The Bretton Woods system, which established the rules by which world finance actually functions today, was approved 75 years ago. Why did the US dollar become the world's currency? How did events develop further? In what year did the dollar become the world's currency? Let's sort it out in order.
Agenda
When the main results of the Second World War were summed up and realized, one of the main remaining questions was the following: according to what laws will the global financial community develop further, and especially taking into account the huge economic losses that many countries faced. This agenda brought together 720 delegates from 44 nations in 1944 at Bretton Woods, New Hampshire, United States.
Participants and motives
When the dollar became the global currency, it was the United States and the United Kingdom who decided the future at Bretton Woods - it was the representatives of these countries who put forward two key positions, one of which determined the world economy for decades to come.
The American Minister of Finance G. Morgenthau became the chairman of the conference. The delegation of Great Britain was headed by well-known economist J. Keynes, the USA - by the chairman of the Ministry of Finance G. White, China - by Chiang Kai-shek, Prime Minister, the USSR - Deputy Minister of the Soviet Union for Foreign Trade M. Stepanov.
Main motives for the conference:
- chaos in the interwar economic system from 1918 to 1939;
- collapse of the gold standard (gold was a “form” of supranational money before WWI);
- The Great Depression in the United States, special customs policy, characterized by high duties on imported goods.
Could be a bancor
The British delegation proposed to introduce a "bancor" - a monetary unit that will stand above national currencies, and completely abandon gold. US representatives recommended using the dollar as the world currency, which was issued by the US reserve system since the beginning of the First World War.
It was also proposed to create the International Monetary Fund to maintain stable exchange rates and ensure the balance of payments of individual states, and the International Bank for Reconstruction and Development - to restore the war-torn economy.
The US position won not because the delegation was convincing in its proposals. The reason was the power (in political, economic and military aspects) of post-war America. The United States was less affected by the war, and the economyjust won. About 70% of the gold reserves were then concentrated in the basements of Ford Knox.
The role of the USSR
Why did the dollar become the global currency in a bipolar world? What was the role of the Soviet Union in the Bretton Woods system, which agreed to a variant of the financial structure of the world with the dominant role of the dollar? It is obvious that the decision was made not by the head of the delegation, Stepanov, but by I. V. Stalin himself. The leader understood that Washington would use the meeting to legally secure dominance in the world.
Historians put forward several assumptions as to why, in such a situation, Stalin agreed to the participation of a delegation from the USSR in the conference. The dollar became the world's currency in the year before the end of the war. It was expected that America would open the Western Front, the lend-lease program would be continued, according to which arms, food, equipment and other goods were supplied to the USSR. There was hope for US economic assistance after the end of the war.
How did the dollar become the global currency? In short, international relations obliged the USSR to check in at Bretton Woods, where the Soviets did not decide anything. The position of the USA played a huge role. Therefore, it was the dollar that became the world's leading unit.
Dollar high point
Under the New Economics, exchange rates were pegged to the dollar and the dollar to gold. A specific price was set for the precious metal: $35 per ounce. The national currencies of other countries have become a commodity that has receivedspecific cost.
When the dollar became the world currency, an agreement on the establishment of the IMF was signed and ratified by twenty-nine states, a couple of months later the fund began to fulfill its tasks. The IBRD, which later became the World Bank, began operations in 1946.
Weak link
When the dollar became the global currency, critics immediately saw a weakness in the new system. The established order could function only as long as the US gold fund ensured the conversion of foreign dollars into gold. As the turnover of transactions increased, the gold reserves of the States were melting before our eyes: sometimes three tons a day. In this regard, the exchange was limited: I can only carry out in the US Treasury. But still, from 1949 to 1970 Ford-Knox reserves decreased from 21.8 to 9.8 thousand tons of gold.
Redistribution of gold
Charles de Gaulle - an opponent of the priority of the dollar - moved from criticism of the established system to real action. During his visit to the States, he presented $750 million in exchange for gold. The US authorities were forced to exchange money because the formalities were followed.
Following France, Japan, Germany, Canada and other large countries presented huge sums for exchange. As a result of colossal financial pressure, America unilaterally abandoned its international obligations to back its national currency with gold.
By the beginning of the seventies there was an end to the redistribution of gold reserves in favor of Europe. Miningprecious metal is clearly not ahead of the growth in international trade. The world community's confidence in the dollar was falling, while the balance of payments deficit was growing. New economic centers have appeared in the world.
Dollar devaluation
When the dollar became the world's reserve currency, the US could back paper money with gold. But already in the early seventies, the US reserve system was forced to halve the gold content, that is, in fact, carry out devaluation. In the summer of 1971, the Nixon administration formally abolished fixed-rate gold conversion. The fixed exchange rate is a thing of the past because it has not justified itself. The Jamaican system, based on free exchange of currencies and a floating exchange rate, has come to replace it.
Life after death
The key provisions of the system are functioning until today. For example, the IMF and the World Bank are still the largest lending institutions, although their activities are increasingly subject to criticism, especially after the 2008 global crisis.
Dissatisfaction is caused by the fact that loans are issued on strict conditions, requiring cost reduction, which hinders the development of crisis countries. The IMF is still dominated by the G7 countries, although in today's realities, dynamically developing economies, for example, the BRICS countries, are gaining weight.
Despite the criticism, the dollar has retained a key role and is today the main means of payment in international transactions. This allows the US authorities to issue newdollars that are no longer backed by anything.
The dollar is losing ground
When the dollar became the global currency, the powers that be probably suspected that the system would only work successfully for about thirty years. Still, the Bretton Woods system was designed to breathe new life into the world economy, exhausted by the war. During the Bretton Woods system, the turnover of trade in the world increased almost fivefold, and at the end of the past century, experts even call it the “golden age of the market economy.”
Modern analysts tend to consider the system a relic of the past. The structure of the economy has changed dramatically over the past few decades. Cardinally new financial instruments have appeared, and investors are no longer guided only by the dollar. The functions of national banks, the conditions for the transfer of tangible capital from the economy of one country to another have undergone great changes.
Forecasts and opinions
Most leading financial analysts agree that one monetary unit can no longer dominate others. When the dollar became the world currency, the economy had almost the same problems as it does now. But nowadays more and more transactions in the world market are carried out in other currencies.
Perhaps in the near future the main positions will be taken by the dollar, the euro and the yuan, or one artificial currency with a global reach (like the continental euro) will be created. There is another opinion, based on the fact that any unions will soon completely become obsolete andfall apart. As a result, each state will be for itself, and gold will take the place of the world currency. If the forecast turns out to be correct, the world will return to the “Dobreton Woods” time.
