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Seventy years ago finance ministers and central bankers from over 40 nations converged on the small US ski resort of Bretton Woods, New Hampshire, to hammer out a new international monetary system.
As the conference kicks off in Bretton Woods on July 1, 1944, the world's economy and finances have also been turned to rubble thanks to two world wars. Most nations have long since dropped the gold standard, that is to say, their currencies are no longer rigidly linked to the gold price. They had financed two wars by printing money and were prepared to accept high inflation rates. "And this ultimately precipitated a currency devaluation race – a currency war of sorts," says Jürgen Matthes from the Cologne Institute for Economic Research (IW). All parties want to sell their goods at low prices, effectively walling of their markets. Global trade is hamstrung.
The world needs a new currency and trade order - all participants of the Bretton Woods conference agree on this point. Two models are floated; one is the brainchild of the well-known British economist John Maynard Keynes who suggests the creation of a deposit currency to settle the accounts of trade partners. "Keynes didn't want the Americans to have the sole responsibility and control over the global currency system," says Dominik Geppert, an historian at Bonn University.
Dollar replaces pound as lead currency
Keynes' plan is doomed to fail. One the one hand the world back then was not yet ready for a multilateral solution; on the other hand Keynes is in a weak position from the outset. "Keynes was grappling with the added problem of having to negotiate the debts Britain had piled up with America," says Geppert. In the end the so-called White Plan prevailed, named after Harry Dexter White, a US treasury official. This concept envisages an international currency system with the US dollar as reserve currency. This means that all countries pledge to keep any currency fluctuations to the dollar within a defined margin; the US in turn guarantees to change dollars into gold when required.
The International Monetary Fund (IMF) and World Bank are established in the wake of the congress, supplemented by the General Agreement on Tariffs or GATT in 1947. All together make up the Bretton Woods system, which undoubtedly helped revive global trade.
But as global trade is mainly conducted in the reserve currency of US dollars, more trade means increased demand for dollars. This highlights the contradiction of the Bretton Woods system: how can the re-exchange for gold be secured if more and more dollars are being circulated?
Making debts at the expense of others
The Americans soon realized that they can print as many dollar bills as they want thanks to their reserve currency status. And they frequently make full use of this privilege even if it means chalking up a current account deficit. This means they consume more than they produce. Moreover, the Vietnam war is generating an ever larger hole in the budget.
The fact that the exchange rate of $35 per fine ounce of gold persists until 1971 is owed to the submissiveness of America's allies who carry on using their dollars to buy US government bonds. All but one: French President Charles de Gaulle. He no longer wants to share the costs of the American war effort and in 1965 he starts exchanging the French dollar reserves for gold. De Gaulle even dispatches a submarine to bring the gold back to Paris. In a way this heralded the beginning of the end of the Bretton Woods system.
On August 15, 1971 US President Richard Nixon suspended the gold convertibility of the dollar. The move that went down in history as the "Nixon shock" was followed by several attempts by Western central banks to prop up the ailing Bretton Woods system. Especially for Germany the sum required for currency interventions becomes astronomical. In March 1973 Willy Brandt's government declares it will no longer support the dollar. More countries follow the German example, leading to the ultimate collapse of the Bretton Woods system.
"In the end the Bretton Woods system folded because all was centered on the US. And Washington - other than Germany - failed to pursue a monetary policy geared towards stability, also during the Vietnam war," says Matthes. The institutions, the IMF and World Bank, survived its demise. GATT later became the World Trade Organization (WTO).