The Bretton Woods Gold Standard and the Beginning of Monetary Chaos
When 730 delegates from all 44 of the Allied nations gathered near the end of World War II in Bretton Woods, New Hampshire, they made decisions that they thought best for the world’s primary industrial states, such as tying the various currencies among its members to the U.S. dollar, which in turn was tied to the value of gold.
It seemed like an outstanding concept at the time (July 1944); gold was abundant in the U.S. and a stable, literally solid measure of financial strength that backed the dollar well in the 1940s. However, the Bretton Woods agreement of 1944 soon dissolved, and in some ways they set up a world financial system that has become chaotic, to put it mildly.
The Bretton Woods conference was a milestone moment in world financial history, the first negotiated monetary order intended to regulate commercial and financial relations among a broad spectrum of nation-states. The intent was noble, the system seemingly sturdy, yet the agreements planted the seeds for later trouble, much like a seemingly orderly field eventually being filled with wild weeds.
Among the still-current legacies of the Bretton Woods agreement of 1944 were the International Monetary Fund (IMF) and the World Bank, both of which became operational in 1945. The IMF was originally intended to bridge imbalances of payments in the early days of the Bretton Woods system, but the agreements began to collapse in the 1970s as the U.S. dollar ceased to be linked to gold under President Richard Nixon and currencies of member-states began to float freely on the international market.
Other developments contributed to the collapse of the Bretton Woods conference agreement: economies of nations outside of the original group began to flourish after a long period of recovery from World War II, Japan being the chief example; the growing trade and budget deficits in the U.S., which weakened its standing as the peg for the world financial markets; the decrease and eventual death of the threat from the Soviet Union, which had unified nations in the West under the Bretton Woods umbrella; and, perhaps most importantly, the decline of the U.S. dollar’s value.
In short, the world had changed significantly since 1944—the U.S. no longer produced half of the world’s manufactured goods and it had run up a deficit, with foreign interventions and inflation simply adding to the country’s economic woes.
Today, after the rudest of shocks to the international financial system in 2008, global leaders and many economists are calling for a Bretton Woods II, some sort of international agreement on monetary policy through a realignment of currency exchange rates. Prime Ministers of countries that have suffered the most in recent years, including Greece and France, have made pointed calls for an almost total revamp of the world’s economic system. The IMF and World Bank have worked hard to boost employment in member nations, but have had limited impact.
However, the most critical legacy of the Bretton Woods agreement of 1944 was its tie between currency values and gold. As Nathan Lewis so aptly points out in his book ‘Gold: The Once and Future Money’. Even though the U.S. dollar is not directly tied to the value of gold now, the use of the gold standard greatly limits the possible tweaks that governments could use to regulate their economies. Bretton Woods’ link of gold to currency value was extremely short-sighted, and once that anchor of dollar-to-$35-per-ounce-gold was cut in 1971, currencies began to fluctuate wildly, setting the state for today’s incredibly fragile world economy, where a single headline about one nation’s currency can kill confidence in it and send a country’s economy into a death spiral.
As the case for a unified and global economic system is made, a sort of Bretton Woods 2.0, one wonders what the anchor for future currency rates would be. In any event, it certainly will not be gold. Whether fast-rising countries such as China, India and Turkey agree to be locked into a system with underachievers such as Greece, Portugal and Spain remains to be seen.
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.” Alan Greenspan
At the Bretton Woods conference, attempts were made to control the Western world’s economy through the strength of the U.S. dollar backed by gold, but in the end set up a system of flimsy agreements that tore apart as soon as other nations caught up to U.S. industriousness and economies grew far beyond what gold could dictate its currencies to be worth. Now, the euro, the dinar and the dollar are only worth what investors believe they are worth, which means chaos will continue in the short run, at least.
Finally, if you want a really thorough take on the Bretton Woods agreement. Consider getting a copy of Barry Eichengreen Global Imbalances and the Lessons of Bretton Woods. Its a fresh and comprehensive take on the future of the dollar reserve system and is a must ready for serious monetary policy ethusiasts. Its excellently rated on Goodreads.com with 4.5 stars. Check it out if you get chance.