Created by delegates from 44 countries near the end of World War II, the Bretton Woods system anchored the U.S. dollar to gold. The system came into being in 1958 and lasted until the Nixon Shock in August 1971. What exactly was the Bretton Woods monetary system? Why was it created? And does the system still have an impact today? In this blog post, we will provide a short history of the Bretton Woods monetary system.
What was the Bretton Woods Monetary system?
The Bretton Woods monetary system was a system that anchored the value of the U.S. dollar to physical gold. The price of gold was set at $35 an ounce. Other currencies were then pegged to the U.S. dollar. The Bretton Woods system can therefore best be described as an indirect gold standard monetary system. The U.S. dollar was the only currency that could directly be converted into gold, which increased demand for dollars in the global economy. The Bretton Woods monetary system was in use until the Nixon Shock in August 1971.
The 1940s: The Bretton Woods Monetary system is created
In July 1944, delegates from 44 different countries came together in Bretton Woods, New Hampshire, USA. The goal of this conference was to establish a new foreign currency exchange system that would promote global economic growth. U.S. President Roosevelt and U.K. Prime Minister Churchill believed that global economic prosperity could help to avoid a potential future war after World War II.
Based on the ideas of British economist John Maynard Keynes and American Chief of the U.S Treasury Harry Dexter White, the Bretton Woods system created a more prominent role for the U.S. dollar in the global economy. Along with the indirect gold standard system, the Bretton Wood conference also brought forth the World Bank and International Monetary Fund (IMF).
The 1950s – 1960s: The Bretton Woods system comes under pressure
Because the Bretton Woods monetary system was underpinned by the U.S. dollar it brought a significant increase in demand for dollars. And due to the U.S. policy of providing foreign aid, the Marshall Plan, and the U.S. military spending, there were increasingly more dollars present in the wider economical system. The number of dollars increased so much that during the 1960s there was not enough gold to back up the amount of foreign-held dollars.
This increasing number of dollars being printed, combined with the economic growth of Japan and European countries in the 1960s, led to the dollar becoming overvalued and domestic inflation taking place in the United States. The Bretton Woods System’s pegging of gold at $35 an ounce worked for the economy in 1944 but not for the increasingly global economy of 1971. The overvaluation of the dollars caused U.S. imports to become cheaper than U.S. exports.
The U.S government tried to turn the tide and protect the Bretton Wood system with some quick fixes, but it could not be done. The era of the Bretton Woods monetary system was coming to an end.
The 1970s: The end of the Bretton Woods system
The Bretton Woods monetary system ended abruptly when President Nixon announced that the U.S. dollar would no longer be fixed to gold. This announcement became known as the Nixon Shock. Nixon’s decision to cut ties between the U.S. dollar and gold was based on the high rates of inflation in the U.S. and the looming run on U.S. gold by the other countries. The Nixon Shock meant the end of the Bretton Woods monetary system, and the beginning of the fiat monetary system.
The present: does the Bretton Woods Monetary system still have an effect today?
Although the Bretton Woods system has been gone for fifty years now, it still influences today’s economy. The Bretton Woods system helped to restore confidence in the world economy after the disastrous years of the Second World War. Bretton Woods created the foundation for international economic development and even the Marshall Plan, the scheme that helped European countries and Japan restore their economies. Without the foundations for international development that the Bretton Woods system created, it might have taken longer for Japan and European countries to have prosperous economies again.
In addition to that, the Bretton Woods system also helped to create today’s global economy. Having 44 different countries from across the world agree to keep to the same financial system, led to the later development of a globalized economy that still lasts to this day. The two institutions that were established along with the monetary system, the World Bank and the International Monetary Fund (IMF), are also still in existence. Even though the Bretton Woods System has gone, it didn’t go without reshaping the global economy.