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An overconsumption of alcohol and a general lack of sleep is usually a guaranteed recipe for failure, but this was not the case with the Bretton Woods agreement. From a 22-day conference in New Hampshire, a new world order emerged, ending years of economic instability. This era, known as the “golden age of capitalism,” established a fixed-but-adjustable exchange rate system where currencies were pegged to the U.S. dollar, which was convertible to gold at $35 per ounce. Although this period was marked by monetary stability and growth, it ultimately led to the dominance of the rich world.
Before this, the gold standard broke down because of the Great Depression, but it had more to do with nations' refusal to maintain all the rules that came along with it. During what was known as the “beggar-thy-neighbour” policy countries reneged and started devaluing their currencies at the expense of others. This reduction in the cost of exports helped lessen trade deficits. Consequently, BWs attempted to move away from economic chaos without returning to a system of unsustainable discipline.
Generally, The Bretton Woods period is regarded as a time of vast economic growth. This was in part due to the Marshall Plan, the US financed $13 billion to Europe to enable the devaluation of their currencies. As a result, the competitive balance of international trade was restored through the reduction of U.S. trade surpluses. War-torn economies were able to recover and grow, whilst full current account convertibility was achieved in 1958.
Ironically, it was a Soviet spy (Harry Dexter White) who made the US dollar the world's reserve currency. This begs the question as to why so many nations essentially agreed to a dollar standard to play the part of gold when this was a domestic currency of its own. Especially, given that Keynes was advocating for an alternative through the creation of an international currency Bancor- or what some called “funny money”. If we ignore one’s lack of judgment when intoxicated, nations didn't really have much of a say in the matter. Post WW2 the US was such a great creditor that so many European debtors were not really in a negotiating position.
Bretton Woods was a success until it wasn’t. Initially, the system provided much-needed stability in the post-World War II era, with the U.S. dollar serving as the global reserve currency, convertible to gold at a fixed rate. However, as international trade expanded, more countries began accumulating U.S. dollars, increasing the demand for American currency. This growth in trade meant that the U.S. needed to print more dollars to keep up with global demand, but the gold reserves required to back these dollars did not grow at the same pace. This imbalance created a fundamental issue: the need to have currency tied to a limited supply of metal.
Over time, this tension grew unsustainable. The U.S. found itself in a precarious position, unable to maintain this tie due to the sheer volume of dollars in circulation. The situation was exacerbated by several factors, most notably the costs associated with the Vietnam War, which led to massive U.S. budget deficits, and the oil crisis of the early 1970s, which strained the global economy. The final blow came with President Nixon’s protectionist policies, particularly his decision in 1971 to suspend the dollar's convertibility to gold, effectively ending the Bretton Woods system. This series of events led to the collapse of the fixed exchange rate regime and ushered in the era of floating currencies that continues to this day.
As the Bretton Woods system collapsed in 1971, Europe transitioned to a new era of monetary stability, first with currencies like the Deutsche Mark and the Franc, and ultimately with the Euro. However, this stability in the West contrasted sharply with the increasing monetary volatility in the developing world. The breakdown of the system led to expanded access to credit for developing economies, which precipitated a debt crisis, exacerbated by borrowing in the now unstable U.S. dollar. Latin America, particularly, endured a prolonged debt crisis throughout the 1980s, triggered by Mexico's default, with East Asia following suit. The post-Bretton Woods era ushered in greater currency instability, disproportionately impacting poorer nations and triggering severe economic crises.
With the high fiscal discipline of the Euro and current market volatility, should we try and get back to this “golden age of capitalism”? The US is no longer in such a position to maintain a similar system, but more to the fact that other states are unlikely to go back to a world dominated by the dollar.
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