After World War II, the United Nations called for creating an international monetary system. This would aid in creating stable exchange rates, encourage economic growth, and prohibit competitive devaluations after the previous international monetary systems and gold standards failed to do so. Financial experts worldwide held multiple meetings to prepare for this monumental task, and it took two years for them to come up with an approach that would suit everyone.
How the International Monetary System was Created
The primary designers of the system were John Maynard Keyes, the adviser to the British Treasury, and Harry Dexter White, the chief international economist at the United States Treasury Department. While they both similarly approached the idea of the world having fixed exchange rates, their suggestions differed greatly.
Keynes suggested the creation of an institution with resources and authority that would take action when imbalances occurred because he believed that public institutions should intervene in a crisis. He called the global central bank the Clearing Union, and it would issue an international currency called the “bancor” to settle international imbalances. Keynes suggested that each country be issued a limited line of credit to prevent payment deficits and be discouraged from running surpluses by having to remit excess bancor to the global central bank. His ideas stemmed from the assumption that the United States would go into another depression and affect the global economy.
White’s idea was much more straightforward. He called for a global central bank, The Stabilization Fund, to act as a limited pool of national currencies rather than issue a new currency.
The Bretton Woods Conference
In July 1944, 730 delegates from 44 nations met at the Mount Washington Hotel in Bretton Woods, New Hampshire, at the United Nations Monetary and Financial Conference to discuss and create such a system. Ultimately, the conference decided on a system, and parts of White and Keynes’ ideas were used to make it: International balances were to use the U.S. dollar, which was to be convertible to gold at a fixed exchange rate of $35 per ounce. The fixed exchange rate was called the Bretton Woods System.
The Bretton Woods Conference also created the Bretton Woods Agreement Act, which established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). The IMF would lend funds to countries with payment deficits and monitor exchange rates, while the IBRD, now known as the World Bank Group, was to provide financial assistance for rebuilding after WWII and to develop poorer countries.
While the two new institutions were established and running soon after in December, the Bretton Woods system didn’t become fully functional until 1958. This stayed in place until 1971 when President Nixon ended the dollar-to-gold conversion due to a deficit in the gold supply. Floating exchange rates became the standard two years later, and the system ultimately collapsed. The IMF and World Group are still active today and remain essential global institutions.
The Effect of the Bretton Woods Agreement Act & System on the Precious Metals Market
The 30 years that the Bretton Woods System was in place were mostly peaceful and prosperous for investors, global relations, and the precious metals market. When the System was working as it was supposed to, there were no complaints. Many nations enjoyed exchanging their currencies for gold, significantly increasing the value and trade volume. However, as the U.S. failed to adjust the interest policy during global economic fluctuations, the System broke down and tensions between nations rose. Some historians blame the System’s collapse on the U.S., while others blame the System itself. The Bretton Woods System was not perfect by any means, but the economic success during the time it was monitored and used heavily illustrates the need for such a system.
