How did the monetary system come into being after World War II? Before the U.S. dollar became a hard currency, international trade was initially conducted with the help of precious metals, most notably gold. There is a familiar concept called the "gold standard". In the 19th century, paper money was issued, and the face value was required to be linked to a certain weight of gold. There were "gold pounds" and "gold francs", and gold and paper money were exchangeable. The gold standard existed for about 60 years.
When gold took on a different meaning and became valuable, many people smelled the way to get rich by mining gold and developing foreign trade to obtain foreign exchange linked to gold. You may be confused when you hear this. The pros and cons of foreign trade, "surplus" and "deficit" are full of news every day. In the era of the gold standard, the government's strategy for dealing with these fluctuations was laissez-faire. Trade deficits lead to the loss of gold, which naturally reduces the money supply and reduces prices. This reduces export costs, improves the competitiveness of domestic goods, and the deficit is alleviated. The government often does not interfere with this natural adjustment process, nor does it ask about unemployment and bankruptcy.
But by the 1930s, the European powers, which owed huge sums of money in World War I and needed financing from the United States, could no longer maintain the gold standard. Different foreign exchange management methods were formulated, and the unemployment rate was emphasized. When foreign trade deficits appeared again, high tariffs were set to reduce imports to support domestic enterprises. Of course, some countries violated conventions and adjusted the exchange rate between their currencies and gold.
After suffering great damage in World War II, countries faced the problem of restoring their economies and establishing a new system for the effective circulation of goods and capital. In July 1944, 730 senior economic officials from 44 different countries around the world gathered in Bretton Woods for a three-week meeting. This meeting determined the new monetary system, also known as the Bretton Woods system. Let's take a look at what the Bretton Woods system means. Simply put, it established the status of the US dollar and the fixed exchange rate system between the US dollar and gold and other currencies. Representatives from Britain and the United States also had fierce debates. The dollar's ability to become a "world currency" does not rely solely on the industrial strength and military power of the United States. In the early post-war period, the United States provided cash flow for most countries, which was also a factor.
After the end of World War II, Western Europe and Japan were almost on the verge of bankruptcy, but the United States sent a large amount of US dollars at a low cost to build infrastructure and raw materials, etc. Holding US dollars not only generates interest, but is more affordable, making the US dollar have an indestructible position in the capitalist world.
Not only Europe was satisfied, but the US government was also satisfied, and US finance executives were also free, most of them would take special cars to work after 9 o'clock, and no one would be there at 7 o'clock in the evening. The dollar's dominant position lasted for 20 years.
Under the Bretton Woods system, countries need more dollars to buy goods. How do they get them? One is to export, and the other is to attract American capital. But in order to control the inflation rate, it is impossible to issue them indiscriminately, so there is a "dollar shortage". How to alleviate it? By increasing the deficit in the United States' foreign trade, more dollars will flow into the international market, and the stability of the US economy will not be doubted. This phenomenon is called the "Triffin Dilemma".
The US trade deficit and fiscal deficit are not fatal. The real problem is that there is an implicit competition between the US dollar and gold. In the more than 20 years since the end of World War II, although the US gold reserves have hardly changed, if all foreign governments and companies holding US dollar assets sell off US dollars and demand to exchange them for gold at a price of US$35 per ounce, the US government will face the dilemma of being unable to pay. In order to maintain the operation of the Bretton Woods system, investors must be convinced that holding US dollars is safer than holding gold, and that the strength of the US dollar will not be shaken by trade deficits.
In the late 1960s, the US launched a "US dollar defense war". The US adopted a variety of strategies, such as levying "stationing fees", that is, requiring European countries to bear the costs of US troops stationed in their territories to recover US dollars. The US also established a "gold pool" to coordinate countries such as Britain and Germany to allocate $270 million in gold reserves to resist speculative selling of US dollars. It is a temporary solution, but it cannot fundamentally solve the problem. In fact, in the 25 years after World War II, the average annual growth rate of the US economy was only 3%, far lower than the 6% of Western Europe. In addition, the US share of global industrial production fell from 35% in 1950 to 27% in 1969. The growth rate of the US economy and foreign trade could not support the growing supply of US dollars, and the collapse of the Bretton Woods system was inevitable.
In order to prevent private gold hoarding, the United States once banned private purchases of gold bars and gold nuggets except for gold jewelry and medical purposes, but there was no such restriction in Europe. This allowed investors to sell dollars in London and buy a large amount of gold, causing the gold price in the UK to be 1/7 higher than that in the United States. In the late 1960s, Western European countries used the 1% space of the Bretton Woods system to artificially intervene in the exchange rate in order to stimulate exports, further worsening the import and export situation of the United States. In the summer of 1971, the market value of the US gold reserves fell to US$10.2 billion, while the US dollars circulating in the overseas market reached as high as US$40 billion.
From August 1971, the exchange of dollars and gold was suspended, and the price of gold was adjusted to US$38 per ounce, allowing European countries to fine-tune their currency exchange rates on this basis. This move was called the "Smithsonian Agreement" and was formally adopted at the Smithsonian Institution's annual meeting in December 1971. However, the Federal Reserve implemented a low interest rate policy during this period, resulting in the dollar in the overseas market not flowing back to the United States. Instead, it further became a financial asset, transmitting the inflation problem to other countries. By the spring of 1973, the seven European countries and Japan unanimously announced that their currency exchange rates would no longer be pegged to the US dollar and officially entered a free floating state. At this point, the Bretton Woods system completely collapsed.
The rise and collapse of the Bretton Woods system not only changed the global monetary and financial landscape, but also provided important historical experience and inspiration for the international economic order.
That’s it for now, I’ll update later on the decline of the US dollar~~