Bretton Woods 1944
Can you imagine a master craftsman who doesn't know the history of his work? I don't think so. I believe every master knows his work well, its history, and how it all started.
Today, we will delve into some historical events, like Bretton Woods, and discuss how the US broke the rules. I think you will enjoy this read. So, without further ado, let's dive into it.
We are in 1944, a year of war (WWII), financial crisis, and high tariff barriers from the Great Depression (1929), and a competitive devaluation of currencies. At this time, the world was in an instability situation. The US and international leaders concluded that the solution was economic cooperation. John Maynard Keynes and Harry Dexter White called for a meeting; both had different plans for this meeting, but the adopted ideas were taken from both.
Approximately 730 delegates representing 44 countries met in Bretton Woods in July 1944. The principal goals were creating a foreign exchange system to promote international economic growth and economic order for long-term economic growth.
At the same time, allied delegates signed the ‘final act,’ which created the International Monetary Fund (IMF) and the International Bank for Reconstruction (IBRD).
Bretton Woods introduced what is known as an “Adjustable Pegged FX rate system.” The US Dollar was pegged to the price of gold, and GBP, CHF, and other currencies were pegged to USD. The exchange rate applied at the time set the price of gold at $35 an ounce.
With the USD being pegged to the price of gold, this gave the USD more value, and the production supply of new paper money (printing) is supposed to only increase with an increase in the supply of newly mined gold at a very slow and predictable rate.
So instead of countries transporting large quantities of gold to pay for goods and services between them, they could easily use the USD as it was easier to convert it. So the USD became the default currency when paying for something between nations, and countries were in a position in which they had to always accumulate large amounts of USD reserves.
A few years later, the downside regime became apparent when the US broke the rules in order to finance the Vietnam War. This was at the same time many countries started recovering after WW2 and the US share of world economic output fell from 35% to 27%.
In 1971, concerned that the US gold supply was no longer adequate to cover the number of dollars in circulation, President Richard M. Nixon devalued the U.S. dollar relative to gold. After a run on gold reserves, he declared a temporary suspension of the dollar’s convertibility into gold.
In 1971, West Germany left the Bretton Woods system, and by 1973 the Bretton Woods system had collapsed. Countries were then free to choose any exchange arrangement for their currency, except pegging its value to the price of gold. They could, for example, link its value to another country's currency, or a basket of currencies, or simply let it float freely and allow market forces to determine its value relative to other countries' currencies.
Conclusion:
he Bretton Woods Conference in 1944 was a game-changer for global finance. It led to the creation of the International Monetary Fund (IMF) and the World Bank, setting up a new monetary system that helped stabilize economies and spur recovery after World War II. This new system became the backbone of today’s global trade and finance, encouraging countries to work together and grow.
That’s it for today. I hope you enjoyed this article. If you found it valuable, please share it with a friend. Thank you.
O.S.
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