The fields of finance and the economy have been marked throughout history by some important decisions taken by world powers and financial institutions. Understanding the reasons for these events, understanding the nature of their implementation and their persistent impact on global banking systems is part of the development of a competent and knowledgeable financial professional. Although the Bretton Woods conference itself took place for only three weeks, preparations had been underway for several years. The main creators of the Bretton Woods system were the famous British economist John Maynard Keynes and the American chief economist of the US Treasury Harry Dexter White. Keynes` hope was to create a powerful global central bank called the Clearing Union, and a new international reserve currency called Bancor. White`s plan provided for a more modest credit fund and a greater role for the U.S. dollar, instead of creating a new currency. In the end, the adopted plan took ideas of both, which tend more to White`s plan. Meanwhile, to strengthen confidence in the dollar, the United States has separately agreed to tie the dollar to gold at $35 per ounce. At this rate, foreign governments and central banks could exchange dollars for gold. Bretton Woods established a dollar-based payment system, which defined all currencies in terms of dollar, even convertible into gold and above all “as good as gold” for trade. The U.S.
currency was now effectively the world currency, the standard to which every other currency was bound. Most international transactions have been denominated in U.S. dollars as key currencies around the world. The agreement also facilitated the creation of very important financial structures: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now known as the World Bank. A fund is made available to the IMF, consisting of contributions from member countries in gold and their own currencies. The initial quotas totaled $8.8 billion. In the event of IMF membership, members are given “quotas” that reflect their relative economic power – and which, as a kind of credit contribution, are obliged to pay a “subscription” equal to an amount equivalent to the quota. You pay the subscription as 25% convertible into gold or convertible currency into gold (in actual terms the dollar which, at the time of creation, was the only currency still directly convertible for central banks) and 75% in their own currency. Despite its name, the World Bank has not been (and is) not the central bank of the world. At the time of the Bretton Woods agreement, the World Bank was created to lend to European countries devastated by the Second World War. The World Bank`s focus has shifted to lending to economic development projects in emerging countries. The Bretton Woods Agreement is one of those turning points in the development of modern financial systems, which built the dollar as the benchmark currency for world trade after World War II.
While the Bretton Woods system was demanting during the Nixon administration, the financial institutions created by the Agreement – the International Monetary Fund and the World Bank – remain part of the finances of the 21st century. There is no provision in the agreement for the establishment of international reserves. It expected that a new gold production would suffice. In the event of a structural imbalance, it expected national solutions, such as adjusting monetary value or improving a country`s competitive position by other means. However, the IMF had few resources to promote such national solutions. The security of money by the gold standard began to become a serious problem in the late 1960s. In 1971, the problem was so serious that U.S. President Richard Nixon announced that the possibility of converting the dollar to gold was “temporarily” suspended. The stage was inevitably the last straw for the system and the agreement that sketched it.