Towards the end of WWII, most of the world's industrialized nations lay destroyed and in ruin. The unprecedented aerial attacks of the previous five years had demolished Berlin, Stalingrad, Leningrad, Hiroshima, Tokyo, Hamburg, Warsaw, and nearly all the giant European financial and industrial centers that had emerged over the previous century. There was only one major industrial country that hadn't been ravaged by the great war.
It was under this backdrop that the financial leaders from the major countries met at Brenton Woods in New York state in the summer of 1944. Even the Soviet Union attended, though it was probably a forgone conclusion that any resultant agreement would not meet with their governmental standards of state run everything.
What did emerge from that meeting was nothing short of earth-shattering. It was decided for the first time in the history of the world that one currency would rule over all others. Gone were the empire centers of India, East Asia, and Africa where the colonies of European dominion were required to use their master's currency exclusively. After the wholesale destruction of Europe, those rules could no longer aptly apply.
Enter the US dollar. The world's largest economy was also the only major industrialized country that had been virtually unaffected by the carnage of the previous five years. With little effort, in comparison, it could return to a prewar economy and produce the goods the others needed to rebuild. And it was decided that the US dollar would be pegged to the agreed-to price of gold ($35) with all other currencies pegged to the dollar. There ya go . stability in the finance sector and mobility in the industrial sector.
The next few decades saw tremendous growth in these same countries and a worldwide economic boom that was to rival the best of antiquity. The US became a super juggernaut that clearly dominated everyone else on almost every front. American industry became the proverbial Midas with the word "golden" seemingly stamped on almost anything they made.
Another major benefit for the US was that after Bretton Woods, a great majority of international commerce took place using the US Dollar as the transaction currency of choice. For example, if Saudi Arabia wanted coffee beans from Brazil, they'd pay Brazil in US Dollars. If Great Britain wanted tea from Sri Lanka, they'd use US Dollars as their base monetary unit.
This meant specifically that nations needed to produce goods and services and sell them in US Dollars to other countries before they could spend those dollars to purchase goods and services they needed. But, while the rest of the world needed US dollars to buy anything from anybody, the US only needed a printing press, paper and some ink. We could print dollars all day long and they were just as valid as the dollars everyone else needed. Gold was seen by the Bretton Woods Agreement as a check so that the US never went nutsoid with its printing.
One unexpected consequence of all this began surfacing by the late 1950s. The idea that the US could print money freely to use at its discretion bothered world leaders. Many countries had become oversaturated with US Dollars and started asking for the "other currency" instead, e.g. gold. In 1957, the US owned over 20,000 tons of gold, by far the greatest amount of any country ever. By 1971, that amount had dwindled to below 9,000 tons.
One of the most vocal critics was French President De Gaulle of France who railed against this concept of free money. By 1965, President de Gaulle had had enough of this special preference given the US Dollar and spoke out.
According to Wikipedia, "by the early 1970s, as the costs of the Vietnam War and increased domestic spending accelerated inflation, the U.S. was running a balance-of-payments deficit and a trade deficit, the first in the 20th century. By 1971, the money supply had increased by 10%. In the first six months of 1971, $22 billion in assets left the U.S In May 1971, inflation-wary West Germany was the first member country to unilaterally leave the Bretton Woods system -- unwilling to devalue the Deutsche Mark in order to prop up the dollar.
Due to the excess printed dollars, and the negative U.S. trade balance, other nations began demanding fulfillment of America's "promise to pay" -- that is, the redemption of their dollars for gold. Switzerland redeemed $50 million of paper for gold in July. France, in particular, repeatedly made aggressive demands, and acquired $191 million in gold, further depleting the gold reserves of the U.S."
So, in August, 1971, Nixon opted for a formal divorce between Mr. Dollar and Mrs. Gold. The Nixon Shock, a three-day bank closure where Nixon annulled any connection between the two, solved America's gold exodus problem. But hey, the US dollar was still the world's currency, right? It was still being used in most international transactions. Everyone in the world still needed the US dollar and all the US needed was a printing press, paper and some ink. Free money, even better than before.
And what did we use this new, incredibly special privilege on? How did we take advantage of this unique position heretofore unprecedented in the annals of world history? How did the US spend its free money?
Did we build incredible, modern architectural marvels for the benefit of mankind around the world? A little.
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