World monetary order endures eighty years of Bretton Woods

Edoardo Beretta, a Full Professor at USI Faculty of Economics, recently commemorated the 80th anniversary of the event that took place on 1 July 1944, where the United States of America and its allies established the foundations for the creation of two institutions: the IMF and the World Bank. You can find the complete article published in the economic pages of Corriere del Ticino, below.

Turning eighty and still feeling young. An example is the historic event that began on 1 July 1944 at the Bretton Woods American ski resort. During the crucial stages of World War II, more than 700 representatives from 44 countries gathered for three weeks to define the international monetary order. Germany, Japan, and Italy were notably absent due to their involvement in the wartime hostilities that led to World War II. However, countries such as Australia, Belgium, Brazil, Canada, China, France, Greece, India, the United Kingdom, Russia, and the United States were among those present.

A milestone

Whether you're an insider or simply interested in history and current events, the Bretton Woods Conference (1-22 July 1944) remains a crucial milestone of the 20th century. The decisions made in that convulsive and dramatic historical moment continue to define various mechanisms for the functioning of the international monetary economy. Let's consider a few examples right away. Although increasingly challenged by China and emerging countries, the dominance of the U.S. dollar is still an objective fact. This dominance can be traced back to decisions made in three weeks, during which it was agreed that the U.S. currency would be the only one accepted in international trade and financial exchanges. In other words, nations worldwide would need U.S. dollars to settle their trade and financial purchases from the rest of the world. Needless to point out, the situation is no different today, except for the fact that since the 1970s, the pool of international reserve currencies (i.e., expendable cross-border) has expanded to often include the British pound-which at the time of the final phase of the gold system (gold standard) in the early 20th century was by international expendability the alter ego of the U.S. dollar and some of the precursor currencies of the euro. Without indulging in regrets but while noting the inevitable - if the "Keynes Plan" representing the United Kingdom had been opted for at the time instead of the "White Plan" brought by the United States - the distribution of "checks and balances" in terms of international monetary role would have been (at least on paper) more balanced since the British proposal included a unit of account somehow still based on gold (not coincidentally, called bancor) and accounting issuance by a supranational body (International Clearing Union) apt to offset international trade and financial balances.

The French and Canadian plans - much less remembered than the American and British plans - rested instead, respectively, even more on precious metals and the role of a few (few) currencies that could be considered international reserve currencies.

Keynes's Failure to Bancor

Also derived from the Bretton Woods Accords are the "sister" international monetary institutions such as the International Monetary Fund (IMF) and the World Bank Group, about which John Maynard Keynes himself is remembered by David D. Driscoll (1995) as commenting that he "was confused by the names: I thought the Fund should be called a bank and the Bank should be called a fund".

In fact, neither the IMF nor the World Bank are banks; rather, they are funds. They do not have the authority to issue money; instead, they only have the capacity to facilitate financial transactions. This fact is not crucial in this context, but it demonstrates that there is currently no actual "central bank of central banks" at the global level. But it is also from those New Hampshire mountains that the now structural U.S. external debt ($25,984.6 billion on a gross basis, according to 31 December 2023 data from the U.S. Treasury) also descends, which not coincidentally began to accumulate at a significant rate in the immediate post-World War II period and entailed - again not coincidentally - from 1971 (the year of demonetisation of gold) the first deficit in the current account of the U.S. balance of payments. To make it clear: while the U.S. enjoyed for several decades the monetary privilege of having the only internationally accepted currency to settle trade and financial transactions, it was (and partially still is) called upon to supply the entire world with so-called international liquidity, that is, the U.S. dollars needed for international trade. The main way of doing this consists(ed) of buying (increasingly and excessively) goods and services from the rest of the world instead of producing them domestically. This "exorbitant privilege" as defined by the French economist Jacques Rueff in 1971, was, therefore, also an "exorbitant burden" that made the U.S. industrial sector from the post-World War II period onward deeply dependent on foreign imports with a balance of payments increasingly in structural deficit with an annual deficit reaching as much as $971.6 billion in 2022.

The end of the gold system

And it was also at Bretton Woods that the role of gold in international payments was deemed increasingly outdated. This was solidified by its demonetisation in 1971 when the U.S. dollar also ceased to be convertible to gold, and by the sale of one-sixth of the IMF's gold reserves in 1976. During this period, the price of gold saw unprecedented growth, emerging as a safe-haven asset whose fluctuations continue to be closely monitored today. Bretton Woods is, therefore, a milestone in economic-monetary history for fully understanding some of today's phenomena influencing economic-political decisions. The question remains, perhaps, whether (and when) a "Bretton Woods 2" will be necessary, although - for the moment - such a scenario does not seem to be on the horizon. Exactly: eighty years old, and still feeling young. Best wishes, Bretton Woods!

* Attached you can download the PDF with Professor Beretta's piece, on the economic pages of the Corriere del Ticino