The Bretton Woods agreements refer to the decisions taken at the convention that in July 1944 brought together 44 countries in order to establish a new post-war world economic model where the rules of commercial and financial relations between the most important countries would be established. industrialized.
It took place at the Mount Hotel in Bretton Woods, in the state of New Hampshire (USA) between July 1 and 22, 1944. In the middle of World War II, therefore, it is not surprising that it was held on the ground American, seeing the panorama that devastated Europe.
On the table were two proposals, the American by Harry Dexter White and the British by John Maynard Keynes.
The American proposal is imposed on the British
The British Keynes proposal was based on:
- Establish a world monetary system based on the international monetary unit through the creation of Bancor , a currency that would be linked to hard currencies and would be exchangeable in local currency through a fixed exchange rate.
- Create an international clearing body, the International Clearing Union (ICU) with the capacity to issue international currency (Bancor) and whose objective would be to maintain a balanced trade balance. Countries with surpluses would have to transfer their surplus to countries with deficits, thus increasing world demand and avoiding deflation.
Ideas that would not come forward, taking into account the weight of the United States in the world economy, the size of its gold reserves and that it was a country with a large trade surplus, was not going to support these proposals.
The US position in charge of HD White, US Deputy Secretary of the Treasury was:
- Replace the gold standard with a gold-linked dollar standard: Due to the war spending of the Second World War, the gold reserves of the countries had been depleted. Consequently, it was very difficult to ensure the gold equivalence of their national currencies. Thus, a parity of the different currencies and gold is established, the dollar being the reference currency for the rest of the currencies, displacing the pound sterling, and the value of an ounce of gold is fixed at $ 35. On the one hand, the central banks of the member countries have the right to exchange their reserves in dollars for gold or vice versa, at the fixed price, by going to the Federal Reserve. On the other hand, the US has the power to provide liquidity by issuing dollars, based on debt, to safeguard the system.
- The creation of the International Monetary Fund (IMF) with the aim of monitoring and protecting the good course of the global economy and mitigating the devastating effects of the Great Depression.
- The World Bank is founded, originally called the International Bank for Reconstruction and Development. It would be the entity in charge of facilitating financing to the European countries devastated by the Second World War. It would then expand its scope to all developing countries, providing both financial and technical assistance.
- The need to create another body, the World Trade Organization , was discussed, but it was never founded at the Bretton Woods meeting. It will be in 1948 when the General Agreement on Tariffs and Trade (GATT, General Agreement on Tariffs and Trade) is signed, consisting of a provisional agreement on tariffs and trade, as its name indicates, by which world trade would be governed since after the Second World War and until the birth of the World Trade Organization (WTO) that would replace it.
Duration of the Bretton Woods system
After 27 years, this system saw its end on August 15, 1971. The day that US President Richard Nixon declared the non-conversion of the dollar into gold and its devaluation. Let’s see how it got to this point.
Until the 1960s, the world monetary system functioned correctly, or let’s say the way it was stipulated. The US issued debt-based dollars to keep the economies in balance. As we have already explained, a capacity that had been granted to him at the Bretton Woods. In this period, the world was flooded with dollars, economies grew and the welfare state was established. For this reason, it is known as the golden age of capitalism.
Everything changes from the mid-1960s, when distrust in the strength of the dollar begins to emerge. Fear that is due to two factors:
- The abundance of dollars in the world has inflationary consequences worldwide.
- The growing inflation of the American economy and the increase in its deficit, which is largely responsible for financing the Vietnam War (1955-1975).
The concern materialized and the different countries began to exchange their dollar reserves for German marks and gold from the Federal Reserve. This situation further calls into question the health of the dollar. The domino effect occurs, the American gold reserves fall considerably, which means a loss of liquidity in the markets as there is less and less gold to exchange for dollars, which increases the instability of the dollar and the desire of central banks for turn your dollars into gold.
Unsustainable situation that the US has to stop in some way and leads Nixon to make the decision exposed by Milton Friedman to prevent the conversion of the dollar into gold and devalue the currency. Thus ignoring the position of Paul Samuelson focused on the devaluation of the dollar against gold. That is, increase the amount of dollars needed to obtain an ounce of gold and thus stop the frantic exchange of dollars for gold.