Bretton Woods system: how it all began

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

A certain circle of specialists knows that long before the Bretton Woods system arose, there was a time of the gold standard on our planet, when the pound sterling could be freely exchanged for gold. Britain in those days was a strong world power, so it could afford such operations. However, everything changed in 1914, when during the 1st World War, the US currency entered the financial arena, which spread to North and Latin America.

In 1922, an attempt was made to create a reserve currency and a gold standard based on the pre-war model. In 1925, England introduces the gold standard for the pound, backed by gold and the reserve currency (US dollars). However, in 1929 there was a stock market crash in America, and in 1931 a panic began on the London financial market, which finally assigned the pound a secondary role after the dollar. In 1931 and 1933, the gold standards were abolished in Great Britain and the USA, respectively. exchange rates became floating, which served as the basis for future forex systems. Attempts to createthe gold convertibility of currencies by European countries collapsed (1936, the collapse of the "Golden Bloc", which included a number of countries, including France, Holland, etc.).

By the end of the 1940s, due to the financial crises of the 1930s and World War II, there was a need for a radical renewal of the financial system in the world. And in this regard, in 1944, the Bretton Woods Conference was convened, at which it was decided to peg the currencies of 44 countries to the dollar, and the dollar to gold at the rate of $35 per troy ounce (31.1034 grams). After World War II, the predominant share of the world's gold reserves was concentrated in the United States, which gave this country grounds for world leadership. In December 1944, the Bretton Woods system went into effect.

At the 1944 conference, a provision was adopted on the creation of two organizations that will exercise control functions and provide the countries participating in the agreement with funds to stabilize the national currency. These were the International Monetary Fund and the International Bank for Reconstruction and Development. The Bretton Woods system assumed that gold remained the final medium in international settlements, that national currencies were freely circulating, that national currencies had fixed rates against the dollar, and that central banks supported this rate (+-1 percent).

However, by the mid-70s, gold reserves were redistributed to other financial centers (European, Asian), and thus the theorem was violatedTriffin that the issue of currency should be compared with the gold reserves of the country that produced this issue. The Bretton Woods system began to lose its relevance, which was intensified by speculative transactions, the instability of the foreign exchange balances of the participating countries, and the currency crisis of 1967. This creates the prerequisites for changing the existing world monetary system, which the United States has been supporting by force of arms for many years, because. they have not had a gold reserve equivalent to the issuance of dollars for many years.