"The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value-plus or minus one percent-in terms of gold; and the ability of the IMF to bridge temporary imbalances of payments."
The only currency capable of handling such a load was the US dollar. As long as the US dollar was fixed to a set gold standard, all other member countries of the IMF could fix their currency against the dollar and international trade could continue with little problem. The most notable absences from the IMF were the Soviet Union and the so-called Iron Curtain countries. These countries were barred from setting any fixed rate of their currency against the dollar and were, therefore, outside of the Bretton Woods Agreements. I remember visiting Warsaw, Poland, in the winter of 1978 on a inter-airline tour sponsored by the Polish government air carrier, LOT. It was well known that the currencies from the Iron Curtain countries were worthless outside of their respective nations and that one needed to exchange money, preferably US dollars, at one of the local banks in order to have spending cash while visiting there.
Seizing the opportunity, I went to one of the local banks at the Cointrin Airport in Geneva, Switzerland, on the day of the trip. I asked the clerk for 3,000 zloty, the official currency of Poland. "Sir," the bank clerk stated with an incredulous look of bewilderment on his face, "That currency is useless outside of Poland, and you can't take any of the money in there with you."
"I know," I feigned. "I'm doing an economics project for the local university, and I need some zlotys to show the classroom." Fifteen dollars later, I was given the 3,000 zloty (worth over $300 at the official exchange rate inside Poland) and I ran gleefully towards the departure lounge where I stuffed the money in between my sock and shoe. I was never searched, though the customs officer asked me if I was bringing in any money. "No sir," I lied. Throughout the Cold War the Soviet and their satellite nations were exempt from enjoying the ease of international trade and their currencies stayed vorbotten outside their country.
Again, according to Wikipedia, "The United States had emerged from the Second World War with the strongest economy, experiencing rapid industrial growth and capital accumulation. The U.S. had remained untouched by the ravages of World War II and had built a thriving manufacturing industry and grown wealthy selling weapons and lending money to the other combatants; in fact, U.S. industrial production in 1945 was more than double that of annual production between the prewar years of 1935 and 1939. In contrast, Europe and East Asia were militarily and economically shattered.
"As the Bretton Woods Conference convened, the relative advantages of the U.S. economy were undeniable. The U.S. held a majority of investment capital, manufacturing production and exports. In 1945, the U.S. produced half the world's coal, two-thirds of the oil, and more than half of the electricity. The U.S. was able to produce great quantities of machinery, including ships, airplanes, vehicles, armaments, machine tools, and chemicals. Reinforcing the initial advantage-and assuring the U.S. unmistakable leadership in the capitalist world-the U.S. held 80% of gold reserves and had not only a powerful army but also the atomic bomb.
"The U.S. stood to gain more than any other country from the opening of the entire world to unfettered trade. The U.S. would have a global market for its exports, and it would have unrestricted access to vital raw materials. In addition, U.S. capitalism could not survive without markets and allies. William Clayton, the assistant secretary of state for economic affairs, was among myriad U.S. policymakers who summed up this point: "We need markets-big markets-around the world in which to buy and sell".
This gigantic advantage over other economies around the globe gave the US one of its greatest periods of sustained growth ever witnessed. The US loaned billions of dollars to the four corners of the Earth with nearly all of it immediately returning to the US in the form of construction, raw material, agricultural and other purchases. But all was not rosy in the land of the giants. Less than thirty years after the historic Bretton Woods Agreements sought to stabilize world commerce and trade with fixed exchanged rates, the house of cards it was built on slowly collapsed.
HELLO RICHARD NIXON, GOODBYE GOLD
According to the Global Policy Forum, "It is an exaggeration to say that the whole Bretton Woods system broke down. What did break down was the rules of cooperation for the convertibility of the dollar into gold and the exchange rates regime. After the war, the US dollar became the international reserve currency. The US also went from being in surplus to running trade deficits. States at first wanted US dollars to meet their trade obligations. They were also happy to let the US run deficits since this provided liquidity in the international monetary system. This situation led, however, to a crisis first anticipated by the economist Triffin in 1960 (R. Triffin, Gold and the Dollar Crisis, New Haven CT, 1960). The problem was that if the US attempted to correct its balance of payments deficit it would cause a liquidity crisis. If it allowed its deficit to continue, other states would lose confidence in the dollar as a reserve currency and seek to convert their dollars into gold. US deficits continued to increase, partly because the US had to pay for its war in Vietnam. Confidence in the dollar started to slide. States began to seek, as the gold standard allowed them to, the conversion of their dollars into gold. The US reacted by announcing in August 1971 that it was going to abandon the convertibility of the dollar. "
The Privateer dot com notes that, "By the beginning of the 1960s, the $US 35 = 1 oz. Gold ratio was becoming more and more difficult to sustain. Gold demand was rising and U.S. Gold reserves were falling, both as a result of the ever increasing trade deficits which the U.S. continued to run with the rest of the world. Shortly after President Kennedy was Inaugurated in January 1961, and to combat this situation, newly-appointed Undersecretary of the Treasury Robert Roosa suggested that the U.S. and Europe should pool their Gold resources to prevent the private market price of Gold from exceeding the mandated rate of $US 35 per ounce. Acting on this suggestion, the Central Banks of the U.S., Britain, West Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg set up the "London Gold Pool" in early 1961.
The Pool came unstuck when the French, under Charles de Gaulle, reneged and began to send the Dollars earned by exporting to the U.S. back and demanding Gold rather than Treasury debt paper in return. Under the terms of the Bretton Woods Agreement signed in 1944, France was legally entitled to do this. The drain on U.S. Gold became acute, and the London Gold Pool folded in April 1968. But the demand for U.S. Gold did not abate.
By the end of the 1960s, the U.S. faced the stark choice of eliminating their trade deficits or revaluing the Dollar downwards against Gold to reflect the actual situation. President Nixon decided to do neither. Instead, he repudiated the international obligation of the U.S. to redeem its Dollar in Gold just as President Roosevelt has repudiated the domestic obligation in 1933. On August 15, 1971, Mr Nixon closed the "Gold Window". The last link between Gold and the Dollar was gone. The result was inevitable. In February 1973, the world's currencies "floated". By the end of 1974, Gold had soared from $35 to $195 an ounce."
THE GLOBAL FREE-FOR-ALL
By the beginning of the 70s, the US government realized that it was sitting on something more powerful than just the preferred global trade currency. The Global Policy Forum states, "The era of flexible and floating exchange rates that followed the breakdown of the Bretton Woods exchange regime was not really a victory for the principle of national sovereignty as much as a triumph of US financial hegemony. Keynes had always thought that in the postwar era the only hope for peace and economic growth lay in the creation of an international monetary system. He saw that sterling's luster was fading and so the UK had to cooperate with the US in this enterprise.
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