Another critical factor, which contributed to the rise of power in America, was the Bretton Woods agreement of 1944. The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial states in the mid-20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. It is through the Breton Woods agreement that the U.S. dollar became the world’s “reserve currency.”
Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference.
The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944. Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.
The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary payments. Simply stated, the power centers of the world met in Bretton Woods, New Hampshire and it was decided that international trade and settlements such as the purchase of oil for example, must be exchanged with the U.S. dollars. This meant that the central banks of these nations were required to have sufficient U.S. dollars.
As a result, the increasing global demand for the U.S. dollar continued and based on supply and demand this kept the dollar strong. This is about to change with competing reserve currencies like the Chinese RMB for example with SDR backing from the IMF.
Another reason for this decision in 1944 is due to the fact that up until that point in history, America’s currency was kept under control without runaway inflation as the U.S. dollar was backed by gold and silver and the trust and confidence in the US. Dollar was strong. Confidence is the critical underlying factor that keeps the financial structures and systems in place. Including confidence in the currency itself. In fact it can be stated that money is nothing more than an idea backed by confidence and a means to easily facilitate trade and keep order. What happens when this confidence is shattered? To be continued. Meanwhile tic-tock-tic-tock. USA debt clock.
Subscribe to my blog site and receive a FREE COPY of my book “Misconceptions and Course Corrections-A Collection of Critical Essays for Our Times”.