The Bretton Woods System: a Blueprint for a Globalised Economy

The Bretton Woods System was a set of international economic and financial agreements established in July 1944 during a conference in Bretton Woods, New Hampshire, USA, towards the end of WW2. The agreements intended to establish a renewed framework for the global economy, stabilise the international monetary system, and prevent economic conflicts such as protectionism and trade wars. However, this system eventually faced strain over time as the US was running a large trade deficit and printing more money to finance its domestic programs, leading to fears that the US did not have enough gold to back the dollar. This consequently led to the collapse of this fixed exchange rate system as countries began demanding gold in exchange for their dollars. Although the agreement ultimately failed, the impacts of the ground-breaking system provide a valuable lesson for today’s economic leaders. 

The Smoot-Hawley Tariff Act of 1930, credited to be one of the reasons for the introduction of this system, raised tariffs on around 25% of all goods imported to the US, encompassing about 800 to 900 different types of products. This led to average tariff rates jumping to almost 40% on around 20,000 types of important goods, the highest they had ever been in US history. This act aimed to protect American farmers and manufacturers from foreign competition during the early days of the Great Depression. Unfortunately, this protectionist measure failed to defend against retaliatory tariffs imposed by other countries, with trade partners closing markets to US goods. As a consequence, global trade plummeted, as global trade contracted by 65% between 1929 and 1934. It can be speculated that this act greatly exacerbated the Great Depression by reducing demand for US exports, increasing consumer prices, and deepening the global economic crisis. Thus, this act has been branded as a calamitous protectionist policy. 

To add salt to the wound, many nations faced a need for rebuilding and preventing currency devaluation, which had been a significant issue in the interwar period. The Bretton Woods Conference of 1944 occurred, resulting in the formation of a fixed exchange rate pegged to the US dollar, the creation of the International Monetary Fund (IMF), the World Bank, capital mobility and control, and US dollar dominance. 

First, currencies were pegged to the US dollar, and the dollar itself was pegged to gold at a rate of $35 per ounce (with a maximum diversion of only 1%). Countries were liable to monitor and maintain currency pegs, which were achieved by buying and selling the USD using their currencies. The aim was to minimise the volatility of exchange rates, helping to foster the recovery of trade relations following the damage done by WW2. This also allowed for the successful support of loans and grants from the World Bank. 

  

Secondly, the IMF and World Bank – two crucial institutions in this system – were created to provide financial stability and aid to war-torn countries. The IMF was designed to oversee the international monetary system and provide temporary financial assistance to such countries, particularly those suffering from balance of payments problems. Similarly, the World Bank was created to help Europe rebuild after WW2, similar to the Marshall Aid, aligned with the goals of the US Containment policy with anti-communist motives. The World Bank was tasked with providing loans and financial support for the reconstruction of key infrastructure and to aid development in these countries, such as France, the Netherlands, Denmark, and Luxembourg. 

Capital mobility and control meant that while trade had been liberalised, countries still had a level of autonomy over capital inflows and outflows in the form of investments and loans. While governments could pursue independent monetary policy, capital controls may have hindered global economic integration, significantly reducing the free flow of capital across international borders. This aspect of the Bretton Woods system was key in preventing destabilising speculative flows that could weaken the system. Lastly, the Bretton Woods system signified US dollar dominance as it became the world’s primary reserve currency; its influence was evident in the fact that most global transactions used dollars. 

The Bretton Woods System, however, collapsed due to the increasing strain that it faced over time as the US was running large trade deficits, and, in order to finance its domestic programs, the US kept printing more dollars. This reverberated growing fears that there was insufficient gold to back the dollar, which, as discussed earlier, meant that countries began demanding gold in return for the dollar. Such a run on the dollar, alongside other evidence which propelled the notion that this system was key in undermining the nation’s foreign trading position, prompted President Nixon to take the US off the gold standard and terminate the Bretton Woods System. 

The long-term impact of the Bretton Woods System is that, despite the collapse of this system, the US dollar has remained the dominant global reserve currency. At the end of 2024, the dollar accounted for 58% of global foreign exchange reserves. The IMF and World Bank have maintained their unwavering position as central to global economic governance, despite criticism of their role in shaping development policies, particularly in the Global South. Rather interestingly, the growth of globalisation coincided with the collapse of Bretton Woods, as international trade expanded, as well as more freedom in capital flows and economic integration. 

Ultimately, this ground-breaking system established a stable framework for post-war recovery and laid a foundation for the modern globalised economy. Its disintegration, however, displayed a transition from fixed to floating exchange rates, paving the way for interconnected and interdependent global markets present today.