Cohen, Benjamin J. "Bretton Woods System". In Routledge Encyclopedia of International Political Economy, edited by R. J. Berry Jones. Abingdon, Oxfordshire: Routledge, 2002.

Cohen, Benjamin J. "Bretton Woods System". In Routledge Encyclopedia of International Political Economy, edited by R. J. Berry Jones. Abingdon, Oxfordshire: Routledge, 2002.

• The Bretton Woods system was created at the eponymous conference in 1944 and was the first fully negotiated international monetary system. It was in place from 1945 to the 1970s. Both the initial design of the system and its ultimate destruction were led by the USA.
• The initial Bretton Woods conference was the terminus of two and a half of discussions between the Allies about monetary policy in the postwar period. It was attended by all 44 Allies as well as Argentina. 
• Two rival factions emerged at the conference, one led by Henry Dexter White of the US Treasury and one led by John Maynard Keynes, of the British delegation. Although they disagreed about access to international liquidity, both sides agreed on many other points.
• Both sides wanted to avoid the speculation and reduced trade flows caused by the volatile floating exchange rates of the 1930s, but also wanted to retain control over exchange rate policy that was impossible under the old Gold Standard. They responded by creating a 'pegged rate' or 'adjustable peg' system, by which states set their exchange rates and were required to intervene should the market exchange rate shift beyond an acceptable deviation 'band' of 1%. They were also allowed to change this peg should it reflect a 'fundamental disequilibrium' in the balance of payments. 
• They agreed that any system without adjustable exchange rates would require large currency reserves and an additional source of outside financing. Mr. Keynes wanted this outside financier to be a global central bank able to issue an international reserve currency, known as 'bancor', whereas Mr. White proposed a more limited system based around of the IMF, where each state would pay in reserves in exchange for being able to borrow during times of need. American preferences prevailed on both issues, as the US dollar, backed by massive US gold reserves, would remain the international reserve currency, and the IMF was created over Mr. Keynes's proposal.
• They agreed that the kind of economic warfare of the 1930s must be avoided and worked to prohibit restrictions on currency exchange and similar restrictions on the trade in goods and services. Some countries could claim waivers from this in a 'transitional period'. At the same time, both sides agreed that capital markets should be limited to prevent destabilizing capital flows through the imposition of currency controls.
• They also agreed that the crises of the 1930s had been exacerbated by the lack of intergovernmental dialogue and sought to create an international forum for monetary policy. The IMF ended up serving this role. The USA secured dominance over this body by organizing voting on the basis of the quotas paid into the IMF, not on a one-state-one-vote basis, meaning that it controlled ⅓ of all votes in the body. 
• The dominant role of the USA in these negotiations led to the development of hegemonic stability theory, as it emphasized the role of the hegemon's power in creating institutions as well as the general acceptance of this role as necessary to maintaining global order. 
• The IMF played three roles in the Bretton Woods system: regulatory, by administering the rules regarding currency convertibility and exchange rates; financial, by supplying emergency liquidity; and consultative, by providing a forum for governments to discuss monetary issues. 
• The creators of the Bretton Woods system expected that the 'transition period' would be brief, that trade imbalances in the postwar period to be minimal, and that future crises would be limited in scope. These assumptions explain why the system was set up with the idea that currency pegs would only rarely change and why governments were given so few tools except currency controls to manage the balance of payments. 
• These assumptions immediately collapsed within the first years of the Bretton Woods system, as the resources of the IMF were hopelessly insufficient and monetary relations proved to remain unstable for many years. Within 2 years, the reserves of the IMF were exhausted and the USA took over most of the burden of maintaining the Bretton Woods system. 
• The USA was both willing and able to take over management of the international monetary system, maintaining convertibility and liquidity and supplying reserves for the rest of the world. This was done by maintaining an open market for foreign imports, having the Federal Reserve maintain a liberal lending policy to countries in crisis, and giving out long-term loans and investments, initially through the Marshall Plan and related projects and then through New York capital markets. This system allowed for countries to accumulate US dollars as reserves, thus stabilizing exchange rates, provided liquidity in US dollars, and allowed for a growth in global liquidity through running a balance of payments deficit. 
• Being the global monetary leader gave the USA a number of advantages, as well as cementing its role in the Cold War and meshing well with its goals to build up European and Japanese industry. Being able to borrow in its own currency also allowed the USA to safely run deficits, necessary to support its military and strategic goals during the Cold War. 
• Although it had originally been designed as multilateral, the Bretton Woods system thus quickly became based around the USA and centered around the US dollar. 
• American allies largely accepted this system and conceded their monetary autonomy to the USA. In return, the USA allowed Japan and Europe to engage in discrimination against US exports and promote their own exports, as well as maintain special privileged arrangements in trade and payments.
• The Bretton Woods system can be divided into two periods: the dollar shortage from its creation until 1958, and the dollar glut from 1958 until its dissolution. 
• The period of dollar shortage reflected a global need for US dollars to provide liquidity and reserves in order to avoid a destructive period of competitive devaluations as countries desperately sought to avoid balance of payments crises and hoarded gold reserves. This was maintained through a dollar deficit from the USA, beginning in 1950, and represented an average annual deficit of $1.5 billion. 
• 1958 marked a turning point because the size of the US balance of payments deficit rose to an unprecedented $3.5 billion and because most European currencies returned to mutual convertibility that year. This greatly lessoned the desire of Europeans to hold US dollars at a time when dollar deficits were only growing higher. This put tremendous pressure on the USA since, whereas it had previously been able to finance 90% of deficits with US dollars, following 1958, over 2/3s of all deficits were paid in gold reserves. 
• The core dynamic that led to the collapse of the Bretton Woods system was described by Robert Triffin in his 1960 book 'Gold and The Dollar Crisis': plentiful US dollars were required to maintain global liquidity, but the increased ratio of dollars to the US' actual gold reserves created doubts about the future convertibility of the dollar. In other words, the USA could not simultaneously supply global liquidity and correct its balance of payments in the way necessary to retain confidence in the dollar. 
• Governments tried to avoid the Triffin Dilemma by instituting swaps of currencies between central banks, as well as enlarging the lending powers of the IMF. In the 1960s, they also created a new reserve currency, called Special Drawing Rights, that was intended to provide non-dollar liquidity. None of these solutions was able to cope with the surplus of global reserves that occurred in the late 1960s.
• The Triffin Dilemma became more acute as Europe and Japan began to pressure to USA to reduce its deficit. Their only way to do this was by demanding convertibility to gold rather than to dollars, thus depreciating the dollar's value. These tactics only intensified the Triffin Dilemma, however, and all governments became increasingly wary about doing this.
• The system of pegged exchange rates, particularly the lack of clarity regarding what constituted 'fundamental disequilibrium', also proved a constant source of stress on the Bretton Woods system. The greatest strain came from the consistent trade imbalance between the USA and Europe and the USA and Japan, particularly since the USA had no direct control over its own exchange rates. This relationship creating pressure on the Europeans and Japanese to appreciate their currencies and on the USA to depreciate, which neither country wanted to do. Speculators waited for one side or the other in these disputes to change their pegged exchange rates, creating dangerous capital flows. 
• The Bretton Woods system began its collapse following 1965, as American involvement in the Vietnam War, increased welfare spending, and the dollar glut combined to created global inflation that exacerbated global trade imbalance and further encouraged speculation on expected future changes in pegged exchange rates.
• On 15 August 1971, President Richard Nixon unilaterally suspended the convertibility of the US dollar into gold. Initially, this was a power move to force the Europeans and Japanese to accept joint changes to exchange rates and these results were reflected in the new pegged rates set in the Smithsonian Agreement in late 1971. However, these new pegged rates still faced massive pressure from speculation and, so, in February 1973, the currencies of all industrialized countries were allowed to free float on global markets. 
• The collapse of the Bretton Woods system was not occasioned by general chaos, as was the end of the Gold Standard in the 1930s, but by a general continuation of the same institutions, with the IMF still playing a consultative, regulatory, and financial role in the new economic system.