bretton Woods, New Hampshire, USA, during the United Nations Monetary and Financial Conference, aiming to avoid mistakes from the Treaty of Versailles, which ultimately led to World War II, and to eliminate the “beggar thy neighbor” policies.
A Brief Overview of the Bretton Woods System
The Bretton Woods Agreement, which led to the Bretton Woods System, unified forty-four nations to tackle a communal problem. It created fixed foreign exchange rates under the Bretton Woods Monetary System, where all signatories pegged their currency to the US Dollar within 1% of fixed parity rates. Under the Bretton Woods System, a fixed conversion of US Dollars to gold bullion at $35 per troy ounce existed.
Until the Bretton Woods System collapse of 1973, it provided financial stability and increased international trade, while global debt levels remained sustainable. It also created the International Monetary Fund and the World Bank.
John Maynard Keynes, a well-known British economist, and Dexter White, former Chief International Economist of the US Treasury Department, were the key architects of the Bretton Woods System. The former also founded the Keynesian economic model most governments follow today, which many blame for the global debt problems. Keynes favored the creation of a new currency, but the US pushed back and favored the US Dollar to become the global reserve currency. The implemented Bretton Woods System took aspects from both individuals but heavily favored proposals by White.
Despite the Bretton Woods Agreement in 1944, it did not become fully functional until 1958, before US President Nixon initially announced a temporary suspension of US Dollar convertibility to gold, before abandoning it. By 1973, the Bretton Wood System collapsed, and global debt began to soar, while the foreign exchange market we use today was born.
A Bretton Woods System Summary and How it Worked
The core features of the Bretton Woods System were:
- Fixed currency exchange rates
- The creation of the International Monetary Fund and the World Banks
- The cooperation of forty-four sovereign countries to solve a communal problem
The Atlantic Charter paved the way for the Bretton Woods System, also referred to as the gold standard, which ushered in a much-needed period of stability as the global economy and society recovered from two world wars.
How did the Bretton Woods System work?
- Each country pegged its currency to the US Dollar within a 1% margin and complied by buying and selling their currencies for US Dollars to maintain the peg
- The conversion of US Dollars into gold remained fixed at $35 per troy ounce
In 1968, concerns grew about the weakness of the US Dollar and questions about the amount of US gold reserves and their ability to maintain a stable system.
The Bretton Woods System, the International Monetary Fund, and the World Bank
The International Monetary Fund and the World Bank are two institutions created under the Bretton Woods System. Despite the Bretton Woods System collapse, both are operational today. The responsibility of the International Monetary Fund was to monitor exchange rates and identify countries in need of financial support. The primary task of the World Bank, formerly the International Bank for Reconstruction and Development, was monetary assistance to damaged countries during World War II.
The Importance of the Bretton Woods System
During its functionality, the Bretton Woods System provided stability, promoted cross-border trade, and allowed the economy to recover, society to heal, and countries to rebuild and develop.
One of the most important accomplishments of the Bretton Woods System was the cooperation of forty-four countries to solve common issues. It laid the groundwork for future international deals, agreements, and other cross-border associations.
Despite its collapse, the Bretton Woods System yields influence today via the International Monetary Fund and the World Bank, created under the Breton Woods System in 1945. Additionally, it provides countless lessons used in academia and real-world applications today.
The Collapse of the Bretton Woods System
The Bretton Woods System provided much-needed stability in a time of chaos, but why did the Bretton Woods System collapse, and what replaced the Bretton Woods System?
The Bretton Woods System collapsed amid concerns over the US gold supply and its ability to support the system, fueled by stagflation, high inflation, and stagnant economic performance. Other reasons include overpopulation and associated social requirements and economic mismanagement.
The replacement of the Bretton Woods System was fiat currencies, or currencies not backed by physical assets. Each country was free to decide on any exchange agreement, except for a peg to gold. It gave birth to the modern Forex market operational today.
Bretton Woods System Conclusion
The Bretton Woods System stabilized the post-World War II era, offered much-needed stability, allowed for the reconstruction of countries and societies, and created the International Monetary Fund and the World Bank.
What are the key elements of the Bretton Woods System?
Fixed currency exchange rates pegged to the US Dollar pegged to gold were the core elements of the Bretton Woods System.
Why did the Bretton Woods System fail?
Concerns over the US gold supply, stagflation in the US, economic mismanagement, and overpopulation caused the collapse of the Bretton Woods System.