Very few events, in the development of the world economy, have had this kind of impact than the Bretton Woods Agreements. The Yalta Conference was to the political scene, what these agreements, were to the economic scene, they had to become the pillars to settle the reconstruction of the new world order which was under the devastating effects of the Second World War. A war created these agreements, but another war put an end to them, 27 years later. From the Bretton Woods Agreements, The International Monetary Fund and the World Bank were born.
The Genesis of the Bretton Woods Agreements
It was the year of 1944. The Second World War was underway, but really close to its final conclusion. The chosen scenery was the Mount hotel, in the small community of Bretton Woods, New Hampshire. There, 44 nations gathered, to set the new foundations required to rebuild a decaying Europe, and with it, a new form of monetary stabilization. A few weeks later, the attack on Normandy was about to happen, marking the beginning of the end, of the wartimes initiated by Germany.
For almost 3 weeks, on July 1944, began a conference to discuss two models to rebuild and stabilize the economy. On one side, Harry Dexter White, the U.S treasury department official and on the other side, John Maynard Keynes, a British economist. Keynes wanted a unique and nonnational monetary system, he named it Bancor. Meanwhile, White had the idea of a monetary exchange system, using the American dollar and their own gold reserves.
Of course, one of them had more advantages. During the war, United Stated accumulated huge product reserves from its industrial development and the selling of weapons to countries in wartimes. The same was happening with some emerging nations, which their primary productions, linked to food products, such as Argentina, saw a growth in their reserves.
Finally, it was the American proposal that was imposed and a parity of $35 an ounce of gold was established. Thus the United States became a kind of central bank with global characteristics and its main function was to print banknotes and accumulate gold. In addition, the US was going to have the task of “financing” the reconstruction of a Europe that was totally in ruins. The Bretton Woods Agreements were the end of the pound sterling as a reference currency.
The agreements also helped in the creation of the IMF and the World Bank, credit organisms that worked with each country’s capital. From the initial 8.000 million dollars required for it to work, the United States would provide 31%. The IMF had the mission of financing the fiscal deficits of all these countries, using midterm credits, but at the same time, it set the economic guidelines of those countries, to guarantee the repayment of these credits.
The End of Bretton Woods
While almost all nations, required to create goods and services, the United States only had to print bills. By 1970, and as a consequence of the pressure to finance the war in Vietnam, the United States flooded the markets with dollars, depleting the gold reserves in the process. President Richard Nixon, with the advice Paul Samuelson, devalued the North American currency, and on August 15, 1971, he declared the inconvertibility of the dollar to gold.
Thus, the Bretton Woods Agreements came to an end, and with it, the imposition of the floating exchange rates in the whole world, starting a new era of crisis.