75 years on from Bretton Woods
Seventy-five years ago this month, the world had a new plan.
A type of global co-operation never seen before.
Some 730 delegates from 44 countries made their way to Bretton Woods in the US state of New Hampshire.
Together, they created the Bretton Woods agreement…
…a blueprint for a new type of financial system…
Ending economic nationalism
Few people know that the planning for a Bretton Woods-style conference began two weeks after Pearl Harbor was bombed in December 1941.
Up until this point, the US had made a point of staying out of the Second World War.
But as the war progressed, the need for a ‘global’ monetary policy was becoming more paramount.
The bombing of Pearl Harbor brought both Japan and the US into the war.
Just before Christmas that year, US Treasury economist Harry Dexter White was asked to plan some sort of international framework that would prevent other nations from devaluing their currencies during the war.
Turn outs, British economist John Maynard Keynes was in the process of coming up with something similar.
Two and a half years later, from 1-22 July 1944, the tiny American town of Bretton Woods was flooded with people from all different countries willing to work together for a solution.
Rumour has it New Hampshire was chosen because Keynes begged for a cooler climate rather than a blistering Washington, DC summer.
The end result is the Bretton Woods Agreement.
This agreement put the world on a quasi-gold standard.
To create financial harmony, the US dollar was backed by one ounce of gold, pegged to US$35 per ounce.
And all other currencies were pegged to the US dollar.
The exchange rates of other currencies were set. It then became the responsibility of the US government to control the supply of US dollars to support the system as it needed.
Pegging exchange rates was meant to prevent the persistent devaluing of currencies.
Basically, Bretton Woods was nothing more than a request to America’s allied nations to work together for the global good, rather than an act of economic nationalism.
At the same time, the International Monetary Fund was created to oversee the new exchange rates.
And the World Bank (initially called the International Bank for Reconstruction and Development) was set up as a lender of a ‘reserve currency’ to help countries ravished by the war.
Money games continue
The success of the Bretton Woods Agreement is probably a debate for another time.
Global trade flourished and billions of people were lifted out of extreme poverty. The world became less susceptible to trade ‘shocks’.
But by putting the US dollar at the epicentre of the new financial system, the world relied on the US to act in good faith for everyone else.
Former US President Richard Nixon’s decision to end the US dollar’s convertibility to gold led to unprecedented debt creation.
More the point, 75 years later, global currencies are right back where they started.
Bretton Woods was less about creating a stable financial system and more about preventing the devaluing of currencies to enhance economic competition.
However, as Jim points out today, this tit-for-tat currency devaluation began again a decade ago…and looks like it’s about to heat up once more.
Until next time,