Everything Everywhere Daily: History, Science, Geography & More - The Bretton Wood System

Episode Date: May 7, 2022

Barely a month after the Normandy Landing in 1944, the allied powers were already thinking of what the post-world would look like. One of the big issues was the creation of a monetary system that could replace the then abandoned gold standard.  So, in at a resort in New Hampshire, representatives from 44 countries hammered out a new international monetary system that would govern the world for the next 25 years. Learn more about the Bretton Woods System and how parts of it still influence the world today on this episode of Everything Everywhere Daily. Subscribe to the podcast!  https://podfollow.com/everythingeverywhere/ -------------------------------- Executive Producer: Darcy Adams Associate Producers: Peter Bennett & Thor Thomsen   Become a supporter on Patreon: https://www.patreon.com/everythingeverywhere Update your podcast app at newpodcastapps.com Discord Server: https://discord.gg/UkRUJFh Instagram: https://www.instagram.com/everythingeverywhere/ Twitter: https://twitter.com/everywheretrip Website: https://everything-everywhere.com/everything-everywhere-daily-podcast/ Everything Everywhere is an Airwave Media podcast." or "Everything Everywhere is part of the Airwave Media podcast network Please contact [e-mail] to advertise on Everything Everywhere. Learn more about your ad choices. Visit megaphone.fm/adchoices

Barely a month after the Normandy landing in 1944, the Allied powers were already thinking of what the post-war world would look like. One of the big issues was the creation of a monetary system which could replace the then-abandoned gold standard. So at a resort in New Hampshire, representatives from 44 countries hammered out a new international monetary system which would govern the world for the next 25 years. Learn more about the Bretton Wood system and how parts of it still influenced the world today on this episode of Everything Everywhere Daily. What if your perceptions about the past were wrong? ThruLine is a podcast that takes you back in time to uncover the parts of the story that may have gone unnoticed. It effectively turned day into night. And how it shaped the world now.

Time travel with us every week on the ThruLine podcast from NPR. You've probably heard the expression that history repeats itself. Well, many of the powers that be, to their credit, actively tries to be, actively trying to tried to make sure that the end of the Second World War wasn't a repeat of the First World War. The extreme sanctions which were placed upon Germany were largely responsible for the subsequent hyperinflation in the Weimar Republic and the rise of the Nazi Party. Moreover, during the Great Depression, many countries began a currency war where they devalued their currencies to gain an economic advantage.

Now, you might wonder why a country would purposely devalue their currency. By devaluing your currency, you make imported items more expensive and exported items cheaper. During the Depression, many countries use this strategy to try to boost employment by increasing exports. However, when everyone does it, it can reduce total global trade, which just hurts all parties. If you remember back to my episode on the Gold Standard, it wasn't a planned system. Its creation was sort of an accident and grew organically. Many economists complained that the Gold Standard was too inflexible, which didn't get government's enough latitude to solve problems during the Depression.

So the idea was that after the conclusion of the war, this time things would be different. The idea for a new organized global financial system was hatched by the British economist John Maynard Keynes, an American Henry Dexter White, who was the assistant U.S. Secretary of the Treasury. Keynes' initial idea was something called the International Clearing Union. This would be an international bank that would work as a clearinghouse between countries. He also proposed that there would be a new currency that would be used between countries that he called the Bankor. A series of negotiations between British American and other allied countries in April resulted in the joint statement by experts on the establishment of an international monetary fund. With that, invitations were sent to representatives from 44 countries to meet from July 1st to the 22nd, 1944, at the Mount Washington Hotel in Breton Woods, New Hampshire.

The event was formerly known as the United Nations Monetary and Financial Conference. and I should note the term United Nations was used generically during World War II to refer to all the allied countries, and it wasn't yet referring to the international organization which later bore the name. The simple fact, looming over everything at the conference, was the United States was running the show, and was going to be the center of the new international monetary system. This was just the reality of things in 1944. The United States was home to half of the world's industrial capability at this time. Moreover, the United States alone guaranteed that the world couldn't go back to a gold standard

because over 75% of the world's gold reserves were now in the United States. There just wasn't enough gold for the rest of the world. The 730 delegates in attendance broke into three groups. The first was led by Harry Dexter White and was tasked with the creation of an international monetary fund, which had, at its purpose, the stability of exchange rates. John Maynard Keynes led the second group, and it dealt with the creation of a very group, and it dealt with the creation of an international bank for reconstruction and development. The final group was led by Eduardo Suarez, the Mexican Minister of Finance, and it covered

everything not included in the other two groups. In the end, several major agreements were signed that outlined the new international monetary order. The system envisioned by Keynes didn't quite pan out. Instead of an international currency used between countries, the decision was made to just use the U.S. dollar as the International Reserve currency. All of the countries which took part would peg their currencies to the U.S. dollar and hold dollars in reserve. The U.S. dollar would then be backed by gold at a set price of $35 an ounce.

This was by far the biggest thing to come out of Bretton Woods. The ban on private ownership of gold bullion, which FDR established, was still in effect in the United States. So this gold convertibility was only good for other countries. This system allowed for more flexibility than the gold. Standard did. After joining the system, a country could adjust its exchange rate by as much as 10% on a one-time basis without penalty, and then by 1% every year thereafter. Countries would maintain their currency peg by buying and selling U.S. dollars. If their currency was overvalued, they would buy U.S. dollars, thus putting more of their currency out into the economy

and devaluating it. If their currency was undervalued, they could sell U.S. dollars, thus taking their currency out of circulation and driving up the price. This system was overseen by one of the two major institutions to come out of the Bretton Woods Agreement, the International Monetary Fund or the IMF. The IMF sort of served as the bank for the World Central Banks, but without the power of a central bank itself. They were the institution that monitored global exchange rates and helped countries bring their currencies back to the peg.

The other institution that came out of the conference was the International Bank for Reconstruction and Development, which is better known today as the World Bank. The World Bank served as a lending organization, for developing countries, but its first loan recipients were actually European countries that were rebuilding after World War II. Today, the World Bank is actually the World Bank Group, which consists of five different organizations, four of which were founded after Bretton Woods, the International Development

Association, the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the International Center for Settlement of Investment Disputes. Both the IMF and all of the World Bank organizations are headquartered in Washington, D.C., which reflects the influence that the United States had on the Bretton Woods system at that time. Underlying all of the Bretton Woods agreements was the desire to facilitate free and open trade around the world and to end economic nationalism, which had plagued the first half of the 20th century and led to disastrous trade wars. Another underlying assumption that was understood but not part of any of the formal agreements was that the United States would go, guarantee the peaceful movement of ships and cargo on the high seas with its navy. One thing which was lacking in the Bretton Woods Accord was the creation of an international trade organization. From November 1947 to March 1948, negotiators hammered out the terms

for an international trade organization in Cuba. The final document known as the Havana Charter never amounted to anything because the United States Congress refused to ratify the treaty. The current system, which the IMF managed, didn't come into full effect until 1958, but it was in limited effect before that. The system managed to work reasonably well. Through the 1950s and 1960s, more countries were added to the system as they became independent after decolonization. The Soviet Union actually took part in the Breton Woods Conference and signed the final document, but didn't end up actually participating because communism. The flaw in the Bretton Woods system was not surprisingly the United States. Every other country had to keep U.S. dollars in reserve,

which was relatively easy enough. The U.S., however, had to keep gold in reserve. While they had the majority of the world's bullion reserves when the Bretton Wood system started, their reserves eventually started to decline. If you remember back to my episode on the gold standard, I mentioned that the successor system to the gold standard wasn't a gold standard per se, but in part it was, and that part was the United States having to keep gold reserves. In the late 1960s, the U.S. had a hard time keeping up its end of the bargain.

The main problem was increased spending due to the Vietnam War and Great Society Social Programs. Another problem was that the United States didn't have the same economic advantage that it held in 1944. Japan and countries in Europe had been able to rebuild from the war and had become much wealthier, and they were amassing their dollars in reserve. There were more U.S. dollars floating around than could be backed up by the American gold reserves. This resulted in a run-on gold by countries that wanted to convert their dollars into gold bullion that was being held in Fort Knox, Kentucky. This resulted in President Richard Nixon closing the gold window by ending the convertibility

of gold on August 15, 1971. That date marked the end of the Breton Wood system. After that point, foreign currencies would freely float in international exchanges. Also, the U.S. dollar and many other currencies broke their last tenuous link to gold and became full fiat currencies. A fiat currency is just a currency that isn't backed by anything. Previously, this was something that had only been done during times of war to pay for military expenditures. Now, it became the permanent state of affairs for most of the world.

As for Bretton Woods, there are still legacies of it that exist today. The IMF and the World Bank are still around, albeit with a slightly different mission for the IMF. In the end, putting all of the weight for the world's monetary system on the shoulders of the United States wasn't feasible in the long run. The entire Bretton Woods system only ended up lasting about 25 years. There have been calls for a new Bretton Woods-type approach to the international monetary system, but as of right now, nothing has been done. The end of Bretton Woods wasn't the end of a global monetary system. A new system was soon in place within a few years,

but it wasn't based on decisions made in conferences and ratified in multilateral treaties. It was an informal arrangement between the United States and a handful of countries, and that system is still sort of in place today. And it will be the subject of my next episode in the series of and monetary policy, the petro dollar system. Everything Everywhere Daily is an airwave media podcast. The executive producer is Darcy Adams. The associate producers are Thor Thompson and Peter Bennett.

Today's review comes from listener Frank Katroney Jr. Over at Podcast Addict. He writes, The Ponzi Scheme episode was really good to find out where the phrase Ponzi scheme comes from. Thanks, Frank. There are actually lots of words and phrases that have interesting origins, and I might just do some episodes on them in the future.

Remember, if you leave a review or send a boostogram, you too can have it read on the show. I have directed Secretary Connolly to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interest of the United States. In full cooperation with the International Monetary Fund and those who trade with us, we will press for the necessary reforms to set up an urgently needed. new international monetary system. Stability and equal treatment is in everybody's best interest.