Bretton Woods

In July 1944, 730 delegates from 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, to design the postwar international monetary order. The conference was shaped by two competing visions, embodied in their principal architects: John Maynard Keynes, representing Britain, who proposed an International Clearing Union with a supranational currency (the bancor) and symmetrical obligations on surplus and deficit countries; and Harry Dexter White, representing the United States, who proposed an International Monetary Fund with fixed exchange rates anchored to gold and dollar -- an arrangement that would institutionalize American monetary dominance.

The United States, holder of two-thirds of the world's monetary gold and the only major economy undamaged by the war, prevailed. The Bretton Woods system established the dollar as the world's reserve currency at a fixed rate of $35 per ounce of gold, with other currencies fixed to the dollar and adjustable only through IMF approval. The United States undertook to exchange dollars for gold at that rate on request. Other countries accumulated dollar reserves, effectively lending the United States the real resources those dollars represented in exchange for a reserve asset.

This arrangement conferred what Valery Giscard d'Estaing, then France's finance minister, called an "exorbitant privilege" on the United States: the ability to run trade deficits and finance them by issuing the world's reserve currency, rather than by surrendering real assets. Countries that accumulated dollar surpluses held claims on the US economy but accepted those claims in the form of US Treasury bonds rather than demanding immediate payment in goods. The United States could, in effect, import more than it exported indefinitely -- as long as the world remained willing to hold dollars.

The dollar is our currency, but it is your problem.John Connally, US Treasury Secretary, 1971, to European finance ministers

The system functioned reasonably well through the 1950s, when the United States maintained a strong trade surplus and dollar holdings abroad were modest. It began to strain in the 1960s, when the simultaneous demands of the Great Society programs and the Vietnam War expanded the supply of dollars faster than the gold stock that backed them. European central banks, particularly France under de Gaulle's finance minister Jacques Rueff, began converting dollar holdings to gold -- precisely as the system permitted -- exposing the growing gap between gold reserves and dollar liabilities.

The Bretton Woods system also embedded an asymmetry in adjustment: countries running deficits faced immediate pressure to deflate their economies, while surplus countries faced no equivalent pressure to expand. This asymmetry, which Keynes had tried to address with his bancor proposal, meant that the burden of adjustment fell consistently on deficit countries and their workers. The postwar dollar hegemony would persist after Bretton Woods' formal end, but on terms that the 1944 architects had not anticipated.