The Fall of the Bretton Woods Agreement and its Aftermath

Hammes and Willis (2005, 503-504) tell us the basic history of The Bretton Woods Agreement: “The Bretton Woods Agreement takes its name from the international conference held in the New Hampshire town of that name in July 1944…. The arrangement provided for fixed exchange rates, with each member country fixing its currency value to the U.S. dollar. The price of gold, fixed at U.S.$35 per ounce, applied to official transactions between national central banks.”

Preparata (2009, 23) identifies a significant aspect of this agreement and an outcome of it. “The potential for deflation…was reversed by a policy of steady inflationary pressure, built into the system by the provisions of the Bretton Woods Conference of July 1944. As known, the new world standard of The Pax Americana was a gold-dollar-exchange anchored on the promise to redeem the greenback at $35 per fine ounce of gold. The United States went on to inflate massively the money supply providing 1) the international means of payment, and banking reserves, to their newly-annexed western satellites – money which these could spend on 2) America’s market, the largest in the world.”

Preparata states that “a policy of steady inflationary pressure” was “built into the system by the provisions of the Bretton Woods Conference”, but I am not convinced.  “Policy” implies that it was deliberately planned. Perhaps it is more accurate to use the word potential instead of policy.  Either way, inflation is what happened and it is what ruined the effectiveness of the Bretton Woods Agreement.

Hammes and Willis (2005, 504) add: “In the late 1960s, several countries argued that U.S. fiscal and monetary profligacy, resulting from the financing of the Great Society programs and the Vietnam War and from the Federal Reserve's monetization of the government's deficits, contributed to their accumulating dollar reserves and their rising rates of domestic price inflation. These dollar reserves accumulated and inflationary pressures grew as those countries supplied more of their own currencies to the foreign-exchange markets in order to keep their currencies pegged to the dollar at the fixed rates. Therefore, they accused the United States of "exporting" inflation.”

Back to Preparata:

During post-war reconstruction, the United States accumulated significant trade surpluses vis-à-vis the rest of the world. These surpluses, however, were systematically exceeded by substantial flows of US economic and military investment overseas, which consolidated American hegemony by way of industrial and financial acquisitions. Conventionally stated, America printed dollars and bought the world.

So long as there existed a 'dollar shortage' - i.e. a commercial dependence on US exports, which manifested itself through a strong demand for the American currency - such capital outflows were sustainable: in other words, they did not foment an immediately detectable bout of inflation. But as soon as the european countries had achieved reconstruction and an industrial (exporting) capability of their own, they found their reserves to be such that the 'dollar gap' was finally being closed. This occurred in 1958. America's outgoing dollar flows, however, kept increasing dramatically throughout the 1960s, and its persistent trade surpluses offered little offsetting relief against this steady transfer of dollars earmarked for strategic placement.

It so happened that the central banks of the recipient countries found themselves flooded with dollar balances (presented to them by resident businesses and private citizens) against which they had to issue the equivalent value expressed in the domestic currency. The tricky dimension to this business was that such capitals denominated in dollars thus surrendered by European payees to their central banks, were eventually re-placed ('invested') by the latter in the American market itself. Therefore, America perpetrated two economic injustices at once. First, owing to its hegemonic position, the United States fuelled a ceaseless generation of world inflation, as funds earmarked for foreign investment originally issued by the Federal Reserve found themselves duplicated: once as converted balances in Europe and twice as capital disposable anew on Wall Street. Second, the dollar, as the currency vested with the role of internationally recognised reserve, permitted the United States the luxury to score chronic capital account deficits, by which it managed, in fact, to 'expropriate' - as French president Charles de Gaulle polemically put it - key industrial assets in Europe, paid for with freely-printed dollars. De Gaulle's economic advisor, Jacques Rueff, referred to the dollar's bullying privilege as that 'marvelous secret of the tearless deficit' (le déficit sans pleurs). (Rueff, 1971, 24, 92)

From America's viewpoint, however, the adherence to a tempered gold regime entailed an annoying constraint, namely, that creditor countries could actually squeeze a tear or two from the US giant by demanding sooner or later the redemption of their dollar gluts in gold. This, they eventually did. Chronologically, the point at which America's debts to foreign central banks exceeded the value of the US Treasury's gold stock was reached in 1964, 'by which time the US payments stemmed entirely from foreign military spending, mainly for the Vietnam War.' (Hudson, 2002, 16). In 1967, France finally resolved to spearhead a run on the dollar by demanding conversion of dollar balances into gold; in March 1968, as President Johnson avowed failure in Vietnam by announcing his withdrawal from American politics, the US gold stock had been so depleted that American strategists awoke to the reality, lamenting bitterly how european financiers had 'forced peace' (Hudson, 2002, 307) upon them and caused, indeed, an American president to be ousted. (Preparata, 2009, 23-24)

Preparata, drawing on sources such as Hudson (2002, 18, 22, 340, 351)  then gets us to the end of the Bretton Woods Agreement. “… America… wrought yet another momentous modification on the modern capitalist engine with a view, of course, always to maintain hegemonic control. It was done in 1971, under Nixon. The alteration was straightforward: sever the link to gold (i.e., suspend gold payments), and upgrade to a full-fledged US Treasury Bill Standard which, with the addition of further refinements, is the regime under which the world economy has been operating to this day. It was a critical transition - the end of Bretton Woods. The scheme has been deemed Machiavellian in that it cleverly shifted the burden of US external deficits squarely and definitively onto the creditor countries by raising the spectre of dramatic dollar devaluation (Nixon had already driven down the dollar by 30% in the aftermath of the 1971 break). In other words, europeans would be forced to continue to absorb dollars for fear 1) of suffering crippling losses on their dollar reserves, and 2) of seeing their exports to the United States irremediably undercut by protectionism and rival American merchandise boosted by a low dollar. One by one die western allies, including France, fell back into line. (Preparata, 2009, 24-25)

Hammes and Willis (2005, 504) present these events with a bit more abridgement: “Once countries began to redeem these reserve dollars for gold, it became clear the United States could no longer support a gold price of $35 per ounce. By early 1971, U.S. dollar liabilities exceeded $70 billion, backed by only $12 billion of gold (Yarbrough and Yarbrough 1994, 641). To staunch the outflow of gold, the United States suspended its obligation to buy dollars from foreign central banks at $35 per ounce of gold. On August 15, 1971, the United States unilaterally and without consulting allies or the IMF closed the "gold window." With this "floating" of gold, the world moved from a fixed to a flexible exchange-rate system as countries followed West Germany's lead and stopped interventions in the foreign-exchange markets once the United States stopped buying dollars with gold (James 1996, 220).”

An interesting detail about a French warship is added is by Sinn (2012, 12) in this account:

“As my colleague Wilhelm Kohler has pointed out, these problems of the eurozone are similar to, but much more extreme than, those of the Bretton Woods system, the fixed exchange rate system that lasted until 1973. At the time, the U.S. Federal Reserve System had printed many more dollars than were needed for internal U.S. circulation. These dollars were used, for example, to buy cheap goods and assets in Europe, including German and French firms that had attracted the interest of American investors. By virtue of the fixed exchange rate regime, the dollars arriving in Europe had to be converted into national currencies by the Bundesbank and the Bank of France, and the converted "dollar-deutschmarks" and "dollar-francs" then crowded out the refinancing deutschmarks and francs that usually constituted the respective currency stocks. The dollars (or U.S. Treasury Bills to which they were converted) accumulating with the European national banks were the analogue of today's Target claims, and in both cases there were sizable public credit flows through the central bank systems. It was said that Europe financed the Vietnam war that way.

General De Gaulle did not like this public credit flow. In 1968, he asked the United States to convert the dollars that had piled up with the Banque de France into gold, and he sent a warship to protect the gold transport back home. This was the beginning of the end of the Bretton Woods system, as the United States was forced to end the gold convertibility of the dollar.” (Sinn, 2012, 78)

General De Gaulle seems to have been a man who didn’t march to anyone’s drum.  The year before, when Canada was celebrating the 100^th year of Quebec’s union with Canada, he had visited the Province of Quebec, and had made a speech in which he shouted “Vivre Quebec libre!” --- a rallying cry of freedom for Quebec from Canada.  He was sent packing quietly and quickly.  This speech is captured at http://www.youtube.com/watch?v=C0LQBcygNew

The aftermath of the collapse of the Bretton Woods Agreement saw commodities prices escalate. Hammes and Willis (2005, 504-505) recount this.

Gold was initially revalued to $38 per ounce, then to $42, and shortly thereafter it was allowed to float freely. By mid-1973, the dollar price of gold had risen to $90.50 per ounce, and by the end of the decade it had risen to more than $455--an increase of 1,200 percent in less than a decade.

As the world adjusted to a new international trading arrangement, currency markets experienced turmoil. From early 1971 to mid-1973, the U.S. dollar fell dramatically relative to all Western currencies except the pound sterling. It fell more than 30 percent against the Deutschmark and the Swiss franc, and more than 20 percent against the currencies of Japan, France, Belgium, Holland, and Sweden. On average, by mid-1973 the U.S. dollar had fallen by 25 percent relative to the major Western currencies. Given that oil contracts were stipulated in U.S. dollars, this decline meant that oil revenues per unit from these countries fell to OPEC.

In addition, the average annual inflation rate in Western countries rose to more than 5 percent during the early 1970s and averaged approximately 9 percent for the entire decade across the Western countries (Economic Report of the President 1992, 418, table B-105). Prices of nearly all commodities, not just gold, rose dramatically during the decade: aluminum by 165 percent, pig iron by 200 percent, lead by 170 percent, potash by 269 percent, silver by 1,065 percent, and tin by 219 percent…”

They discuss “The Oil Price of Gold”. “When the price of oil is analyzed in terms of gold, instead of in terms of U.S. dollars, the 1970s look quite different. The U.S. dollar price of oil hardly changed from the end of World War II to the late 1960s: from 1947 to 1967, it rose by less than 2 percent annually on average (from $2.07 to $3.07 per barrel), not even keeping up with U.S. price inflation. Thus, given the Bretton Woods system, the oil/gold price was also nearly fixed. Throughout this entire period, through to the end of Bretton Woods in late 1971, 10-15 barrels of oil would buy an ounce of gold.” (Hammes & Willis, 2005, 505)

The Bretton Woods Agreement brought some predictability to planning for commodities prices and currency exchange rates, but was defeated by market forces.  Even governments eventually have to cave to the market.

References

Hammes, D., & Willis, D. (2005). Black gold: The end of Bretton Woods and the oil price shocks of the 1970s. Independent Review, 9(4), 501+. Retrieved from http://www.questia.com

Hudson, M. (2002). Superimperialism. The origin and fundamentals of US world dominance. London: Pluto Press

James, H. (1996). International monetary co-operation since Bretton Woods. Washington, D.C. and New York: IMF and Oxford University Press.

Preparata, G. G. (2009). Of Money, Heresy, and Surrender: Part I: The Ways of Our System, an Outline, from Bretton Woods to the Financial Slump of 2008. Anarchist Studies, 17(1), 18+. Retrieved from http://www.questia.com

Rueff, J. (1971). Le péché monétaire de l’occident. Paris: Plon

Sinn, H. (2012, Winter). European End Game: The Striking Similarity between Today's Eurozone Situation and the End of Bretton Woods. The International Economy, 26(1), 10+. Retrieved from http://www.questia.com 

Yarbrough, B. V., & R. M. Yarbrough. 1994. The World Economy (3rd ed.) Orlando, FLA.: Dryden Press.