This is some Trippy reading. If ever there was fodder for a conspiracy theory, this is it.
The political basis for the Bretton Woods system was in the confluence of several key conditions: the shared experiences of the Great Depression (external - login to view)
, the concentration of power in a small number of states (further enhanced by the exclusion of a number of important nations because of the war), and the presence of a dominant power willing and able to assume a leadership role in global monetary affairs.
Also based on experience of interwar years, U.S. planners developed a concept of economic security—that a liberal international economic system (external - login to view)
would enhance the possibilities of postwar peace. One of those who saw such a security link was Cordell Hull (external - login to view)
, the United States Secretary of State (external - login to view)
from 1933 to 1944. Hull believed that the fundamental causes of the two world wars lay in economic discrimination and trade warfare. Specifically, he had in mind the trade and exchange controls (bilateral arrangements) of Nazi Germany (external - login to view)
and the imperial preference system practised by Britain (by which members or former members of the British Empire were accorded special trade status).
Free trade relied on the free convertibility (external - login to view)
of currencies. Negotiators at the Bretton Woods conference, fresh from what they perceived as a disastrous experience with floating rates in the 1930s, concluded that major monetary fluctuations could stall the free flow of trade.
The liberal economic system (external - login to view)
required an accepted vehicle for investment, trade, and payments. Unlike national economies, however, the international economy lacks a central government
that can issue currency and manage its use. In the past this problem had been solved through the gold standard (external - login to view)
, but the architects of Bretton Woods did not consider this option feasible for the postwar political economy. Instead, they set up a system of fixed exchange rates (external - login to view)
managed by a series of newly created international institutions using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency (external - login to view)
The Bretton Woods Conference led to the establishment of the IMF and the IBRD (now the World Bank (external - login to view)
), which still remain powerful forces in the world economy.
As mentioned, a major point of common ground at the Conference was the goal to avoid a recurrence of the closed markets and economic warfare that had characterized the 1930s. Thus, negotiators at Bretton Woods also agreed that there was a need for an institutional forum for international cooperation on monetary matters. Already in 1944 the British economist John Maynard Keynes (external - login to view)
emphasized "the importance of rule-based regimes to stabilize business expectations"—something he accepted in the Bretton Woods system of fixed exchange rates. Currency troubles in the interwar years, it was felt, had been greatly exacerbated by the absence of any established procedure or machinery for intergovernmental consultation.
Return to convertibility
In the 1960s and 70s, important structural changes eventually led to the breakdown of international monetary management. One change was the development of a high level of monetary interdependence. The stage was set for monetary interdependence by the return to convertibility (external - login to view)
of the Western European currencies at the end of 1958 and of the Japanese (external - login to view) yen (external - login to view)
in 1964. Convertibility facilitated the vast expansion of international financial transactions, which deepened monetary interdependence.
"Floating" Bretton Woods (1968–72)
By 1968, the attempt to defend the dollar at a fixed peg of $35/ounce, the policy of the Eisenhower, Kennedy and Johnson administrations, had become increasingly untenable. Gold outflows from the U.S. accelerated, and despite gaining assurances from Germany and other nations to hold gold, the profligate fiscal spending of the Johnson administration had transformed the "dollar shortage" of the 1940s and 1950s into a dollar glut (external - login to view)
by the 1960s. In 1967, the IMF agreed in Rio de Janeiro (external - login to view)
to replace the tranche (external - login to view)
division set up in 1946. Special Drawing Rights (external - login to view)
were set as equal to one U.S. dollar, but were not usable for transactions other than between banks and the IMF. Nations were required to accept holding Special Drawing Rights (external - login to view)
(SDRs) equal to three times their allotment, and interest would be charged, or credited, to each nation based on their SDR holding. The original interest rate was 1.5%.
The intent of the SDR system was to prevent nations from buying pegged gold and selling it at the higher free market price, and give nations a reason to hold dollars by crediting interest, at the same time setting a clear limit to the amount of dollars which could be held. The essential conflict was that the American role as military defender of the capitalist world's economic system was recognized, but not given a specific monetary value. In effect, other nations "purchased" American defence policy by taking a loss in holding dollars. They were only willing to do this as long as they supported U.S. military policy. Because of the Vietnam War and other unpopular actions, the pro-U.S. consensus began to evaporate. The SDR agreement, in effect, monetized the value of this relationship, but did not create a market for it.
The use of SDRs as "paper gold" seemed to offer a way to balance the system, turning the IMF, rather than the U.S., into the world's central banker. The U.S. tightened controls over foreign investment and currency, including mandatory investment controls in 1968. In 1970, U.S. President Richard Nixon (external - login to view)
lifted import quotas on oil in an attempt to reduce energy costs; instead, however, this exacerbated dollar flight, and created pressure from petro-dollars (external - login to view)
now linked to gas-euros (external - login to view)
resulting in the 1963 energy transition from coal to gas with the creation of the Dutch Gasunie (external - login to view)
. Still, the U.S. continued to draw down reserves. In 1971 it had a reserve deficit of $56 billion; as well, it had depleted most of its non-gold reserves and had only 22% gold coverage of foreign reserves. In short, the dollar was tremendously overvalued with respect to gold.
Bretton Woods II?
A number of economists (e.g. Doole, Folkerts-Landau and Garber) have referred to the system of currency relations which evolved after 2001, in which currencies, particularly the Chinese renminbi (external - login to view) (yuan), remained fixed to the U.S. dollar (external - login to view) as Bretton Woods II. The argument is that a system of pegged currencies is both stable and desirable, a notion that causes considerable controversy.
However, this informal meaning has been superseded in the wake of the Global financial crisis of 2008 (external - login to view).
On September 26, 2008, French, and current European Union president, Nicolas Sarkozy (external - login to view), said, "we must rethink the financial system from scratch, as at Bretton Woods.”
On October 8, 2008, Argentine President Cristina Fernandez de Kirchner (external - login to view) said "the financial world crisis will need a strong regulation in the matter of financial markets and capital movements throughout the world. A new Bretton Woods will be needed".