Bretton Woods: The Post-War Monetary Order The Bretton Woods system was the first fully negotiated, international monetary order intended to govern financial relations among independent nation-states. Established in July 1944 at a conference in Bretton Woods, New Hampshire, its primary goals were to create a stable framework for post-World War II economic recovery, prevent the competitive currency devaluations that worsened the Great Depression, and promote international trade and investment. The Key Architects & Their Vision ![[Bretton Woods0x524.jpg]] The system was largely designed by two brilliant but opposing economists: 1. John Maynard Keynes (UK): Proposed a global central bank and a new international reserve currency called "Bancor" to avoid reliance on a single national currency. 2. Harry Dexter White (USA): Advocated for a more limited system with the US Dollar at its center, backed by gold. The final agreement reflected the United States' overwhelming economic and political power at the end of the war, leading to White's plan being largely adopted. The Core Mechanics: How It Worked The system was built on a few simple but powerful rules, often described as the "Golden Straitjacket": 1. The US Dollar was Anchored to Gold: The United States guaranteed that it would redeem US dollars for gold at a fixed rate of $35 per ounce. This made the dollar "as good as gold." 2. All Other Currencies were Pegged to the Dollar: Other member countries would fix their own exchange rates to the US dollar within a narrow band (a 1% fluctuation was allowed). They could adjust this "peg" only in cases of "fundamental disequilibrium." 3. The Role of Two New Institutions: The system was managed by two newly created pillars: · [[The International Monetary Fund]] (IMF): Acted as the system's monitor and emergency lender. It provided short-term loans to countries facing balance-of-payments deficits to help them stabilize their currencies without resorting to devaluation or trade barriers. · The International Bank for Reconstruction and Development (IBRD), now part of the World Bank Group: Was tasked with providing long-term loans for the post-war reconstruction of [[Europe]] and later, for development projects in poorer nations. Why It Collapsed ([[1968]]-1971) The very design of Bretton Woods contained the seeds of its own destruction, a [[Paradox]] known as the Triffin Dilemma. · The Problem: For the system to function, the world needed a growing supply of US dollars to fuel international trade and investment. This meant the US had to run persistent trade deficits, pumping dollars into the global [[Economics|economy]]. · The Contradiction: However, the continuing outflow of dollars undermined global confidence in the US's ability to redeem them for gold at $35/ounce. Foreign governments began to worry that US gold reserves were insufficient to cover all the dollars in circulation. Faced with rising inflation and a run on its gold reserves, President Richard Nixon announced the "Nixon Shock" in August 1971. He unilaterally suspended the convertibility of the dollar into gold, effectively ending the Bretton Woods system. By 1973, the major world currencies had shifted to the system of floating exchange rates that we have today. Legacy and Importance Despite its collapse, Bretton Woods left an indelible mark: · The Institutions Endure: The IMF and the World Bank remain central players in global economics, though their roles have evolved. · The Dollar's Hegemony: The US dollar's role as the world's primary reserve currency is a direct legacy of Bretton Woods. · A Blueprint for Cooperation: It represented a historic high point of international economic cooperation and created a period of remarkable stability and growth (the "Golden Age of [[Capitalism]]") in the 1950s and 60s. · A Cautionary Tale: It highlights the inherent instability of a system that relies on one country's currency for global liquidity, a lesson that remains relevant today. In short, Bretton Woods was the system that built the modern global economy, and its echoes are felt in every international financial transaction today. `Concepts:` `Knowledge Base:`