Bretton Woods System

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Bretton Woods systemFrom Wikipedia, the free encyclopedia

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid-20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944. Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund (IMF) and theInternational Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments. On August 15, 1971, the United States unilaterally terminated convertibility of the dollar to gold. This brought the Bretton Woods system to an end and saw the dollar become fiat currency.[1] This action, referred to as the Nixon shock, created the situation in which the United States dollar became a reserve currency used by many states. At the same time, many fixed currencies (such asGBP, for example), also became free floating.Contents[hide]

1 Origins


1.1 Great Depression

1.1.1 Economic security 1.1.2 Rise of governmental intervention 1.1.3 Atlantic Charter 1.1.4 Wartime devastation of Europe and East Asia

2 Design of the financial system


2.1 Informal regimes

2.1.1 Previous regimes


2.1.2 Fixed exchange rates

2.2 Formal regimes

2.2.1 International Monetary Fund Design Subscriptions and quotas Trade deficits Par value Operations

2.2.2 International Bank for Reconstruction and Development

3 Readjustment

o o

3.1 Dollar shortages and the Marshall Plan 3.2 Cold War

4 Late application

o o

4.1 U.S. balance of payments crisis 4.2 Structural changes

4.2.1 Return to convertibility 4.2.2 Growth of international currency markets 4.2.3 Decline

o U.S. monetary influence Dollar

4.3 Paralysis of international monetary management

4.3.1 Floating-rate system during 19681972 4.3.2 Nixon Shock 4.3.3 Smithsonian Agreement

5 Bretton Woods II


5.1 The Bretton Woods system after the 2008 crisis

6 Academic legacy 7 Pegged rates

o o o o o

7.1 Japanese yen 7.2 Deutsche Mark 7.3 Pound sterling 7.4 French franc 7.5 Italian lira

o o o o o o o

7.6 Spanish peseta 7.7 Dutch gulden 7.8 Belgian franc 7.9 Greek drachma 7.10 Swiss franc 7.11 Danish krone 7.12 Finnish markka

8 See also 9 Notes 10 References 11 Further reading 12 External links

[edit]OriginsThe political basis for the Bretton Woods system was in the confluence of several key conditions: the shared experiences of the Great Depression, 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).



A high level of agreement among the powerful on the goals and means of international economic management facilitated the decisions reached by the Bretton Woods Conference. Its foundation was based on a shared belief in capitalism. Although the developed countries' governments differed in the type of capitalism they preferred for their national economies (France, for example, preferred greater planning and state intervention (dirigisme), whereas the United States favored relatively limited state intervention),[citation needed] all relied primarily on market mechanisms and private ownership of means of production. Thus, it is their similarities rather than their differences that appear most striking. All the participating governments at Bretton Woods agreed that the monetary chaos of the interwar period had yielded several valuable lessons. The experience of the Great Depression was fresh on the minds of public officials. The planners at Bretton Woods hoped to avoid a repeat of the debacle of the 1930s, when intransigent insistence by creditor nations on the repayment of Allied war debts and reparations, combined with an inclination to isolationism, led to a breakdown of the international financial system and a worldwide economic depression.[2] The so called "beggar thy neighbor" policies that emerged as the crisis continued saw some trading nations using currency devaluations in an attempt to increase their competitiveness (i.e. raise exports and lower imports), though

recent research suggest this de facto inflationary policy probably off set some of the contractionary forces in world price levels (see Eichengreen "How to Prevent a Currency War"). Despite devaluation policy increasing national liquidity these national policy responses were neither deep enough or coordinated enough to restore international trade volume. Over the run of the decade, world markets never broke through the haphazardly constructed nationally motivated and imposed barriers and restricts on international trade and investment volume. The various anarchic and often autarkic protectionist and neo merchantilist national policies - often mutually inconsistent that emerged over the first half of the decade though variously intended, in the event, worked inconsistently and self defeatingly to promote national import substitution, increase national exports, divert foreign investment and trade flows, and even prevent certain categories of cross border trade and investment out right. These national policies included exclusionary trading blocs, currency zones (groups of nations that use an equivalent currency, such as the "Sterling Area" of the British Empire), bilateral barter mechanisms (see Nazi era German trade policy), etc. Together, they not only slowed the recovery of international trade, they clogged the cross border flow of capital and foreign investment. As a consequence of these uncoordinated inward looking mutually contradictory national policies, international trade and investment stagnated - and crucially contemporaneous expert perceptions of the 'whys ' of this stagnation best summed up in the phrase 'beggar thy neighbor , decisively conditioned notions of a better global trade and investment system "next time". When many of these same expert observers reared on the 1930s debacle became the architects of a new unified post war system at Bretton Woods, the watch words became "no more beggar thy neighbor." Preventing a repetition of this process of competitive devaluations became job one. Of course today, these key 1930s events look different to careful scholars of the era (see the work of Barry Eichengreen "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939" and "How to Prevent a Currency War") in particular devaluations today are viewed by advanced scholars with far greater nuance. Ben Bernanke's opinion on the subject follows: "... [T]he proximate cause of the world depression was a structurally flawed and poorly managed international gold standard... For a variety of reasons, including among others a desire of the Federal Reserve to curb the US stock market boom, monetary policy in several major countries turned contractionary in the late 1920sa contraction that was transmitted worldwide by the gold standard. What was initially a mild deflationary process began to snowball when the banking and currency crises of 1931 instigated an international "scramble for gold". Sterilization of gold inflows by surplus countries [the USA and France], substitution of gold for foreign exchange reserves, and runs on commercial banks all led to increases in the gold backing of money, and consequently to sharp unintended declines in national money supplies. Monetary contractions in turn were strongly associated with falling prices, output and employment. Effective international cooperation could in

principle have permitted a worldwide monetary expansion despite gold standard constraints, but disputes over World War I reparations and war debts, and the insularity and inexperience of the Federal Reserve, among other factors, prevented this outcome. As a result, individual countries were able to escape the deflationary vortex only by unilaterally abandoning the gold standard and re-establishing domestic monetary stability, a process that dragged on in a halting and uncoordinated manner until France and the other Gold Bloc countries finally left gold in 1936." (from "Great Depression" B. Bernanke) At any rate, in 1944 at Bretton Woods, as a result of the collective conventional wisdom of the time. Elite policy circles, gathered there from all the leading allied nations, collectively favored a regulated system of fixed exchange rates, indirectly disciplined by a US dollar tied to gold - a system that relied on a regulated market economy with tight controls on the value of currencies. Although the various national experts disagreed to some degree on the specific implementation of this system, all agreed on the need for tight controls.

[edit]Economic security

Cordell Hull, US Secretary of State 193344

Also based on experience of the inter-war years, U.S. planners developed a concept of economic security that a liberal international economic systemwould enhance the possibilities of postwar peace. One of those who saw such a security link was Cordell Hull, the United States Secretary of State from 1933 to 1944.[Notes 1] 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) [3] of Nazi Germany and the imperial preference system practiced by Britain, by which members or former members of the British Empire were accorded special trade status, itself provoked by German, French, and American protectionist policies. Hull argued [U]nhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with warif we could get a freer flow of tradefreer in the sense of fewer discriminations and obstructionsso that

one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace. [4]

[edit]Rise of governmental interventionThe developed countries also agreed that the liberal international economic system required governmental intervention. In the aftermath of the Great Depression, public management of the economy had emerged as a primary activity of governments in the developed states.[citation needed] Employment, stability, and growth were now important subjects of public policy. In turn, the role of government in the national economy had become associated with the assumption by the state of the responsibility for assuring its citizens of a degree of economic well-being.[citation needed] The welfare state grew out of the Great Depression, which created a popular demand for governmental intervention in the economy, and out of the theoretical contributions of the Keynesian school of economics, which asserted the need for governmental intervention to counter market imperfections.[citation needed] However, increased government intervention in domestic economy brought with it isolationist sentiment that had a profoundly negative effect on international economics.[citation needed] The priority of national goals, independent national action in the interwar period, and the failure to perceive that those national goals could not be realized without some form of international collaborationall resulted in beggar-thy-neighbor policies such as high tariffs, competitive devaluations that contributed to the breakdown of the gold-based international monetary system, domestic political instability, and international war. The lesson learned was, as the principal architect of the Bretton Woods system New Dealer Harry Dexter White put it: the absence of a high degree of economic collaboration among the leading nations willinevitably result in economic warfare that will be but the prelude and instigator of military warfare on an even vaster scale. [Notes 2] To ensure economic stability and political peace, states agreed to cooperate to closely regulate the production of their individual currencies to maintain fixed exchange rates between countries with the aim of more easily facilitating international trade.[citation needed] This was the foundation of the U.S. vision of postwar world free trade, which also involved lowering tariffs and among other things maintaining a balance of trade via fixed exchange rates that would be favorable to the capitalist system.[citation needed] Thus, the more developed market economies agreed with the U.S. vision of post-war international economic management, which was to be designed to create and maintain an effectiveinternational monetary system and foster the reduction of barriers to trade and capital flows.[citation needed] In a sense, the new international monetary system was in fact a return to a system similar to the pre-war gold standard, only using US dollars as the world's new reserve currency until the world's gold supply could be reallocated via international trade. [citationneeded]

Thus, the new system would be devoid (initially) of governments meddling with their currency supply as they had during the years of economic turmoil preceding WWII. Instead, governments would closely police the production of their currencies and ensure that they would not artificially manipulate their price levels.[citationneeded]

If anything, Bretton Woods was in fact a return to a time devoid of increased governmental intervention in

economies and currency systems.[citation needed]

[edit]Atlantic Charter

Roosevelt and Churchill during their secret meeting of August 9 12, 1941, in Newfoundlandthat resulted in the Atlantic Charter, which the U.S. and Britain officially announced two days later.

The Atlantic Charter, drafted during U.S. President Franklin D. Roosevelt's August 1941 meeting with British Prime Minister Winston Churchill on a ship in the North Atlantic, was the most notable precursor to the Bretton Woods Conference. Like Woodrow Wilson before him, whose "Fourteen Points" had outlined U.S. aims in the aftermath of the First World War, Roosevelt set forth a range of ambitious goals for the postwar world even before the U.S. had entered the Second World War. The Atlantic Charter affirmed the right of all nations to equal access to trade and raw materials. Moreover, the charter called for freedom of the seas (a principal U.S. foreign policy aim since France and Britain had first threatened U.S. shipping in the 1790s), the disarmament of aggressors, and the "establishment of a wider and more permanent system of general security." As the war drew to a close, the Bretton Woods conference was the culmination of some two and a half years of planning for postwar reconstruction by the Treasuries of the U.S. and the UK. U.S. representatives studied with their British counterparts the reconstitution of what had been lacking between the two world wars: a system of international payments that would allow trade to be conducted without fear of sudden currency depreciation or wild fluctuations in exchange ratesailments that had nearly paralyzed world capitalism during the Great Depression.

Without a strong European market for U.S. goods and services, most policymakers believed, the U.S. economy would be unable to sustain the prosperity it had achieved during the war.[citation needed] In addition, U.S. unions had only grudgingly accepted government-imposed restraints on their demands during the war, but they were willing to wait no longer, particularly as inflation cut into the existing wage scales with painful force. (By the end of 1945, there had already been major strikes in the automobile, electrical, and steel industries.)[citation needed] In early 1945 Bernard Baruch described the spirit of Bretton Woods as: if we can "stop subsidization of labor and sweated competition in the export markets," as well as prevent rebuilding of war machines, "oh boy, oh boy, what long term prosperity we will have."[5] The United States [c]ould therefore use its position of influence to reopen and control the [rules of the] world economy, so as to give unhindered access to all nations' markets and materials.

[edit]Wartime devastation of Europe and East AsiaUnited States allieseconomically exhausted by the warneeded U.S. assistance to rebuild their domestic production and to finance their international trade; indeed, they needed it to survive.[citation needed] Before the war, the French and the British realized that they could no longer compete with U.S. industries in an open marketplace.[citation needed] During the 1930s, the British created their own economic bloc to shut out U.S. goods. Churchill did not believe that he could surrender that protection after the war, so he watered down the Atlantic Charter's "free access" clause before agreeing to it.[citation needed] Yet, U.S. officials were determined to open their access to the British empire. The combined value of British and U.S. trade was well over half of all the world's trade in goods. For the U.S. to open global markets, it first had to split the British (trade) empire. While Britain had economically dominated the 19th century, U.S. officials intended the second half of the 20th to be under U.S.hegemony.[6] A Senior Official of the Bank of England commented: One of the reasons Bretton Woods worked was that the US was clearly the most powerful country at the table and so ultimately was able to impose its will on the others, including an often-dismayed Britain. At the time, one senior official at the Bank of England described the deal reached at Bretton Woods as the greatest blow to Britain next to the war, largely because it underlined the way in which financial power had moved from the UK to the US. [7] A devastated Britain had little choice. Two world wars had destroyed the country's principal industries that paid for the importation of half of the nation's food and nearly all its raw materials except coal. The British had no choice but to ask for aid. Not until the United States signed an agreement on December 6, 1945 to grant Britain

aid of $4.4 billion did the British Parliament ratify the Bretton Woods Agreements (which occurred later in December 1945).[8] For nearly two centuries, French and U.S. interests had clashed in both the Old World and the New World.[citationneeded]

During the war, French mistrust of the United States was embodied by General Charles de Gaulle,

president of the French provisional government.[citation needed] De Gaulle bitterly fought U.S. officials as he tried to maintain his country's colonies and diplomatic freedom of action. In turn, U.S. officials saw de Gaulle as a political extremist.[citation needed] But in 1945 de Gaulleat that point the leading voice of French nationalismwas forced to grudgingly ask the U.S. for a billion-dollar loan.[citation needed] Most of the request was granted; in return France promised to curtail government subsidies and currency manipulation that had given its exporters advantages in the world market.[citation needed] On a far more profound level, as the Bretton Woods conference was convening, the greater part of the Third World remained politically and economically subordinate. Linked to the developed countries of the West economically and politicallyformally and informallythese states had little choice but to acquiesce in the international economic system established for them.[citation needed] In the East, Soviet hegemony in Eastern Europe provided the foundation for a separate international economic system.[citation needed]


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Free trade relied on the free convertibility 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 new economic system 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, 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 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.



[edit]Previous regimesIn the 19th and early 20th centuries gold played a key role in international monetary transactions. The gold standard was used to back currencies; the international value of currency was determined by its fixed

relationship to gold; gold was used to settle international accounts. The gold standard maintained fixed exchange rates that were seen as desirable because they reduced the risk when trading with other countries. Imbalances in international trade were theoretically rectified automatically by the gold standard. A country with a deficit would have depleted gold reserves and would thus have to reduce its money supply. The resulting fall in demand would reduce imports and the lowering of prices would boost exports; thus the deficit would be rectified. Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend. This decrease in the amount of money would act to reduce the inflationary pressure. Supplementing the use of gold in this period was the British pound. Based on the dominant British economy, the pound became a reserve, transaction, and intervention currency. But the pound was not up to the challenge of serving as the primary world currency, given the weakness of the British economy after the Second World War. The architects of Bretton Woods had conceived of a system wherein exchange rate stability was a prime goal. Yet, in an era of more activist economic policy, governments did not seriously consider permanently fixed rates on the model of the classical gold standard of the 19th century. Gold production was not even sufficient to meet the demands of growing international trade and investment. And a sizeable share of the world's known gold reserves were located in the Soviet Union, which would later emerge as a Cold War rival to the United States and Western Europe. The only currency strong enough to meet the rising demands for international currency transactions was the U.S. dollar. The strength of the U.S. economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold. Another view is that in the time of discount banks, discount was the interest earned on gold, and that the only way to repay interest on government bonds is by printing more dollars, thus raising the price of gold. If gold is fixed at $35 then other countries will demand gold and not accept dollars. The closing of the gold window in 1971 was the result.

[edit]Fixed exchange ratesThe rules of Bretton Woods, set forth in the articles of agreement of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), provided for a system of fixed exchange rates. The rules further sought to encourage an open system by committing members to the convertibility of their respective currencies into other currencies and to free trade. What emerged was the "pegged rate" currency regime. Members were required to establish a parity of their national currencies in terms of the reserve currency (a "peg") and to maintain exchange rates within plus or

minus 1% of parity (a "band") by intervening in their foreign exchange markets (that is, buying or selling foreign money). In theory, the reserve currency would be the bancor (a World Currency Unit that was never implemented), suggested by John Maynard Keynes; however, the United States objected and their request was granted, making the "reserve currency" the U.S. dollar. This meant that other countries would peg their currencies to the U.S. dollar, andonce convertibility was restoredwould buy and sell U.S. dollars to keep market exchange rates within plus or minus 1% of parity. Thus, the U.S. dollar took over the role that gold had played under the gold standard in the international financial system.[9] Meanwhile, to bolster faith in the dollar, the U.S. agreed separately to link the dollar to gold at the rate of $35 per ounce of gold. At this rate, foreign governments and central banks were able to exchange dollars for gold. Bretton Woods established a system of payments based on the dollar, in which all currencies were defined in relation to the dollar, itself convertible into gold, and above all, "as good as gold". The U.S. currency was now effectively the world currency, the standard to which every other currency was pegged. As the world's key currency, most international transactions were denominated in US dollars.[citation needed] The U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Additionally, all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States, a fact that contributed to the supremacy of the United States[citation needed]. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system. Member countries could only change their par value with IMF approval, which was contingent on IMF determination that its balance of payments was in a "fundamental disequilibrium".



The Bretton Woods Conference led to the establishment of the IMF and the IBRD (now the World Bank), which still remain powerful forces in the world economy. 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 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.

As a result of the establishment of agreed upon structures and rules of international economic interaction, conflict over economic issues was minimized, and the significance of the economic aspect of international relations seemed to recede.

[edit]International Monetary FundMain article: International Monetary Fund Officially established on December 27, 1945, when the 29 participating countries at the conference of Bretton Woods signed its Articles of Agreement, the IMF was to be the keeper of the rules and the main instrument of public international management. The Fund commenced its financial operations on March 1, 1947. IMF approval was necessary for any change in exchange rates in excess of 1%. It advised countries on policies affecting the monetary system.

[edit]DesignThe big question at the Bretton Woods conference with respect to the institution that would emerge as the IMF was the issue of future access to international liquidity and whether that source should be akin to a world central bank able to create new reserves at will or a more limited borrowing mechanism.

John Maynard Keynes (right) and Harry Dexter White at the inaugural meeting of the International Monetary Fund's Board of Governors in Savannah, Georgia, U.S., March 8, 1946

Although attended by 44 nations, discussions at the conference were dominated by two rival plans developed by the United States and Britain. As the chief international economist at the U.S. Treasury in 194244, Harry Dexter White drafted the U.S. blueprint for international access to liquidity, which competed with the plan

drafted for the British Treasury by Keynes. Overall, White's scheme tended to favor incentives designed to create price stability within the world's economies, while Keynes' wanted a system that encouraged economic growth. At the time, gaps between the White and Keynes plans seemed enormous. Outlining the difficulty of creating a system that every nation could accept in his speech at the closing plenary session of the Bretton Woods conference on July 22, 1944, Keynes stated: We, the delegates of this Conference, Mr. President, have been trying to accomplish something very difficult to accomplish.[...] It has been our task to find a common measure, a common standard, a common rule acceptable to each and not irksome to any. [Notes 3] Keynes' proposals would have established a world reserve currency (which he thought might be called "bancor") administered by a central bankvested with the possibility of creating money and with the authority to take actions on a much larger scale. In case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. As outlined by Keynes, countries with payment surpluses should increase their imports from the deficit countries and thereby create a foreign trade equilibrium. Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary. But the United States, as a likely creditor nation, and eager to take on the role of the world's economic powerhouse, balked at Keynes' plan and did not pay serious attention to it. The U.S. contingent was too concerned about inflationary pressures in the postwar economy, and White saw an imbalance as a problem only of the deficit country. Although compromise was reached on some points, because of the overwhelming economic and military power of the United States the participants at Bretton Woods largely agreed on White's plan.

[edit]Subscriptions and quotasWhat emerged largely reflected U.S. preferences: a system of subscriptions and quotas embedded in the IMF, which itself was to be no more than a fixed pool of national currencies and gold subscribed by each country as opposed to a world central bank capable of creating money. The Fund was charged with managing various nations' trade deficits so that they would not produce currency devaluations that would trigger a decline in imports. The IMF is provided with a fund, composed of contributions of member countries in gold and their own currencies. The original quotas were to total $8.8 billion. When joining the IMF, members are assigned "quotas" reflecting their relative economic power, and, as a sort of credit deposit, are obliged to pay a "subscription" of an amount commensurate to the quota. The subscription is to be paid 25% in gold or currency convertible into

gold (effectively the dollar, which was the only currency then still directly gold convertible for central banks) and 75% in the member's own currency. Quota subscriptions are to form the largest source of money at the IMF's disposal. The IMF set out to use this money to grant loans to member countries with financial difficulties. Each member is then entitled to withdraw 25% of its quota immediately in case of payment problems. If this sum should be insufficient, each nation in the system is also able to request loans for foreign currency.

[edit]Trade deficitsIn the event of a deficit in the current account, Fund members, when short of reserves, would be able to borrow foreign currency in amounts determined by the size of its quota. In other words, the higher the country's contribution was, the higher the sum of money it could borrow from the IMF. Members were required to pay back debts within a period of 18 months to five years. In turn, the IMF embarked on setting up rules and procedures to keep a country from going too deeply into debt year after year. The Fund would exercise "surveillance" over other economies for the U.S. Treasury in return for its loans to prop up national currencies. IMF loans were not comparable to loans issued by a conventional credit institution. Instead, they were effectively a chance to purchase a foreign currency with gold or the member's national currency. The U.S.-backed IMF plan sought to end restrictions on the transfer of goods and services from one country to another, eliminate currency blocs, and lift currency exchange controls. The IMF was designed to advance credits to countries with balance of payments deficits. Short-run balance of payment difficulties would be overcome by IMF loans, which would facilitate stable currency exchange rates. This flexibility meant a member state would not have to induce a depression to cut its national income down to such a low level that its imports would finally fall within its means. Thus, countries were to be spared the need to resort to the classical medicine of deflating themselves into drastic unemployment when faced with chronic balance of payments deficits. Before the Second World War, European nationsparticularly Britainoften resorted to this.

[edit]Par valueThe IMF sought to provide for occasional discontinuous exchange-rate adjustments (changing a member's par value) by international agreement. Member nations were permitted to adjust their currency exchange rate by 10%. This tended to restore equilibrium in their trade by expanding their exports and contracting imports. This would be allowed only if there was a fundamental disequilibrium. A decrease in the value of a country's money was called a devaluation, while an increase in the value of the country's money was called a revaluation.

It was envisioned that these changes in exchange rates would be quite rare. However, the concept of fundamental disequilibrium, though key to the operation of the par value system, was never defined in detail.

[edit]OperationsNever before had international monetary cooperation been attempted on a permanent institutional basis. Even more groundbreaking was the decision to allocate voting rights among governments, not on a one-state onevote basis, but rather in proportion to quotas. Since the United States was contributing the most, U.S. leadership was the key. Under the system of weighted voting, the United States exerted a preponderant influence on the IMF. The United States held one-third of all IMF quotas at the outset, enough on its own to veto all changes to the IMF Charter. In addition, the IMF was based in Washington, D.C., and staffed mainly by U.S. economists. It regularly exchanged personnel with the U.S. Treasury. When the IMF began operations in 1946, President Harry S. Truman named White as its first U.S. Executive Director. Since no Deputy Managing Director post had yet been created, White served occasionally as Acting Managing Director and generally played a highly influential role during the IMF's first year.

[edit]International Bank for Reconstruction and DevelopmentMain article: International Bank for Reconstruction and Development The agreement made no provisions for international creation of reserves. New gold production was assumed to be sufficient. In the event of structural disequilibria, it was expected that there would be national solutions, for example, an adjustment in the value of the currency or an improvement by other means of a country's competitive position. The IMF was left with few means, however, to encourage such national solutions. It had been recognized in 1944 that the new system could only commence after a return to normalcy following the disruption of World War II. It was expected that after a brief transition period of no more than five years, the international economy would recover and the system would enter into operation. To promote the growth of world trade and to finance the postwar reconstruction of Europe, the planners at Bretton Woods created another institution, the International Bank for Reconstruction and Development (IBRD), now the most important agency of the World Bank Group. The IBRD had an authorized capitalization of $10 billion and was expected to make loans of its own funds to underwrite private loans and to issue securities to raise new funds to make possible a speedy postwar recovery. The IBRD was to be a specialized agency of the United Nations charged with making loans for economic development purposes.

[edit]Readjustment [edit]Dollar

shortages and the Marshall Plan

The Bretton Woods arrangements were largely adhered to and ratified by the participating governments. It was expected that national monetary reserves, supplemented with necessary IMF credits, would finance any temporary balance of payments disequilibria. But this did not prove sufficient to get Europe out of its conundrum. Postwar world capitalism suffered from a huge dollar shortage. The United States was running huge balance of trade surpluses, and the U.S. reserves were immense and growing. It was necessary to reverse this flow. Dollars had to leave the United States and become available for international use. In other words, the United States would have to reverse the natural economic processes and run a balance of payments deficit. The modest credit facilities of the IMF were clearly insufficient to deal with Western Europe's huge balance of payments deficits. The problem was further aggravated by the reaffirmation by the IMF Board of Governors in the provision in the Bretton Woods Articles of Agreement that the IMF could make loans only for current account deficits and not for capital and reconstruction purposes. Only the United States contribution of $570 million was actually available for IBRD lending. In addition, because the only available market for IBRD bonds was the conservative Wall Street banking market, the IBRD was forced to adopt a conservative lending policy, granting loans only when repayment was assured. Given these problems, by 1947 the IMF and the IBRD themselves were admitting that they could not deal with the international monetary system's economic problems.[10] The United States set up the European Recovery Program (Marshall Plan) to provide large-scale financial and economic aid for rebuilding Europe largely through grants rather than loans. This included countries belonging to the Soviet bloc, e.g., Poland. In a speech at Harvard University on June 5, 1947, U.S. Secretary of State George Marshall stated: The breakdown of the business structure of Europe during the war was complete. Europe's requirements for the next three or four years of foreign food and other essential products principally from the United States are so much greater than her present ability to pay that she must have substantial help or face economic, social and political deterioration of a very grave character. [Notes 4] From 1947 until 1958, the U.S. deliberately encouraged an outflow of dollars, and, from 1950 on, the United States ran a balance of payments deficit with the intent of providing liquidity for the international economy. Dollars flowed out through various U.S. aid programs: the Truman Doctrine entailing aid to the proU.S. Greek and Turkish regimes, which were struggling to suppress communist revolution, aid to various proU.S. regimes in the Third World, and most important, the Marshall Plan. From 1948 to 1954 the United States provided 16 Western European countries $17 billion in grants. To encourage long-term adjustment, the United States promoted European and Japanese trade competitiveness. Policies for economic controls on the defeated former Axis countries were scrapped. Aid to

Europe and Japan was designed to rebuild productivity and export capacity. In the long run it was expected that such European and Japanese recovery would benefit the United States by widening markets for U.S. exports, and providing locations for U.S. capital expansion. In 1956, the World Bank created the International Finance Corporation and in 1960 it created the International Development Association (IDA). Both have been controversial. Critics of the IDA argue that it was designed to head off a broader based system headed by the United Nations, and that the IDA lends without consideration for the effectiveness of the program[citation needed]. Critics also point out that the pressure to keep developing economies "open" has led to their having difficulties obtaining funds through ordinary channels, and a continual cycle of asset buy up by foreign investors and capital flight by locals[citation needed]. Defenders of the IDA pointed to its ability to make large loans for agricultural programs which aided the "Green Revolution" of the 1960s, and its functioning to stabilize and occasionally subsidize Third World governments, particularly in Latin America[citationneeded]


Bretton Woods, then, created a system of triangular trade: the United States would use the convertible financial system to trade at a tremendous profit with developing nations, expanding industry and acquiring raw materials. It would use this surplus to send dollars to Europe, which would then be used to rebuild their economies, and make the United States the market for their products. This would allow the other industrialized nations to purchase products from the Third World, which reinforced the American role as the guarantor of stability. When this triangle became destabilized, Bretton Woods entered a period of crisis that ultimately led to its collapse.



In 1945, Roosevelt and Churchill prepared the postwar era by negotiating with Joseph Stalin at Yalta about respective zones of influence; this same year Germany was divided into four occupation zones (Soviet, American, British, and French). Roosevelt and Henry Morgenthau insisted that the Big Four (United States, United Kingdom, the Soviet Union, and China) participate in the Bretton Woods conference in 1944,[11] but their goal was frustrated when the Soviet Union would not join the IMF. In the past, the reasons why the Soviet Union chose not to subscribe to the articles by December 1945 have been the subject of speculation. But since the release of relevant Soviet archives, it is now clear that the Soviet calculation was based on the behavior of the parties that had actually expressed their assent to the Bretton Woods Agreements. [citation needed] The extended debates about ratification that had taken place both in the UK and the U.S. were read in Moscow as evidence of the quick disintegration of the wartime alliance.[citation needed] Facing the Soviet Union, whose power had also strengthened and whose territorial influence had expanded, the U.S. assumed the role of leader of the capitalist camp. The rise of the postwar U.S. as the world's leading industrial, monetary, and military power was rooted in the fact that the mainland U.S. was untouched by the

war, in the instability of the national states in postwar Europe, and the wartime devastation of the Soviet and European economies. Despite the economic effort imposed by such a policy, being at the center of the international market gave the U.S. unprecedented freedom of action in pursuing its foreign affairs goals. A trade surplus made it easier to keep armies abroad and to invest outside the U.S., and because other nations could not sustain foreign deployments, the U.S. had the power to decide why, when and how to intervene in global crises. The dollar continued to function as a compass to guide the health of the world economy, and exporting to the U.S. became the primary economic goal of developing or redeveloping economies. This arrangement came to be referred to as the Pax Americana, in analogy to the Pax Britannica of the late 19th century and the Pax Romana of the first. (See Globalism)

[edit]Late [edit]U.S.

applicationbalance of payments crisis

After the end of World War II, the U.S. held $26 billion in gold reserves, of an estimated total of $40 billion (approx 60%). As world trade increased rapidly through the 1950s, the size of the gold base increased by only a few percentage points. In 1950, the U.S. balance of payments swung negative. The first U.S. response to the crisis was in the late 1950s when the Eisenhower administration placed import quotas on oil and other restrictions on trade outflows. More drastic measures were proposed, but not acted upon. However, with a mounting recession that began in 1958, this response alone was not sustainable. In 1960, with Kennedy's election, a decade-long effort to maintain the Bretton Woods System at the $35/ounce price was begun. The design of the Bretton Woods System was that nations could only enforce gold convertibility on the anchor currencythe United States dollar. Gold convertibility enforcement was not required, but instead, allowed. Nations could forgo converting dollars to gold, and instead hold dollars. Rather than full convertibility, it provided a fixed price for sales between central banks. However, there was still an open gold market. For the Bretton Woods system to remain workable, it would either have to alter the peg of the dollar to gold, or it would have to maintain the free market price for gold near the $35 per ounce official price. The greater the gap between free market gold prices and central bank gold prices, the greater the temptation to deal with internal economic issues by buying gold at the Bretton Woods price and selling it on the open market. In 1960 Robert Triffin, Belgian American economist, noticed that holding dollars was more valuable than gold because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. What would later come to be known as Triffin's Dilemma was predicted when Triffin noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world's economic growth, and, thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability. [12]

The first effort was the creation of the London Gold Pool on November 1 of 1961 between eight nations. The theory behind the pool was that spikes in the free market price of gold, set by themorning gold fix in London, could be controlled by having a pool of gold to sell on the open market, that would then be recovered when the price of gold dropped. Gold's price spiked in response to events such as the Cuban Missile Crisis, and other smaller events, to as high as $40/ounce. The Kennedy administration drafted a radical change of the tax system to spur more production capacity and thus encourage exports. This culminated with the 1963 tax cut program, designed to maintain the $35 peg. In 1967, there was an attack on the pound and a run on gold in the sterling area, and on November 18, 1967, the British government was forced to devalue the pound.[13] U.S. President Lyndon Baines Johnson was faced with a brutal choice, either institute protectionist measures, including travel taxes, export subsidies and slashing the budgetor accept the risk of a "run on gold" and the dollar. From Johnson's perspective: "The world supply of gold is insufficient to make the present system workableparticularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth."[14] He believed that the priorities of the United States were correct, and, although there were internal tensions in the Western alliance, that turning away from open trade would be more costly, economically and politically, than it was worth: "Our role of world leadership in a political and military sense is the only reason for our current embarrassment in an economic sense on the one hand and on the other the correction of the economic embarrassment under present monetary systems will result in an untenable position economically for our allies."[citation needed] While West Germany agreed not to purchase gold from the U.S., and agreed to hold dollars instead, the pressure on both the dollar and the pound sterling continued. In January 1968 Johnson imposed a series of measures designed to end gold outflow, and to increase U.S. exports. This was unsuccessful, however, as in mid-March 1968 a run on gold ensued, the London Gold Pool was dissolved, and a series of meetings attempted to rescue or reform the existing system.[15] But, as long as the U.S. commitments to foreign deployment continued, particularly to Western Europe, there was little that could be done to maintain the gold peg.[citation needed][original research?] All attempts to maintain the peg collapsed in November 1968, and a new policy program attempted to convert the Bretton Woods system into an enforcement mechanism of floating the gold peg, which would be set by either fiat policy or by a restriction to honor foreign accounts. The collapse of the gold pool and the refusal of the pool members to trade gold with private entitieson March 18 , 1968 the Congress of the United States repealed the 25% requirement of gold backing of the dollar[16]as well as the US pledge to suspend gold sales to governments that trade in the private markets,[17] led to the expansion of the private markets for international gold trade, in which the price of gold rose much higher than the official dollar price. [18] [19] The US

gold reserves continued to be depleted due to the actions of some nations, notably France,[19] who continued to build up their gold reserves.



[edit]Return to convertibilityIn the 1960s and 1970s, 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 of the Western European currencies at the end of 1958 and of the Japanese yen in 1964. Convertibility facilitated the vast expansion of international financial transactions, which deepened monetary interdependence.

[edit]Growth of international currency marketsAnother aspect of the internationalization of banking has been the emergence of international banking consortia. Since 1964 various banks had formed international syndicates, and by 1971 over three quarters of the world's largest banks had become shareholders in such syndicates. Multinational banks can and do make huge international transfers of capital not only for investment purposes but also for hedging and speculating against exchange rate fluctuations. These new forms of monetary interdependence made possible huge capital flows. During the Bretton Woods era countries were reluctant to alter exchange rates formally even in cases of structural disequilibria. Because such changes had a direct impact on certain domestic economic groups, they came to be seen as political risks for leaders. As a result official exchange rates often became unrealistic in market terms, providing a virtually risk-free temptation for speculators. They could move from a weak to a strong currency hoping to reap profits when a revaluation occurred. If, however, monetary authorities managed to avoid revaluation, they could return to other currencies with no loss. The combination of risk-free speculation with the availability of huge sums was highly destabilizing.

[edit]Decline [edit]U.S. monetary influenceA second structural change that undermined monetary management was the decline of U.S. hegemony. The U.S. was no longer the dominant economic power it had been for more than two decades. By the mid-1960s, the E.E.C. and Japan had become international economic powers in their own right. With total reserves exceeding those of the U.S., with higher levels of growth and trade, and with per capita income approaching that of the U.S., Europe and Japan were narrowing the gap between themselves and the United States. The shift toward a more pluralistic distribution of economic power led to increasing dissatisfaction with the privileged role of the U.S. dollar as the international currency. As in effect the world's central banker, the U.S., through its deficit, determined the level of international liquidity. In an increasingly interdependent world, U.S.

policy greatly influenced economic conditions in Europe and Japan. In addition, as long as other countries were willing to hold dollars, the U.S. could carry out massive foreign expenditures for political purposesmilitary activities and foreign aidwithout the threat of balance-of-payments constraints. Dissatisfaction with the political implications of the dollar system was increased by dtente between the U.S. and the Soviet Union. The Soviet threat had been an important force in cementing the Western capitalist monetary system. The U.S. political and security umbrella helped make American economic domination palatable for Europe and Japan, which had been economically exhausted by the war. As gross domestic production grew in European countries, trade grew. When common security tensions lessened, this loosened the transatlantic dependence on defence concerns, and allowed latent economic tensions to surface.

[edit]DollarReinforcing the relative decline in U.S. power and the dissatisfaction of Europe and Japan with the system was the continuing decline of the dollarthe foundation that had underpinned the post-1945 global trading system. The Vietnam War and the refusal of the administration of U.S. President Lyndon B. Johnson to pay for it and its Great Society programs through taxation resulted in an increased dollar outflow to pay for the military expenditures and rampant inflation, which led to the deterioration of the U.S. balance of trade position.[citationneeded]

In the late 1960s, the dollar was overvalued with its current trading position, while the Deutsche Mark and

the yen were undervalued; and, naturally, the Germans and the Japanese had no desire to revalue and thereby make their exports more expensive, whereas the U.S. sought to maintain its international credibility by avoiding devaluation.[20] Meanwhile, the pressure on government reserves was intensified by the new international currency markets, with their vast pools of speculative capital moving around in search of quick profits.[19] In contrast, upon the creation of Bretton Woods, with the U.S. producing half of the world's manufactured goods and holding half its reserves, the twin burdens of international management and theCold War were possible to meet at first. Throughout the 1950s Washington sustained a balance of payments deficit to finance loans, aid, and troops for allied regimes. But during the 1960s the costs of doing so became less tolerable. By 1970 the U.S. held under 16% of international reserves. Adjustment to these changed realities was impeded by the U.S. commitment to fixed exchange rates and by the U.S. obligation to convert dollars into gold on demand.[citation needed]


of international monetary management

[edit]Floating-rate system during 19681972By 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 unbalanced fiscal spending of the Johnson administration had transformed the dollar shortage of the 1940s and 1950s into a dollar glut by

the 1960s. In 1967, the IMF agreed in Rio de Janeiro to replace the tranche division set up in 1946. Special drawing rights (SDRs) 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 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 that 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 defense 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 lifted import quotas on oil in an attempt to reduce energy costs; instead, however, this exacerbated dollar flight, and created pressure from petro-dollars. 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.

[edit]Nixon ShockMain article: Nixon Shock By the early 1970s, as the Vietnam War accelerated inflation, the United States as a whole began running a trade deficit. The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar had lost faith in the ability of the U.S. to cut budget and trade deficits. In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window", making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the Nixon Shock.

The surcharge was dropped in December 1971 as part of a general revaluation of major currencies, which were henceforth allowed 2.25% devaluations from the agreed exchange rate. But even the more flexible official rates could not be defended against the speculators. By March 1976, all the major currencies were floatingin other words, exchange rates were no longer the principal method used by governments to administer monetary policy.

[edit]Smithsonian AgreementThe shock of August 15 was followed by efforts under U.S. leadership to develop a new system of international monetary management. Throughout the fall of 1971, there was a series of multilateral and bilateral negotiations of the Group of Ten seeking to develop a new multilateral monetary system. On December 17 and 18, 1971, the Group of Ten, meeting in the Smithsonian Institution in Washington, created the Smithsonian Agreement, which devalued the dollar to $38/ounce, with 2.25% trading bands, and attempted to balance the world financial system using SDRs alone. It was criticized at the time, and was by design a "temporary" agreement. It failed to impose discipline on the U.S. government, and with no other credibility mechanism in place, the pressure against the dollar in gold continued. This resulted in gold becoming a floating asset, and in 1971 it reached $44.20/ounce, in 1972 $70.30/ounce and still climbing. By 1972, currencies began abandoning even this devalued peg against the dollar, though it took a decade for all of the industrialized nations to do so. In February 1973 the Bretton Woods currency exchange markets closed, after a last-gasp devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime.


Woods II

Main article: Bretton Woods II Dooley, Folkerts-Landau and Garber have referred to the monetary system of today as Bretton Woods II.[21] They argue that in the early 2000s (decade), like 40 years earlier, the international system is composed of a core issuing the dominant international currency, and a periphery. The periphery is committed to export-led growth based on the maintenance of an undervalued exchange rate. In the 1960s, the core was the United States and the periphery was Europe and Japan. This old periphery has since graduated, and the new periphery is Asia. The core remains the same, the United States. The argument is that a system of pegged currencies, in which the periphery export capital to the core that provides a financial intermediary role is both stable and desirable, although this notion is controversial.[21] The term dollar hegemony was populised by Henry C.K. Liu to describe the hegemonic role of the US dollar in the globalized economy."[22]


Bretton Woods system after the 2008 crisis

In the wake of the Global financial crisis of 2008, policymakers and others have called for a new international monetary system that some of them also dub Bretton Woods II. On the other side, this crisis has revived the debate about Bretton Woods II.[Notes 5] On September 26, 2008, French president, Nicolas Sarkozy, said, "we must rethink the financial system from scratch, as at Bretton Woods.[23] On September 2425, 2009 US President Obama hosted the G20 in Pittsburgh. A realignment of currency exchange rates was proposed. This meeting's policy outcome could be known as the Pittsburgh Agreement of 2009, where deficit nations may devalue their currencies and surplus nations may revalue theirs upward. In March 2010, Prime Minister Papandreou of Greece wrote an op-ed in the International Herald Tribune, in which he said: "Democratic governments worldwide must establish a new global financial architecture, as bold in its own way as Bretton Woods, as bold as the creation of the European Community and European Monetary Union. And we need it fast." In interviews coinciding with his meeting with President Obama, he indicated that Obama would raise the issue of new regulations for the international financial markets at the next G20 meetings in June and November 2010. Over the course of the crisis the IMF progressively relaxed its stance on "free market" principles such as its guidance against using capital controls. In 2011 the IMF's managing directorDominique Strauss-Kahn stated that boosting employment and equity "must be placed at the heart" of the IMF's policy agenda. Bank also indicated a switch towards greater emphases on job creation.[25] [26] [24]

The World



The collapse of the Bretton Woods system led to the study in economics of credibility as a distinct field, and to the prominence of open macroeconomic models, such as the MundellFleming model.[citation needed]



Dates shown are those on which the rate was introduced; "*" indicates floating rate supplied by IMF[27]

[edit]Japanese Date

yen# yen = $1 US

August 1946


12 March 1947


5 July 1948


25 April 1949


20 July 1971


30 December 1998


5 December 2008


19 March 2011


3 August 2011


Note: GDP for 2007 is $4.272 trillion US Dollars[28]

[edit]Deutsche Date

Mark# Mark = $1 US Note

21 June 1948


Eur 1.7026

18 September 1949


Eur 2.1474

6 March 1961


Eur 2.0452

29 October 1969


Eur 1.8764

30 December 1998


Last day of trading; converted to Euro (January 4, 1999)

Note: GDP for 2007 is $2.807 trillion US Dollars[28]




# pounds = $1 US

27 December 1945


18 September 1949


17 November 1967


30 December 1998


5 December 2008


Note: GDP for 2007 is $2.1 trillion US Dollars[28]

[edit]French Date

franc# francs = $1 US Note

27 December 1945


1 = 480 FRF

26 January 1948


1 = 864 FRF

18 October 1948


1 = 1062 FRF

27 April 1949


1 = 1097 FRF

20 September 1949


1 = 980 FRF

11 August 1957


1 = 1176 FRF

27 December 1958


1 FRF = 0.0018 g gold

1 January 1960


1 new franc = 100 old francs

10 August 1969


1 new franc = 0.160 g gold

31 December 1998


Last day of trading; converted to euro (January 4, 1999)

Note: GDP for 2007 is $2.075 trillion US Dollars[28]

[edit]Italian Date

lira# lire = $1 US Note

4 January 1946


Eur 0.1162

26 March 1946


Eur 0.2629

7 January 1947


Eur 0.1808

28 November 1947


Eur 0.297

18 September 1949


Eur 0.3228

31 December 1998


Last day of trading; converted to euro (January 4, 1999)

Note: GDP for 2007 is $1.8 trillion US Dollars[28]

[edit]Spanish Date

peseta# pesetas = $1 US Note

17 July 1959


Eur 0.3606

20 November 1967


Devalued in line with sterling

31 December 1998


Last day of trading; converted to euro (January 4, 1999)

Note: GDP for 2007 is $1.361 trillion US Dollars[28]

[edit]Dutch Date

gulden# gulden = $1 US Note

27 December 1945


Eur 1.2034

20 September 1949


Eur 1.7244

7 March 1961


Eur 1.6427

31 December 1998


Last day of trading; converted to euro (January 4, 1999)

Note: GDP for 2007 is $0.645 trillion US Dollars[28]

[edit]Belgian Date

franc# francs = $1 US Note

27 December 1945


Eur 1.085



Eur 1.0876

21 September 1949


Eur 1.2395

31 December 1998


Last day of trading; converted to euro (January 4, 1999)

Note: GDP for 2007 is $0.376 trillion US Dollars[28]

[edit]Greek Date

drachma# drachmae = $1 US Note



Eur 0.088

31 December 1998


Last day of trading; converted to euro (January 4, 1999)

Note: GDP for 2007 is $0.327 trillion US Dollars[28]

[edit]Swiss Date

franc# francs = $1 US Note

27 December 1945


1 = 17.35 CHF

September 1949


1 = 12.25 CHF

31 December 1998


1 = 2.289 CHF

5 December 2008


1 = 1.778 CHF

Note: GDP for 2007 is $0.303 trillion US Dollars[28]

[edit]Danish Date

krone# kroner = $1 US Note

August 1945


19 September 1949


Devalued in line with sterling

21 November 1967


31 December 1998


5 December 2008


Note: GDP for 2007 is $0.203 trillion US Dollars[28]

[edit]Finnish Date

markka# markkaa = $1 US Note

17 October 1945


Eur 22.8736

5 July 1949


Eur 26.9101

19 September 1949


Eur 38.6832

15 September 1957


Eur 53.8201

1 January 1963


1 new markka = 100 old markka

12 October 1967


Eur 0.7064

30 December 1998


Last day of trading; converted to euro (January 4, 1999)

Note: GDP for 2007 is $0.188 trillion US Dollars[28]



General Agreement on Tariffs and Trade Monetary hegemony Neoliberalism Post-war economic boom Triffin's dilemma Washington Consensus World Bank


List of international trade topics Foreign exchange reserves



^ For discussions of how liberal ideas motivated U.S. foreign economic policy after World War II, see, e.g., Kenneth Waltz, Man, the State and War (New York: Columbia University Press, 1969) and yuvi.c Calleo and Benjamin M. Rowland, American and World Political Economy (Bloomington, Indiana: Indiana University Press, 1973).


^ Quoted in Robert A. Pollard, Economic Security and the Origins of the Cold War, 19451950 (New York: Columbia University Press, 1985), p.8.


^ Comments by John Maynard Keynes in his speech at the closing plenary session of the Bretton Woods Conference on July 22, 1944 in Donald Moggeridge (ed.), The Collected Writings of John Maynard Keynes (London: Cambridge University Press, 1980), vol. 26, p. 101. This comment also can be found quoted online at [1]


^ Comments by U.S. Secretary of State George Marshall in his June 1947 speech "Against Hunger, Poverty, Desperation and Chaos" at a Harvard University commencement ceremony. A full transcript of his speech can be read online at [2]


^ For a recent publication see: Michael P. Dooley, David Folkerts-Landau, Peter M. Garber: Bretton Woods II still defines the international monetary system. National Bureau of Economic Research, February 2009.


1. 2.

^ Lowrey, Annie (2011-02-09) End the Fed? Actually, Maybe Not., ^ Michael Hudson, Super Imperialism: The Origin and Fundamentals of U.S. World Dominance, 2nd ed. (London and Sterling, VA: Pluto Press, 2003), ch. 5.


^ Dimitrova, K., Nenovsky, N., G. Pavanelli. (2007). Exchange Control in Italy and Bulgaria in the Interwar Period: History and Perspectives, ICER, Working Paper No. 40.

4. 5.

^ Hull, Cordell (1948). The Memoirs of Cordell Hull: vol. 1. New York: Macmillan. pp. 81. ^ Baruch to E. Coblentz, March 23, 1945, Papers of Bernard Baruch, Princeton University Library, Princeton, N.J quoted in Walter LaFeber, America, Russia, and the Cold War (New York, 2002), p.12.


^ Lundestad, Geir, Empire by Invitation? The United States and Western Europe, 19451952,Journal of Peace Research, Vol. 23, No. 3 (September, 1986), pp. 263277, Sage Publications, Ltd. and Ikenberry, G. John, A World Economy Restored: Expert Consensus and the Anglo-American Postwar Settlement, International Organization, Vol. 46, No. 1, Knowledge, Power, and International Policy Coordination (Winter, 1992), pp. 289321, The MIT Press


^ Senior Official of the Bank of England (1944) In The Bretton Woods Sequel will Flop by Gideon, Rachman. The Financial Times, November 11, 2008.

8. 9.

^ P. Skidelsky, "John Maynard Keynes", (2003), pp. 817820 ^ Prestowitz, Clyde (2003). Rogue Nation.

10. ^ Mason, Edward S.; Asher, Robert E. (1973). The World Bank Since Bretton Woods. Washington, D.C.: The Brookings Institution. pp. 105107, 124135. 11. ^ Raymond F. Mikesell, The Bretton Woods Debates: A Memoir, Essays in International Finance 192 (Princeton: International Finance Section, Department of Economics, Princeton University, 1994) 12. ^ 13. ^ "Wilson defends 'pound in your pocket'". BBC News. 1967-11-19. 14. ^ Francis J. Gavin, Gold, Dollars, and Power The Politics of International Monetary Relations, 19581971, The University of North Carolina Press (2003), ISBN 0-8078-5460-3 15. ^ "Memorandum of discussion, Federal Open Market Committee". Federal Reserve. 1968-03-14. 16. ^ United States Congress, Public Law 90-269, 1968-03-18 17. ^ Speech by Darryl R. Francis, President Federal Reserve Bank of St. Louis (1968-07-12). "The Balance of Payments, The Dollar, and Gold". p. 7. 18. ^ Larry Elliott , Dan Atkinson (2008). The Gods That Failed: How Blind Faith in Markets Has Cost Us Our Future. The Bodley Head Ltd. pp. 615, 7281. ISBN 1-84792-030-6. 19. ^a b c

Laurence Copeland. Exchange Rates and International Finance (4th ed.). Prentice Hall. pp. 10

35. ISBN 0-273-68306-3. 20. ^ Gray, William Glenn (2007), "Floating the System: Germany, the United States, and the Breakdown of Bretton Woods, 19691973", Diplomatic History 31 (2): 295323,DOI:10.1111/j.1467-7709.2007.00603.x. 21. ^a b

Dooley, Folkerts-Landau, and Garber (2003): An Essay on the Revived Bretton Woods System NBER

Working Papers; for a critique, Eichengreen, Barry (2004): Global Imbalances and the Lessons of Bretton Woods NBER Working Papers 22. ^ Henry C.K. Liu (2002-04-11). "US dollar hegemony has got to go". Asia Times Online. Retrieved 2009-0918. 23. ^ George Parker, Tony Barber and Daniel Dombey (October 9, 2008). "Senior figures call for new Bretton Woods ahead of Bank/Fund meetings". 24. ^ Joseph Stiglitz (2010-05-07). "The IMF's change of heart". Aljazeera. Retrieved 2011-05-10. 25. ^ Passim see epecially p.11 -12 2011WorldDevelopemntReport fullPDF World BAnk (2011) 26. ^ Passim see epecially p.11 -12 statement by World Bank director Sarah Cliffe World bank to focus "much more investment in equitable job creation" (approx 5 mins into podcast) World BAnk (2011) 27. ^ Data & Statistics supplied by the International Monetary fund web site[not specific enough to verify]

28. ^

a b c d e f g h i j k l

Country Comparison: GDP purchasing power parity



Van Dormael, A.; Bretton Woods : birth of a monetary system; London MacMillan 1978 Michael D. Bordo and Barry Eichengreen; A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform; 1993

Harold James; International Monetary Cooperation Since Bretton Woods; Oxford University Press, USA 1996



Donald Markwell, John Maynard Keynes and International Relations: Economic Paths to War and Peace, Oxford University Press, 2006

The Gold Battles Within the Cold War (PDF) by Francis J. Gavin (2002) International Financial Stability (PDF) by Michael Dooley, PhD, David Folkerts-Landau and Peter Garber, Deutsche Bank (October 2005)

"Bretton Woods System", prepared for the Routledge Encyclopedia of International Political Economy by Dr. B. Cohen

Bretton Woods Agreement by Addison Wiggin, co-author of Empire of Debt Dollar Hegemony by Henry C.K. Liu Proceedings and Documents of the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, July 1-22, 1944

Bretton Woods AgreementBy Addison Wiggin November 29th, 2006 Related Articles Filed Under The year was 1944. For the first time in modern history, an international agreement was reached to govern monetary policy among nations. It was, significantly, a chance to create a stabilizing international currency and ensure monetary stability once and for all. In total, 730 delegates from 44 nations met for three weeks in July that year at a hotel resort in Bretton Woods, New Hampshire. It was a significant opportunity. But it fell short of what could have been achieved. It was a turning point in monetary history, however. The result of this international meeting, the Bretton Woods Agreement, had the original purpose of rebuilding after World War II through a series of currency stabilization programs and infrastructure loans to war-ravaged nations. By 1946, the system was in full operation through the newly established International Bank for Reconstruction and Development (IBRD, the World Bank) and the International Monetary Fund (IMF).

What makes the Bretton Woods Agreement so interesting to us today is the fact that the whole plan for international monetary policy was based on nations agreeing to adhere to a global gold standard. Each country signing the agreement promised to maintain its currency at values within a narrow margin to the value of gold. The IMF was established to facilitate payment imbalances on a temporary basis. This system worked for 25 years. But it was flawed in its underlying assumptions. By pegging international currency to gold at $35 an ounce, it failed to take into effect the change in gold's actual value since 1934, when the $35 level had been set. The dollar had lost substantial purchasing power during and after World War II, and as European economies built back up, the ever-growing drain on U.S. gold reserves doomed the Bretton Woods Agreement as a permanent, working system. This problem was described by a former senior vice president of the Federal Reserve Bank of New York: "From the very beginning, gold was the vulnerable point of the Bretton Woods system. Yet the open-ended gold commitment assumed by the United States government under the Bretton Woods legislation is readily understandable in view of the extraordinary circumstances of the time. At the end of the war, our gold stock amounted to $20 billion, roughly 60 percent of the total of official gold reserves. As late as 1957, United States gold reserves exceeded by a ratio of three to one the total dollar reserves of all the foreign central banks. The dollar bestrode the exchange markets like a colossus." In 1971, experiencing accelerating depletion of its gold reserves, the United States removed its currency from the gold standard, and the Bretton Woods Agreement was no longer workable. In some respects, the ideas behind Bretton Woods were much like an economic United Nations. The combination of the worldwide depression of the 1930s and the Second World War were key in leading so many nations to an economic summit of such magnitude. The opinion of the day was that trade barriers and high costs had caused the worldwide depression, at least in part. Also, during that time it was common practice to use currency devaluation as a means for affecting neighboring countries' imports and reducing payment deficits. Unfortunately, the practice led to chronic deflation, unemployment, and a reduction in international trade. The lessons learned in the 1930s (but subsequently forgotten by many nations) included a realization that the use of currency as a tactical economic tool invariably causes more problems than it solves. The situation was summed up well by Cordell Hull, U.S. secretary of state from 1933 through 1944, who wrote: "Unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war... If we could get a freer flow of trade ... so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace." Hull's suggestion that war often has an economic root is reasonable given the position of both Germany and Japan in the 1930s. The trade embargo imposed by the United States against Japan, specifically intended to curtail Japanese expansion, may have been a leading cause for Japan's militaristic stance. Another observer agreed, saying that poor economic relations among nations "inevitably result in economic warfare that will be but a prelude and instigator of military warfare on an even vaster scale." Bretton Woods had the original intention of smoothing out economic conflict, in recognition of the problems that economic disparity causes. The nations at the meeting knew that these economic problems were at least partly to blame for the war itself, and that economic reform would help to prevent future wars. At that time, the United States

was without any doubt the most powerful nation in the world, both militarily and economically. Because the fighting did not take place on U.S. soil, the country built up its industrial might during the war, selling weapons to its allies while developing its own economic strength. Manufacturing by 1945 was twice the annual rate of 1935-1939. Due to its economic dominance, the United States held the leadership role at Bretton Woods. It is also important to note that the United States owned 80 percent of the world's gold reserves at the time. So the United States had every motive to agree to the use of the gold standard to organize world currencies and to create and encourage free trade. The gold standard evolved over a period of hundreds of years, planned by a central bank, government, or committee of business leaders. Throughout most of the nineteenth century, the gold standard dominated currency exchange. Gold created a fixed exchange rate between nations. Money supply was limited to gold reserves, so nations lacking gold were required to borrow money to finance their production and investment. When the gold standard was in force, it was true that the net sum of trade surplus and deficit came out to zero overall, because accounts were eventually settled in gold - and credit was limited as well. In comparison, in today's fiat money system, it is not gold but credit that determines how much money a country can spend. So instead of economic might being dictated by gold reserves, it is dictated by a country's borrowing power. The trade deficit and the trade surplus are only "in balance" in theory, because the disparity between the two sides is funded with debt. The pegged rates - the value of currency to the value of gold - maintained sensible economic policy based on a nation's productivity and gold reserves. Following Bretton Woods, the pegged rate was formalized by agreement among the leading economic powers of the world. The concept was a good one. However, in practice the international currency naturally became the U.S. dollar and other nations pegged their currencies to the dollar rather than to the value of gold. The actual outcome of the Bretton Woods Agreement was to replace the gold standard with the dollar standard. Once the United States linked the dollar to gold at a value of $35 per ounce, the whole system fell into place, at least for a while. Since the dollar was convertible to gold and other nations pegged their currencies to the dollar, it created a pseudo-gold standard. The British economist John Maynard Keynes represented Great Britain at Bretton Woods. Keynes preferred establishing a system that would have encouraged economic growth rather than a gold-pegged system. He favored creation of an international central bank and possibly even a world currency. He proposed that the goal of the conference was "to find a common measure, a common standard, a common rule acceptable to each and not irksome to any." Keynes' ideas were not accepted. The United States, in its leading economic position, preferred the plan offered by its representative, Harry Dexter White. The U.S. position was intended to create and maintain price stability rather than outright economic growth. As a consequence, Third World progress would be achieved through lending and infrastructure investment through the IMF, which was charged with managing trade deficits to avoid currency devaluation. In joining the IMF, each country was assigned a trade quota to fund the international effort, budgeted originally at $8.8 billion. Disparity among countries was to be managed through a series of borrowings. A country could borrow from the IMF, which would be acting in fact like a central bank. The Bretton Woods Agreement did not include any provisions for creation of reserves. The presumption was that gold production would be sufficient to continue funding growth and that any short term problems could be resolved through the borrowing regimens.

Anticipating a high volume of demand for such lending in reconstruction efforts after World War II, the Bretton Woods attendees formed the IBRD, providing an additional $10 billion to be paid by member nations. As well-intended an idea as it was, the agreements and institutions that grew from Bretton Woods were not adequate for the economic problems of postwar Europe. The United States was experiencing huge trade surplus years while carrying European war debt. U.S. reserves were huge and growing each year. By 1947, it became clear that the IMF and IBRD were not going to fix the problems of European postwar economic woes. To help address the issue, the United States set up a system to help finance recovery among European countries. The European Recovery Program (better known as the Marshall Plan) was organized to give grants to countries to rebuild. The problems of European nations, according to Secretary of State George Marshall, "are so much greater than her present ability to pay that she must have substantial help or face economic, social, and political deterioration of a very grave character." Between 1948 and 1954, the United States gave 16 Western European nations $17 billion in grants. Believing that former enemies Japan and Germany would provide markets for future U.S. exports, policies were enacted to encourage economic growth. During this period, the Cold War became increasingly worse as the arms race continued. The USSR had signed the Bretton Woods Agreement, but it refused to join or participate in the IMF. Thus, the proposed economic reforms turned into part of the struggle between capitalism and Communism on the world stage. It became increasingly difficult to maintain the peg of the U.S. dollar to $35-per-ounce gold. An open market in gold continued in London, and crises affected the going value of gold. The conflict between the fixed price of gold between central banks at $35 per ounce and open market value depended on the moment. During the Cuban missile crisis, for example, the open market value of gold was $40 per ounce. The mood among U.S. leaders began moving away from belief in the gold standard. President Lyndon B. Johnson argued in 1967 that: "The world supply of gold is insufficient to make the present system workable - particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth." By 1968, Johnson had enacted a series of measures designed to curtail the outflow of U.S. gold. Even so, on March 17, 1968, a run on gold closed the London Gold Pool permanently. By this time, it had become clear that maintaining the gold standard under the Bretton Woods configuration was no longer practical. Either the monetary system had to change or the gold standard itself would need to be revised. During this period, the IMF set up Special Drawing Rights (SDRs) for use as trade between countries. The intention was to create a type of paper gold system, while taking pressure off the United States to continue serving as central banker to the world. However, this did not solve the problem; the depletion of U.S. gold reserves continued until 1971. By that time, the U.S. dollar was overvalued in relation to gold reserves. The United States held only 22 percent gold coverage of foreign reserves by that year. SDRs acted as a basket of key national currencies to facilitate the inevitable trade imbalances. However, the Bretton Woods Agreement lacked any effective mechanism for checking reserve growth. Only gold and the U.S. asset were considered seriously as reserves, but gold production was lagging. Accordingly, dollar reserves had to expand to make up the difference in lagging gold availability, causing a growing U.S. current account deficit. The solution, it was hoped, would be the SDR.

While these instruments continue to exist, this long-term effectiveness can only be the subject of speculation. Today SDRs make up about 1 percent of IMF members' nongold reserves, and when in 1971 the United States went off the gold standard, Bretton Woods ceased to function as an effective centralized monetary body. In theory, SDRs - used today on a very limited scale of transactions between the IMF and its members - could function as the beginnings of an international currency. But given the widespread use of the U.S. dollar as the peg for so many currencies worldwide, it is unlikely that such a shift to a new direction will occur before circumstances make it the only choice. The Bretton Woods system collapsed, partially due to economic expansion in excess of the gold standard's funding abilities on the part of the United States and other member nations. However, the problems of currency systems not pegged to gold lead to economic problems far worse. Addison Wiggin The Daily Reckoning Editor's Note: Addison Wiggin is the editorial director and publisher of The Daily Reckoning. Mr. Wiggin is also the author, with Bill Bonner, of the international bestseller Financial Reckoning Day and the upcoming thriller Empire of Debt. Mr. Wiggin is frequent guest on national radio and television programs.

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed. Related Articles:

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About the Author

Editorial director of The Daily Reckoning, Addison Wiggin is also the author, with Bill Bonner, of the international bestseller Financial Reckoning Day and a frequent guest on national US radio and television programs. Look for the sequel to Financial Reckoning Day, Empire of Debt (John Wiley & Sons) in October, 2005. See All Posts by This Author

There Are 9 Responses So Far. 1. Pingback by The Daily Eudemon on 2 May 2009: [...] little history: The U.S. Dollar became the worlds currency in 1944 at Bretton Woods. Why? Because the U.S. was the only nation still on the gold standard. The other nations had [...] 2. Pingback by Gold and the Summer of Love Uncle Wiggilys Heartland Notebook on 16 August 2009:

[...] In 1933, FDR more or less arbitrarily raised the price of gold from the historical $20.67 per ounce to $35.00 in an effort to stem the rising tide of economic depression by printing more money. This ill-advised and inflationary effort ultimately failed of course, and in 1944 the Allied nations met at Bretton Woods, New Hampshire to establish a worldwide monetary system based on what was called the Gold Exchange Standard. The GES was, in actuality, a cruel sham designed to give the impression of a Gold Standard, but indeed allowed countries to inflate their currencies at will. I will not take the time or space here to fully delineate the hoax that was the Bretton Woods Agreement, but you can read about it here. [...]

3. Comment by ahmed on 3 December 2009: so i think as i understood, that the world was having a problem of being too rich, so it solved the problem with being poor. 4. Pingback by How the Internet Gave the Forex Market a Conceptual Makeover | , on 26 January 2010: [...] near the end of WWII, with the aim of designing a new stable economic environment. Under the Bretton Woods Agreement, national currencies were fixed against the U.S. dollar. The U.S. dollar in turn could be exchanged [...] 5. Pingback by Magic of The Seasons Cracked Chronicles on 1 June 2010: [...] driveway of the historically famous Mount Washington Hotel. It was in this magnificent hotel the Bretton Woods Agreement was [...] 6. Pingback by Remembrance WWI and II; Montserrats Alfred Wade | Acacia on 18 November 2010: [...] As I got older and studied Global Economics the War took on more significance. I learned about the Bretton Woods Agreement, the Gold standard etc. and many more developments which arose out of war. I never knew my [...] 7. Pingback by The Sixty-Four Foot Cube | Be Responsible Be Free! on 18 May 2011: [...] and the International Monetary Fund (IMF), and the World Bank. Also established was the so-called Bretton Woods Agreement on international currency exchange. Under it, the U.S. dollar was fixed to gold at $35/oz (the [...]

8. Comment by sergio leone on 4 March 2012: the bretton woods agreement will return in the future and will work.2013 resposible people will see it work.thank you 9. Pingback by ACACIA Archive Remembrance WWI and II; Montserrats Alfred Wade on 24 May 2012: [...] As I got older and studied Global Economics the War took on more significance. I learned about the Bretton Woods Agreement, the Gold standard etc. and many more developments which arose out of war. I never knew my [...]

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International monetary systemsFrom Wikipedia, the free encyclopedia(Redirected from Bretton Woods II)

International monetary systems are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally thereallocation of capital between nation states. They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected. The systems can grow organically as the collective result of numerous individual agreements between international economic actors spread over several decades. Alternatively, they can arise from a single architectural vision as happened at Bretton Woods in 1944.

Currency trading with floating exchange rates at the Foreign exchange market is a key part of the post 1971 financial system.


1 Historical overview 2 History of modern global monetary orders

o o o o

2.1 The pre WWI financial order: 18701914 2.2 Between the World Wars: 19191939 2.3 The Bretton Woods Era: 19451971 2.4 The post Bretton Woods system: 1971 present

2.4.1 The "Revived Bretton Woods system" identified in 2003

3 Calls for a "New Bretton Woods" 4 See also 5 References 6 External links



See also: Reserve currency

Christ drives the Usurers out of the Temple, a woodcut by Lucas Cranach the Elder

Throughout history, precious metals such as gold and silver have been used for trade, termed bullion, and since early history the coins of various issuers generally kingdoms and empires have been traded. The earliest known records of pre - coinage use of bullion for monetary exchange are from Mesopotamia and Egypt, dating from the third millennium BC.[1] It is believed that at this time money played a relatively minor role in the ordering of economic life for these regions, compared to barter and centralised redistribution - a process where the population surrendered their produce to ruling authorities who then redistrubted it as they saw fit. Coinage is believed to have first developed in China in the late 7th century BC, and independently at around the same time in Lydia, Asia minor, from where its use spread to nearby Greek cities and later to the rest of the world. [1] Sometimes formal monetary systems have been imposed by regional rulers. For example scholars have tentatively suggested that the ruler Servius Tullius created a primitive monetary system in the archaic period of what was to become the Roman Republic. Tullius reigned in the sixth century BC - several centuries before Rome is believed to have developed a formal coinage system.[2]

As with bullion, early use of coinage is believed to have been generally the preserve of the elite. But by about the 4th century BC they were widely used in Greek cities. Coins were generally supported by the city state authorities, who endeavoured to ensure they retained their values regardless of fluctuations in the availability of whatever base precious metals they were made from.[1] From Greece the use of coins spread slowly westwards throughout Europe, and eastwards to India. Coins were in use in India from about 400BC, initially they played a greater role in religion than trade, but by the 2nd century had become central to commercial transactions. Monetary systems that were developed in India were so successful they spread through parts of Asia well into the Middle Ages.[1] As multiple coins became common within a region, they were exchanged by moneychangers, the predecessors of today's foreign exchange market, as famously discussed in the Biblical story of Jesus and the money changers. In Venice and the Italian city states of the early Middle Ages, money changers would often have to struggle to perform calculations involving six or more currencies. This partly led to Fibonacci writing his Liber Abaci where he popularised the use of Indo-Arabic numerals, which displaced the more difficult Roman numerals then in use by western merchants.[3]

Historic international currencies. From top left: crystalline gold, a 5th century BCEPersian daric, an 8th century Englishmancus, and an 18th century Spanish real.

When a given nation or empire has achieved regional hegemony, its currency has been a basis for international trade, and hence for a de facto monetary system. In the West Europe and the Middle East an early such coin was the Persian daric, of the Persian empire. This was succeeded by Roman currency of the Roman empire, such as the denarius, then the Gold Dinar of the Muslim empire, and later from the 16th to 20th centuries, during theAge of Imperialism by the currency of European colonial powers: the Spanish dollar, the Dutch Gilder, the French Franc and the British Pound Sterling; at times one currency has been pre-eminent, at times no one dominated. With the growth of American power, the US Dollar became the basis for the

international monetary system, formalized in the Bretton Woods agreement that established the postWorld War II monetary order, with fixed exchange rates of currencies to the dollar, and convertibility of the dollar into gold. Since the breakdown of the Bretton Woods system, culminating in the Nixon shock of 1971, ending convertibility, the US dollar has remained the de facto basis of the world monetary system, though no longer de jure, with various European currencies and the Japanese Yen being used. Since the formation of the Euro, the Euro has gained use as a reserve currencyand a unit of transactions, though the dollar has remained the primary currency. A dominant currency may be used directly or indirectly by other nations for example, English kings minted gold mancus, presumably to function as dinars to exchange with Islamic Spain, and more recently, a number of nations have used the US dollar as their local currency, a custom calleddollarization. Until the 19th century, the global monetary system was loosely linked at best, with Europe, the Americas, India and China (among others) having largely separate economies, and hence monetary systems were regional. European colonization of the Americas, starting with the Spanish empire, led to the integration of American and European economies and monetary systems, and European colonization of Asia led to the dominance of European currencies, notably the British pound sterling in the 19th century, succeeded by the US dollar in the 20th century. Some, such as Michael Hudson, foresee the decline of a single basis for the global monetary system, and instead the emergence of regional trade blocs, citing the emergence of the Euro as an example of this phenomenon. See also Global financial systems, world-systems approach and polarity in international relations. It was in the later half of the 19th century that a monetary system with close to universal global participation emerged, based on the gold standard.

[edit]History [edit]The

of modern global monetary orders

pre WWI financial order: 18701914

Main article: Gold Standard#Establishment of the international gold standard

The gold standard widely adopted in this era rested on the conversion of paper notes into pre-set quantities of gold.

From the 1870s to the outbreak of World War I in 1914, the world benefited from a well integrated financial order, sometimes known as the First age of Globalisation.[4] [5] Money unions were operating which effectively allowed members to accept each others currency as legal tender including the Latin Monetary Union (Belgium, Italy, Switzerland, France) and Scandinavian monetary union (Denmark, Norway and Sweden). In the absence of shared membership of a union, transactions were facilitated by widespread participation in the gold standard, by both independent nations and their colonies. Great Britain was at the time the world's pre-eminent financial, imperial, and industrial power, ruling more of the world and exporting more capital as a percentage of her national income than any other creditor nation has since.[6] While capital controls comparable to the Bretton Woods System were not in place, damaging capital flows were far less common than they were to be in the post 1971 era. In fact Great Britain's capital exports helped to correct global imbalances as they tended to be counter cyclical, rising when Britain's economy went into recession, thus compensating other states for income lost from export of goods. [7] Accordingly, this era saw mostly steady growth and a relatively low level of financial crises. In contrast to the Bretton Woods system, the preWorld War I financial order was not created at a single high level conference; rather it evolved organically in a series of discrete steps. The Gilded Age, a time of especially rapid development in North America, falls into this period.


the World Wars: 19191939

This era saw periods of world wide economic hardship. The image is Dorothea Lange's Migrant Mother depiction of destitute pea-pickers in California, taken in March 1936.

The years between the world wars have been described as a period of de-globalisation, as both international trade and capital flows shrank compared to the period before World War I. During World War I countries had abandoned the gold standard and, except for the United States, returned to it only briefly. By the early 30's the prevailing order was essentially a fragmented system of floating exchange rates .[8] In this era, the experience of Great Britain and others was that the gold standard ran counter to the need to retain domestic policy autonomy. To protect their reserves of gold countries would sometimes need to raise interest rates and generally follow a deflationary policy. The greatest need for this could arise in a downturn, just when leaders would have preferred to lower rates to encourage growth. Economist Nicholas Davenport[9]

had even argued

that the wish to return Britain to the gold standard, "sprang from a sadistic desire by the Bankers to inflict pain on the British working class." By the end of World War I, Great Britain was heavily indebted to the United States, allowing the USA to largely displace her as the worlds number one financial power. The United States however was reluctant to assume Great Britain's leadership role, partly due to isolationist influences and a focus on domestic concerns. In contrast to Great Britain in the previous era, capital exports from the US were not counter cyclical. They expanded rapidly with the United States's economic growth in the twenties up to 1928, but then almost completely halted as the US economy began slowing in that year. As the Great Depression intensified in 1930, financial institutions were hit hard along with trade; in 1930 alone 1345 US banks collapsed.[10]

During the

1930s the United States raised trade barriers, refused to act as an international lender of last resort, and refused calls to cancel war debts, all of which further aggravated economic hardship for other countries. According to economist John Maynard Keynes another factor contributing to the turbulent economic performance of this era was the insistence of French premier Clemenceau that Germany pay war reparations at too high a level, which Keynes described in his book The Economic Consequences of the Peace.


Bretton Woods Era: 19451971

Main article: Bretton Woods system

Harry Dexter White (left) and John Maynard Keynes (right) at Bretton Woods

British and American policy makers began to plan the post war international monetary system in the early 1940s. The objective was to create an order that combined the benefits of an integrated and relatively liberal international system with the freedom for governments to pursue domestic policies aimed at promoting full employment and social wellbeing.[11] The principal architects of the new system, John Maynard Keynes and Harry Dexter White, created a plan which was endorsed by the 42 countries attending the 1944 Bretton Woods conference. The plan involved nations agreeing to a system of fixed but adjustable exchange rates where the currencies were pegged against the dollar, with the dollar itself convertible into gold. So in effect this was a gold dollar exchange standard. There were a number of improvements on the old gold standard. Two international institutions, the International Monetary Fund (IMF) and the World Bank were created; A key part of their function was to replace private finance as more reliable source of lending for investment projects in developing states. At the time the soon to be defeated powers of Germany and Japan were envisaged as states soon to be in need of such development, and there was a desire from both the US and Britain not to see the defeated powers saddled with punitive sanctions that would inflict lasting pain on future generations. The new exchange rate system allowed countries facing economic hardship to devalue their currencies by up to 10% against the dollar (more if approved by the IMF) thus they would not be forced to undergo deflation to stay in the gold standard. A system of capital controls was introduced to protect countries from the damaging effects of capital flight and to allow countries to pursue independent macro economic policies[12]

while still

welcoming flows intended for productive investment. Keynes had argued against the dollar having such a central role in the monetary system, and suggested an international currency called bancor be used instead,

but he was overruled by the Americans. Towards the end of the Bretton Woods era, the central role of the dollar became a problem as international demand eventually forced the US to run a persistent trade deficit, which undermined confidence in the dollar. This, together with the emergence of a parallel market for gold where the price soared above the official US mandated price, led to speculators running down the US gold reserves. Even when convertibility was restricted to nations only, some, notably France, [13] continued building up hoards of gold at the expense of the US. Eventually these pressures caused President Nixon to end all convertibility into gold on 15 August 1971. This event marked the effective end of the Bretton Woods systems; attempts were made to find other mechanisms to preserve the fixed exchange rates over the next few years, but they were not successful, resulting in a system of floating exchange rates.[13]


post Bretton Woods system: 1971 present

Main article: Washington Consensus

The New York Stock Exchange. The current era has seen huge and turbulent flows of capital between nations.

An alternative name for the post Bretton Woods system is the Washington Consensus. While the name was coined in 1989, the associated economic system came into effect years earlier: according to economic historian Lord Skidelsky the Washington Consensus is generally seen as spanning 19802009 (the latter half of the 1970s being a transitional period).[14] The transition away from Bretton Woods was marked by a switch from a state led to a market led system.[4] The Bretton Wood system is considered by economic historians to have broken down in the 1970s:[14] crucial events being Nixon suspending the dollar's convertibility into gold in 1971, the United states abandonment of Capital Controls in 1974, and Great Britain's ending of capital controls in 1979 which was swiftly copied by most other major economies.

In some parts of the developing world, liberalisation brought significant benefits for large sections of the population most prominently with Deng Xiaoping's reforms in China since 1978 and the liberalisation of India after her 1991 crisis. Generally the industrial nations experienced much slower growth and higher unemployment than in the previous era, and according to Professor Gordon Fletcher in retrospect the 1950s and 60s when the Bretton Woods system was operating came to be seen as a golden age. [15] Financial crises have been more intense and have increased in frequency by about 300% with the damaging effects prior to 2008 being chiefly felt in the emerging economies. On the positive side, at least until 2008 investors have frequently achieved very high rates of return, with salaries and bonuses in the financial sector reaching record levels.

[edit]The "Revived

Bretton Woods system" identified in 2003DateFrom 2003, economists such as Michael P. Dooley, Peter M. Garber, and David FolkertsLandau began writing papers[17] describing the emergence of a new international system involving an interdependency between states with generally high savings in Asia lending and exporting to western states with generally high spending. Similar to the original Bretton Woods, this included Asian currencies being pegged to the dollar, though this time by the unilateral intervention of Asian

International monetary systems over two centuries System Bimetallism Gold standard Reserve assets Gold, silver Gold, pound Gold, dollar Gold, dollar, pound Gold, dollar Dollar


Leaders France, UK UK US, UK, France US, UK, France US, G-10 US

18031873 18731914

19141924 Anchored dollar standard 19241933 Gold standard

19331971 Anchored dollar standard 19711973 Dollar standard

19731985 Flexible exchange rates Dollar, mark, pound US, Germany, Japan 19851999 Managed exchange rates 1999Dollar, euro Dollar, mark, yen Dollar, euro, yen US, G7, IMF US, Eurozone, IMF

governments in the currency market to stop their currencies appreciating. The developing world as a whole stopped running current account deficits in 1999[18] widely seen as a response to unsympathetic treatment following the 1997 Asian Financial Crisis. The most striking example of east-west interdependency is the relationship between China and America, which Niall Ferguson calls Chimerica. From 2004, Dooley et al. began using the term Bretton Woods II to describe this de facto state of affairs, and continue to do so as late as

2009.[19] Others have described this supposed "Bretton Woods II", sometimes called "New Bretton Woods",[20] as a "fiction", and called for the elimination of the structural imbalances that underlie it, viz, the chronic US current account deficit.[21] However since at least 2007 those authors have also used the term "Bretton Woods II" to call for a new de juresystem: for key international financial institutions like the IMF and World Bank to be revamped to meet the demands of the current age,[22] and between 2008 to mid 2009 the terms Bretton Woods II and New Bretton Woods was increasingly used in the latter sense. By late 2009, with less emphases on structural reform to the international monetary system and more attention being paid to issues such as re-balancing the world economy, Bretton Woods II is again frequently used to refer to the practice some countries have of unilaterally pegging their currencies to the dollar.


for a "New Bretton Woods"

G-20 leaders at Summit on Financial Markets and the World Economy.

Leading financial journalist Martin Wolf has reported that all financial crises since 1971 have been preceded by large capital inflows into affected regions. While ever since the seventies there have been numerous calls from the global justice movement for a revamped international system to tackle the problem of unfettered capital flows, it wasn't until late 2008 that this idea began to receive substantial support from leading politicians. On September 26, 2008, French President Nicolas Sarkozy, then also the President of the European Union, said, "We must rethink the financial system from scratch, as at Bretton Woods."[23] On October 13, 2008, British Prime Minister Gordon Brown [24] said world leaders must meet to agree to a new economic system:

We must have a new Bretton Woods, building a new international financial architecture for the years ahead.

However, Brown's approach was quite different to the original Bretton Woods system, emphasising the continuation of globalization and free tradeas opposed to a return to fixed exchange rates.[25] There were tensions between Brown and Sarkozy, who argued that the "Anglo-Saxon" model of unrestrained markets had

failed.[26] However European leaders were united in calling for a "Bretton Woods II" summit to redesign the world's financial architecture.[27] President Bush was agreeable to the calls, and the resulting meeting was the 2008 G-20 Washington summit. International agreement was achieved for the common adoption of Keynesian fiscal stimulus,[28] an area where the US and China were to emerge as the worlds leading actors.[29] Yet there was no substantial progress towards reforming the international financial system, and nor was there at the 2009 meeting of the World Economic Forum at Davos[30]

Despite this lack of results leaders continued to campaign for Bretton Woods II. Italian Economics Minister Giulio Tremonti said that Italy would use its 2009 G7 chairmanship to push for a "New Bretton Woods." He had been critical of the U.S.'s response to the global financial crisis of 2008, and had suggested that the dollar may be superseded as the base currency of the Bretton Woods system.[31] [32] [33] Choike, a portal organisation representing southern hemisphere NGOs, called for the establishment of "international permanent and binding mechanisms of control over capital flows" and as of March 2009 had achieved over 550 signatories from civil society organisations.[34]

Competing ideas for the next international monetary system System Flexible exchange rates[35]

March 2009 saw Gordon Brown continuing to advocate for reform and the granting of

Reserve assets


Dollar, euro, renminbi US, Eurozone, China[36]

extended powers to international financial institutions like the IMF at the

Special drawing rights standard Gold standard[37]

SDR Gold, dollar Currency basket


April G20 summit in London, [40] and was said to

Delhi Declaration


have president Obama's support .[41] Also during March

2009, in a speech entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of the People's Bank of China came out in favour of Keynes's idea of a centrally managed global reserve currency. Dr Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes's bancor. Dr Zhou said that national currencies were unsuitable for use as global reserve currencies as a result of the Triffin dilemma - the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries' demand for reserve currency. Dr Zhou proposed a gradual move towards increased used of IMF special drawing rights (SDRs) as a centrally managed global reserve currency [42] [43] His proposal attracted much international attention.[44] In a November 2009 article published in Foreign Affairs magazine, economist C. Fred Bergsten argued that Dr Zhou's suggestion or a similar change to the international monetary system would be in the United States' best interests as well as the rest of the world's.[45]

Leaders meeting in April at the 2009 G-20 London summit agreed to allow $250 Billion of SDRs to be created by the IMF, to be distributed to all IMF members according to each countries voting rights. In the aftermath of the summit, Gordon Brown declared "the Washington Consensus is over".[46] However in a book published during September 2009, Professor Robert Skidelsky, an international expert on Keynesianism, argued it was still too early to say whether a new international monetary system was emerging.[14] On Jan 27, in his opening address to the 2010 World Economic Forum in Davos, President Sarkozy repeated his call for a new Bretton Woods, and was met by wild applause by a sizeable proportion of the audience.[47] In December 2011, the Bank of England published a paper arguing for reform, saying that the current International monetary system has performned poorly compared to the Bretton Woods system. [48]



Bretton Woods Project Eurodad Exchange rate regime Foreign exchange reserves Financial crisis of 20072010 G20 Global financial system Golden Age of Capitalism - for a comparison of the economic performance during the Bretton Woods and post Bretton Woods period

History of money

[edit]Referencesa b c d



Jonathan Williams with Joe Cribb and Elizabeth Errington, ed. (1997). Money a History. British

Museum Press. pp. 1627 , 111 ,127 , 131 , 136 , 136 ,. ISBN 0-7141-0885-5. 2. ^ Raaflaub, Kurt (2005). Social Struggles in Archaic Rome. WileyBlackwell. pp. 5960. ISBN 1-4051-00613. 3. 4. 5. ^ "The Ascent of Money , episode 1". PBS. ^a b

Ravenhill, John (2005). Global Political Economy. Oxford University Press. pp. 7, 328.

^ Occaisionally also called the golden age of capitalism in older sources, and also the first golden age of capitalism in later sources that recognise golden age that spanned approx 1951 - 73. A few economists such as Barry Eichengreen date the first age of globalisation as starting in the early 1860s with the laying of the first transatlantic cables between Great Britain and the USA.


^ Harold James. The End of Globalization. Harvard University Press / google books. p. page 12. Retrieved 2009-03-17.


^ Helleiner, Eirc (2005). "chpt. 6". In John Ravenhill. Global Political Economy. Oxford University Press. p. p154.

8. 9.

^ Helleiner, Eirc (2005). "6". In John Ravenhill. Global Political Economy. Oxford University Press. pp. p156. ^ Skidelsky, Robert (2003). "22". John Maynard Keynes: 1883-1946: Economist,Philosopher, Statesman. McMillan. p. p346.

10. ^ Stephen J. Lee. Aspects of European history, 1789-1980. Routledge / Google books. p. page 135. Retrieved 2009-03-17. 11. ^ Helleiner, Eirc (1996). "2: Bretton Woods and the Endorsement of Capital Controls". States and the reemergence of global finance. Cornell University Press. 12. ^ According to Keynes: "In my view the whole management of the domestic economy depends on being free to have the appropriate rate of interest without reference to rates prevailing elsewhere in the world. Capital control is a corollary to this" 13. ^a b

Laurence Copeland. Exchange Rates and International Finance (4th ed.). Prentice Hall. pp. 10

35. ISBN 0-273-68306-3. 14. ^a b c

Robert Skidelsky (2009). Keynes: The return of the Master. Allen Lane. pp. 116126.ISBN 978-1-

84614-258-1. 15. ^ Fletcher, Gordon (1989). "Introduction". The Keynesian Revolution and Its Critics: Issues of Theory and Policy for the Monetary Production Economy. Palgrave MacMillan. pp. page xx. 16. ^ Source: International Monetary Reform 2011 Presentation at the China G-20 Seminar, Nanjing PRC, March 31, 2011 by Robert Mundell 17. ^ Michael P. Dooley, David Folkerts-Landau, Peter Garber (September 2003). "An Essay on the Revived Bretton Woods System". National Bureau of Economic Research. 18. ^ Wolf, Martin (2009). "3". Fixing Global Finance. Yale University Press. pp. 39. 19. ^ Michael P. Dooley, David Folkerts-Landau, Peter Garber (February 2009). "Bretton Woods II Still Defines the International Monetary System". National Bureau of Economic Research. 20. ^ *Robert Brenner, "What is Good for Goldman Sachs is Good for America The Origins of the Present Crisis" (October 2, 2009). Center for Social Theory and Comparative History. Paper 2009-1. [1], p 14f. 21. ^ Renegade Economics: The Bretton Woods II Fiction, by Chris P. Dialynas and Marshall Auerback, PIMCO 22. ^ Michael P. Dooley, David Folkerts-Landau, Peter Garber (June 2007). "The Two Crises of International Economics". National Bureau of Economic Research.

23. ^ George Parker, Tony Barber and Daniel Dombey (October 9, 2008). "Senior figures call for new Bretton Woods ahead of Bank/Fund meetings". 24. ^ Agence France-Presse (AFP) (October 13, 2008). "World needs new Bretton Woods, says Brown". 25. ^ Gordon Brown (October 13, 2008). "PM's Speech on the Global Economy". eGov monitor. 26. ^ James Kirkup, Bruno Waterfield (2008-10-17). "Gordon Brown's Bretton Woods summit call risks spat with Nicholas Sarkozy". London: The Daily Telegraph. Retrieved 2008-11-16. 27. ^ "European call for 'Bretton Woods II'". Financial Times. 2008-10-16. Retrieved 2009-03-17. 28. ^ Chris Giles in London, Ralph Atkins in Frankfurt and,Krishna Guha in Washington. "The undeniable shift to Keynes". The Financial Times. Retrieved 2009-01-23. 29. ^ "US and China display united economic stance". Financial Times. 2009-07-29. Retrieved 2009-08-05. 30. ^ Martin Wolf. "Why Davos Man is waiting for Obama to save him". The Financial Times. Retrieved 200802-12. 31. ^ "Italy queries dollar's role in Bretton Woods reform". Reuters. 2008-10-16. Retrieved 2008-11-16. 32. ^ Parmy Olson and Miriam Marcus (2008-10-16). "Bringing The Banking Mess To Broadway".Forbes. Retrieved 2008-11-16. 33. ^ Guy Dinmore (2008-10-08). "Giulio Tremonti: A critic demands a new Bretton Woods".Financial Times. Retrieved 2008-11-16. 34. ^ various - including Action Aid, War on Want, World Council of Churches. "Lets put finance in its place!". Choike. Retrieved 2009-03-18. 35. ^ Mansoor Dailami (September 7, 2011). "The New Triumvirate". Foreign Policy. 36. ^ David Bosco (September 7, 2011). "Dreaming of SDRs". Foreign Policy. 37. ^ Jessica Naziri (September 1, 2011). "Gold standard comeback enjoys support". CNBC. 38. ^ "Fourth BRICS Summit - Delhi Declaration". Indian Ministry of External Affairs. March 29, 2012. 39. ^ Mitul Kotecha (April 14, 2011). "Guest post: Rupee can serve as a reserve currency too". Financial Times. 40. ^ Edmund Conway (2009-01-30). "Gordon Brown warns of void left by collapse of global financial system". London: The Daily Telegraph. Retrieved 2009-03-17. 41. ^ George Parker and Andrew Ward in Washington (2009-03-04). "Brown wins Obama's support for a shake-up of global regulation". Financial Times. Retrieved 2009-03-17. 42. ^ Jamil Anderlini in Beijing (2009-03-23). "China calls for new reserve currency". Financial Times. Retrieved 2009-04-13. 43. ^ Zhou Xiaochuan (2009-03-23). "Reform the International Monetary System". People's Bank of China. Retrieved 2009-04-13.[dead link]

44. ^ Geoff Dyer in Beijing (2009-08-24). "The dragon stirs". The Financial Times. Retrieved 2009-09-18. 45. ^ C. Fred Bergsten (Nov 2009). "The Dollar and the Deficits". Foreign Affairs. Retrieved 2009-12-15.

46. ^ "Prime Minister Gordon Brown: G20 Will Pump Trillion Dollars Into World Economy". Sky News. 2 April 2009. 47. ^ Gillian Tett (2010-01-28). "Calls for a new Bretton Woods not so mad". Financial Times. Retrieved 201001-29. 48. ^ Oliver Bush, Katie Farrant and Michelle Wright (2011-12-09). "Reform of the International Monetary and Financial System". Bank of England. Retrieved 2011-12-15.



The Bretton Woods Project The Rise and Fall of Betton Woods Eurodad: Bretton Woods II conference FAQs Eurodad: IMF back in business as Bretton Woods II conference announced UN Interactive Panel on the Global Financial Crisis UN Commission of Experts on Reform of the International Financial System G20 official website G20 Info Centre (Univ of Toronto) International Monetary System (Banque de France)