In 1944, at Bretton Woods, New Hampshire, an international conference reorganized the international monetary system. One of the important decisions taken at this time was to set a fixed parity between gold and the dollar. The greenback became the reference standard instead of the precious metal. This equivalence lasted until August 1971.
When the Bretton Woods conference opened on July 1, 1944, the war was not over but the outcome was no longer in doubt. 730 delegates, representing 44 allied countries, were gathered in a hotel in a small town in New Hampshire. The Soviets had sent a delegation as in all meetings of the great alliance.
The goal of the Bretton Woods system
The goal of this conference was to organize an international monetary system (IMS) solid enough to ensure post-war reconstruction. The crisis of the 1930s had shattered the Gold Exchange Standard system, defined at the Genoa Conference in 1922.
In fact, the world economy was balkanized around three monetary zones (dollar zone, sterling zone, gold bloc) whose commercial rivalries had blocked international trade. All participants agreed on the principle of a world economy based on free trade and stable exchange rates. Since 1941-1942, teams of economists had been thinking about monetary projects.
The English and John Maynard Keynes proposed an international currency detached from national currencies, called Bancor. The American project wanted to make the dollar the pivot of international settlements. In 1944, the balance of political and economic power was largely in favor of the Americans.
The United States owned 70% of the world’s gold reserves and had a flourishing economy. The American representative Harry Dexter White, Under Secretary of State for the Treasury, imposed his views quite easily. The dollar became the only currency whose value was defined by a fixed parity with gold in the proportion of $35 for an ounce of gold (about 28 g). Other currencies appreciated against the dollar according to a stable exchange rate.
The International Monetary Fund
For example, one dollar was most often exchanged at around 4.50-5.50 French francs. To avoid distortions and imbalances in exchange rates, deficit countries could use two mechanisms: temporary exchange and capital movement controls or recourse to a conditional loan to restore its balance. The body responsible for granting the loan was the IMF (International Monetary Fund), the second creation of the Bretton Woods agreements.
The IMF’s goal was to promote stability in international exchange rates. To do this, the IMF pegged (fixed) exchange rates to the value of the dollar, which was itself pegged to gold. Some flexibility was built into this system, allowing individual countries to change exchange rates in the event of a fundamental imbalance.
This fund was funded by quotas proportional to the size of the country. In exchange, the country received more or less significant voting rights. The discussion on the allocation of quotas was particularly difficult, with each country wanting to play a major role in the institution. Thus the French delegate Pierre Mendès-France protested the fate reserved for France. The United States, for their part, reserved 25% of the votes with a right of veto. The system was completed by a bank: the IBRD, responsible for financing development projects. Discussions on international trade and customs duties were postponed, and led to the creation of the GATT in 1947.
By being the currency to which all other currencies were pegged, the US dollar became the new “gold” and therefore, the new international currency.
The application of the Bretton Woods system
The Bretton Woods system would not really be applied until 1958, after the effects of the Marshall Plan and the renewed growth allowed European currencies to become convertible. One of the conditions for the proper functioning of the IMS was that countries accepted payments in dollars and that the ratio with the precious metal was maintained. However, the growing world economy required dollars and the United States could finance its deficit and the Vietnam War by creating money.
However as the world’s economies, as well as its population, continued to grow, the Bretton Woods system began to feel the pressure of inflation. This meant that the peg system it had created was not providing enough liquidity to continue financing new businesses and therefore to maintain high employment rates.
In 1967, the countries that had joined forces with the Americans in a gold pool to maintain the gold-dollar parity gave up. Doubts about the value of the dollar persisted and grew. In August 1971, President Nixon announced the end of the fixed parity that had founded the Bretton Woods system.
It is not certain that at the time the event had much impact in a world still at war. Among the personalities present we can mention J.M. Keynes, the English economist and the American Secretary of the Treasury Henry Morgenthau. Nationalist China, with the United States and the United Kingdom, was considered a great power, while France’s place was not yet assured. Pierre Mendès-France who negotiated for General de Gaulle played only a minor role.