A monetary system is a system by which a government provides money in a country's economy. Modern monetary systems usually consist of the national treasury , the mint , the central banks and commercial banks .
106-632: The Bretton Woods system of monetary management established the rules for commercial relations among the United States , Canada , Western European countries, and Australia and other countries, a total of 44 countries after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars to within 1% of fixed parity rates, with
212-456: A US dollar tied to gold—a system that relied on a regulated market economy with tight controls on the values of currencies. Flows of speculative international finance were curtailed by shunting them through and limiting them via central banks. This meant that international flows of investment went into foreign direct investment (FDI)—i.e., construction of factories overseas, rather than international currency manipulation or bond markets. Although
318-467: A precious metal , such as gold. This is known as the gold standard . A silver standard was widespread after the fall of the Byzantine Empire , and lasted until 1935, when it was abandoned by China and Hong Kong. A 20th-century variation was bimetallism , also called the "double standard", under which both gold and silver were legal tender . The alternative to a commodity money system
424-624: A "run on the Reichsmark " and a run on the banks viewed as "two independent causes". Schnabel thus similarly de-emphasized the centrality of foreign-currency aspects, and noted the absence of currency mismatch in large banks' balance sheets despite high shares of foreign deposits. Schnabel also argued that the large Berlin-based universal banks were made to feel too big to fail by the Reichsbank's liquidity policy stance, contributing to moral hazard and uncontrolled balance sheet expansion in
530-524: A 69-percent stake in Commerzbank (into which Barmer Bankverein [ de ] was similarly merged), and a 35-percent stake in Deutsche Bank und Disconto-Gesellschaft . By contrast, the non-branch banks, Berliner Handels-Gesellschaft and Reichs-Kredit-Gesellschaft , neither requested nor received public financial assistance, although the latter was state-owned. The unraveling of
636-631: A competitive market. In times of economic distress, central banks can act as a borrower to prompt the creation of new money as well; during quantitative easing they will buy government bonds and mortgage-backed securities . European banking crisis of 1931 The European banking crisis of 1931 was a major episode of financial instability that peaked with the collapse of several major banks in Austria and Germany , including Creditanstalt on 11 May 1931, Landesbank der Rheinprovinz on 11 July 1931, and Danat-Bank on 13 July 1931. It triggered
742-545: A conference in London on 20-23 July. The general bank holiday was lifted after three weeks on 5 August 1931. The Hoover moratorium, which aimed to protect longer-term exposures by imposing a standstill on short-term repayments, disproportionately impacted British merchant banks involved in trade finance to German counterparts, but also triggered a collapse in the value of German bonds, many of which had been underwritten by American institutions. Political constraints linked to
848-717: A context of increasing competition among banks. In 2014, economists Albrecht Ritschl and Samad Sarferaz found empirical evidence "consistent with the claim of Schnabel (2004) that Germany's 1931 crisis was causally a banking crisis, whereas monetary transmission under the Gold Standard played only a limited role." The long-accepted causal link between the Creditanstalt collapse and the events in Germany has likewise been questioned in more recent historiography. Separately, recent research has demonstrated that France
954-473: A decree established the office of Reichskommissar für das Bankgewerbe ( lit. ' Imperial Commissioner for Banking ' ), for which Chancellor Heinrich Brüning appointed Friedrich Ernst [ de ] . In 1934, this was transformed into the Aufsichtsamt für das Kreditwesen , by new comprehensive banking legislation ( German : Kreditwesengesetz of 5 December 1931). Initially
1060-602: A financial account surplus, and payments balanced. Increasingly, Britain's positive balance of payments required keeping the wealth of Empire nations in British banks. One incentive for, say, South African holders of rand to park their wealth in London and to keep the money in Sterling, was a strongly valued pound sterling. In the 1920s, imports from the US threatened certain parts of the British domestic market for manufactured goods and
1166-547: A financial statement. . On 6 June 1931, the German government announced it would be unable to pay reparations as previously planned, triggering a parliamentary crisis. On 20 June 1931, U.S. President Herbert Hoover announced a one-year "holiday" or moratorium on the payment of political debts, known as the Hoover Moratorium , which brought some relief even though it was initially opposed by France. On 22 June 1931,
SECTION 10
#17327652158481272-569: A general panic as the public felt the Reichsbank was reaching the limits of its liquidity assistance capacity. The government declared a general bank holiday, starting on 14 July 1931. On 15 July 1931, the Reichsbank suspended the convertibility of the Reichsmark, effectively taking Germany out of the gold standard , and imposed capital controls . From 16 July 1931, some banking transactions were again authorized but with severe limits and restrictions, partly loosened on 20 July. Meanwhile,
1378-402: A government may stamp a metal coin with a face, value or mark that indicates its weight or asserts its purity, but the value remains the same even if the coin is melted down. One step away from commodity money is "commodity-backed money", also known as "representative money". Many currencies have consisted of bank-issued notes which have no inherent physical value, but which may be exchanged for
1484-599: A large scale from small and mid-sized banks, for which no deposit guarantee existed, to cash, direct deposits at the Banque de France , and accounts at the de facto state-guaranteed savings banks . Several joint-stock and private banks failed as a consequence, such as Banque Oustric in October 1930 and Banque Adam [ fr ] in November 1930, and a severe credit crunch ensued. In Austria, Creditanstalt
1590-555: A lesser extent Romania , and much less so Czechoslovakia . The large Berlin-based branch banks also made a large number of acquisitions of smaller competitors, a trend which contributed in the rapid increase of their market share from 12.6 to 23.3 percent of total assets between 1913 and 1928, and culminated in 1929 with two large-scale transactions, Commerzbank 's acquisition of Mitteldeutsche Creditbank [ de ] and Deutsche Bank 's acquisition of Disconto-Gesellschaft . The long-standing practice of self-regulation in
1696-460: A major contributor to the global economic depression of the early 1930s. In the early decades following the crisis, it was often described as a somewhat serendipitous crisis of confidence, in which the key mechanism was the withdrawal of short-term foreign deposits or " hot money ". Joseph Schumpeter described the crisis as triggered by "vicissitudes [that] would have to be explained primarily in terms of accidents and external factors". This narrative
1802-586: A major shareholder through the Anglo-International Bank , the former Anglo-Austrian Bank which had sold its Austrian operations to Creditanstalt in 1926 in an all-shares transaction. In 1930 and early 1931, the project of an Austro-German Customs Union generated additional friction, restricting the willingness of Austria's international creditors and especially France to support the country in moments of turmoil. On 11 May 1931, Creditanstalt publicly announced that it would not be able to publish
1908-474: A portion of their total deposits banks (Large banks in the United States, for example, have a 10% reserve requirement . ) Central banks set interest rates on funds available for commercial banks to borrow short-term from the central bank to meet their reserve requirement. This limits the amount of money the commercial banks are willing to lend, and thus create, as it affects the profitability of lending in
2014-403: A process that dragged on in a halting and uncoordinated manner until France and the other Gold Bloc countries finally left gold in 1936. — Great Depression , B. Bernanke In 1944 at Bretton Woods, as a result of the collective conventional wisdom of the time, representatives from all the leading allied nations collectively favored a regulated system of fixed exchange rates, indirectly disciplined by
2120-600: A repetition of this process of competitive devaluations was desired, but in a way that would not force debtor nations to contract their industrial bases by keeping interest rates at a level high enough to attract foreign bank deposits. John Maynard Keynes , wary of repeating the Great Depression , was behind Britain's proposal that surplus nations be forced by a "use-it-or-lose-it" mechanism, to either import from debtor nations, build factories in debtor nations or donate to debtor nations. The U.S. opposed Keynes' plan, and
2226-475: A senior official at the U.S. Treasury, Harry Dexter White , rejected Keynes' proposals, in favor of an International Monetary Fund with enough resources to counteract destabilizing flows of speculative finance. However, unlike the modern IMF, White's proposed fund would have counteracted dangerous speculative flows automatically, with no political strings attached—i.e., no IMF conditionality . Economic historian Brad Delong writes that on almost every point where he
SECTION 20
#17327652158482332-726: A ship in the North Atlantic, was the most notable precursor to the Bretton Woods Conference. Like Woodrow Wilson before him, whose " Fourteen Points " had outlined U.S. aims in the aftermath of the First World War , Roosevelt set forth a range of ambitious goals for the postwar world even before the U.S. had entered the Second World War. The Atlantic Charter affirmed the right of all nations to equal access to trade and raw materials. Moreover,
2438-415: A strong European market for U.S. goods and services, most policymakers believed, the U.S. economy would be unable to sustain the prosperity it had achieved during the war. In addition, U.S. unions had only grudgingly accepted government-imposed restraints on their demands during the war, but they were willing to wait no longer, particularly as inflation cut into the existing wage scales with painful force (by
2544-568: A sufficient mechanism to ensure the soundness of the banking sector, not least as German banks published balance sheet data on a monthly basis, and also confidentially reported foreign debt data to the Reichsbank . By contrast, the Bank of France only gathered balance sheet information from the largest four commercial banks ( Comptoir National d'Escompte de Paris , Crédit Industriel et Commercial , Crédit Lyonnais , and Société Générale ) before
2650-406: A supervisory regime was first introduced in 1941. In June 1931, Reichsbank President Hans Luther assured his American counterpart George L. Harrison that "periodical publication of German banks' statement provide safe means for judging their situation which is safe despite large foreign withdrawals." In spite of the apparent abundance of data, however, German public authorities' knowledge about
2756-722: A system of rules, institutions, and procedures to regulate the international monetary system , these accords established the IMF and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group . The United States, which controlled two-thirds of the world's gold, insisted that the Bretton Woods system rest on both gold and the US dollar . Soviet representatives attended
2862-402: A system wherein exchange rate stability was a prime goal. Yet, in an era of more activist economic policy, governments did not seriously consider permanently fixed rates on the model of the classical gold standard of the 19th century. Gold production was not even sufficient to meet the demands of growing international trade and investment. Further, a sizable share of the world's known gold reserves
2968-470: A worldwide monetary expansion despite gold standard constraints, but disputes over World War I reparations and war debts, and the insularity and inexperience of the Federal Reserve , among other factors, prevented this outcome. As a result, individual countries were able to escape the deflationary vortex only by unilaterally abandoning the gold standard and re-establishing domestic monetary stability,
3074-532: Is fiat money which is defined by a central bank and government law as legal tender even if it has no intrinsic value. Originally fiat money was paper currency or base metal coinage, but in modern economies it mainly exists as data such as bank balances and records of credit or debit card purchases, and the fraction that exists as notes and coins is relatively small. Money is mostly created by banks when they loan to customers. Put simply, banks lending currency to customers, subject to each bank's regulatory limit ,
3180-529: Is the principal mode of new deposit creation. The central bank does not directly fix the amount of currency in circulation. Money creation is primarily accomploshed via lending by commercial banks . Borrowers who receive the money created by new lending in turn affect the stock of money, as paying off debts removes money circulating. Although commercial banks create circulating money via lending, they cannot do so freely without limit. Commercial banks are required to maintain an on-hand reserve of funds equaling
3286-468: The Grossbanken , the four largest ( Deutsche Bank , Danat-Bank , Dresdner Bank , and Commerzbank ) maintained extensive branch networks, while others (e.g. Berliner Handels-Gesellschaft and Reichs-Kredit-Gesellschaft ) had no branch network and were comparatively more active lending to other banks than to industry. There was no simple correlation between bank type and risk profiles; for example,
Bretton Woods system - Misplaced Pages Continue
3392-577: The 1931 banking crisis . Intransigent insistence by creditor nations for the repayment of Allied war debts and reparations, combined with an inclination to isolationism , led to a breakdown of the international financial system and a worldwide economic depression. The beggar thy neighbor policies that emerged as the crisis continued saw some trading nations using currency devaluations in an attempt to increase their competitiveness (i.e. raise exports and lower imports), though recent research suggests this de facto inflationary policy probably offset some of
3498-483: The Deutsche Golddiskontbank (a Reichsbank subsidiary, 10 percent), Deutsche Bank und Disconto-Gesellschaft (10 percent), Deutsche Zentralgenossenschaftskasse , Bank für Industrie-Obligationen , Deutsche Rentenbank-Kreditanstalt , Prussian State Bank , and Dresdner Bank (6 percent each), and other Berlin-based joint-stock banks (10 percent). The Akzeptbank's early activity was mainly focused on
3604-559: The Great Depression , which created a popular demand for governmental intervention in the economy, and out of the theoretical contributions of the Keynesian school of economics, which asserted the need for governmental intervention to counter market imperfections. However, increased government intervention in domestic economy brought with it isolationist sentiment that had a profoundly negative effect on international economics. The priority of national goals, independent national action in
3710-911: The Landesbank der Rheinprovinz had expanded its lending to municipalities without proper risk management, whereas its peer the Mitteldeutsche Landesbank had behaved more prudently. Harbingers of crisis started to accumulate at the end of the decade. German stock prices started declining with the "Black Friday" of May 1927, and GDP growth slowed substantially in 1928 and turned negative in 1929. Industrial production started to decline from mid-1929. A cyclical credit crunch started in May 1930 and resulted in German money supply, defined as currency and bank deposits, contracting by 17 percent from June 1930 to June 1931. German policymakers displayed excessive confidence in market discipline as
3816-540: The United States Secretary of State from 1933 to 1944. Hull believed that the fundamental causes of the two world wars lay in economic discrimination and trade warfare. Hull argued [U]nhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war … if we could get a freer flow of trade…freer in the sense of fewer discriminations and obstructions…so that one country would not be deadly jealous of another and
3922-479: The gold standard continued after Germany's exit in mid-July, immediately followed by Hungary . The UK abandoned gold parity on 19 September 1931, and Austria did so on 8 October 1931. France remained in the gold standard until 1936, with severe deflationary effect. Significant banks collapsed in other countries as well. In Hungary, in addition to high foreign indebtedness, several banks had significant exposures to Austrian banks and were thus directly impacted by
4028-872: The reparations negotiations; July 1930, due to governmental crisis; and September 1930, due to the Nazi Party 's strong showing in the Reichstag election . These episodes, however, were kept under control by the Reichsbank. Similarly, the collapse in August 1929 of insurer Frankfurter Allgemeine Versicherungs-AG (FAVAG) due to fraudulent management, known in Germany as the FAVAG scandal [ de ] , turned out to be an idiosyncratic event and perceived as such by depositors. In France, an early wave of deposit flight occurred from October 1930 to February 1931, during which retail savers transferred their holdings on
4134-496: The 1930s, the British created their own economic bloc to shut out U.S. goods. Churchill did not believe that he could surrender that protection after the war, so he watered down the Atlantic Charter's "free access" clause before agreeing to it. Yet U.S. officials were determined to open their access to the British empire. The combined value of British and U.S. trade was well over half of all the world's trade in goods. For
4240-399: The 1930s. Thus, negotiators at Bretton Woods also agreed that there was a need for an institutional forum for international cooperation on monetary matters. Already in 1944, the British economist John Maynard Keynes emphasized "the importance of rule-based regimes to stabilize business expectations"—something he accepted in the Bretton Woods system of fixed exchange rates. Currency troubles in
4346-504: The 19th and early 20th centuries gold played a key role in international monetary transactions. The gold standard was used to back currencies; the international value of currency was determined by its fixed relationship to gold; gold was used to settle international accounts. The gold standard maintained fixed exchange rates that were seen as desirable because they reduced the risk when trading with other countries. Imbalances in international trade were theoretically rectified automatically by
Bretton Woods system - Misplaced Pages Continue
4452-607: The Austrian banking turmoil. In the Kingdom of Yugoslavia , a number of banks became insolvent and were liquidated, acquired or nationalized. In France, a new wave of deposit withdrawals from small and mid-sized banks occurred between July 1931 and January 1932, albeit on a slightly smaller scale than the previous one in late 1930, , and triggered the collapse of a significant bank, the Banque Nationale de Crédit which
4558-430: The Bretton Woods conference, fresh from what they perceived as a disastrous experience with floating rates in the 1930s, concluded that major monetary fluctuations could stall the free flow of trade. The new economic system required an accepted vehicle for investment, trade, and payments. Unlike national economies, however, the international economy lacks a central government that can issue currency and manage its use. In
4664-619: The German banking sector measured by total assets; large Berlin-based universal banks ( German : Grossbanken ), another 20 percent; cooperative banks , about 10 percent; private banks , about 6 percent; the rest being mainly provincial (e.g. Bayerische Vereinsbank and Hypo-Bank in Bavaria , Barmer Bankverein [ de ] in the Ruhr , Allgemeine Deutsche Credit-Anstalt [ de ] in Saxony ) and other joint-stock banks. Of
4770-564: The German banking sector, with the exception of local savings banks ( German : Sparkassen ), implied that this increase in leverage was not kept in check by public supervision. Even at the time, self-regulation was not obviously effective to keep risks in check: for example, Deutsche Bank was impacted by a series of scandals related to poor credit risk controls in the mid-1920s. By the late 1920s, public banks ( Staatsbanken , Landesbanken , Girozentralen , Kommunalbanken , and Sparkassen ) represented more than one-third of
4876-599: The German debt problem would only be settled in 1953 with the London Agreement on German External Debts . At its low point in 1932, German economic output had declined 39 percent from its level in 1929. The large joint-stock banks were fully reprivatized in 1937. Capital controls were kept for an extended time period. The crisis had major consequences for the development of prudential banking supervision in Germany, which had been essentially nonexistent (except for savings banks) before 1931. On 19 September 1931,
4982-660: The Reichsbank introduced restrictions to its domestic bill discounts, with the aim disincentivizing transfers of money abroad by German firms - but this had catastrophic effect by creating financial squeezes even for essentially sound firms. From mid-June, concerns arose around a loan of 48 million Reichsmark that Danat-Bank had granted to struggling textile company Nordwolle , corresponding to 40 percent of its equity. On 4 July 1931, Danat-Bank ran out of discountable bills. The Reichsbank had to discontinue its liquidity assistance on 10 July 1931, and on 13 July 1931 Danat publicly disclosed its inability to meet commitments, triggering
5088-404: The Reichsbank sponsored several mechanisms to facilitate the revival of interbank transactions. On 18 July 1931, it established a temporary Transfer Association ( German : Überweisungsverband ) to allow the system's core banks to transact among themselves without being bound by the general restrictions on payments: this started with 11 institutions, and expanded to 44 by 4 August 1931, after which
5194-489: The Reichsbank was associated with the supervisory process through a newly established Supervisory Office, but that role was transferred to the Economics Minister German : Reichswirtschaftsminister upon a legislative revision in 1939, and the Aufsichtsamt für das Kreditwesen itself was dissolved in 1944 with its duties taken over by the economics ministry. After World War II , banking supervision
5300-515: The Treasuries of the U.S. and the UK. U.S. representatives studied with their British counterparts the reconstitution of what had been lacking between the two world wars: a system of international payments that would let nations trade without fear of sudden currency depreciation or wild exchange rate fluctuations—ailments that had nearly paralyzed world capitalism during the Great Depression . Without
5406-451: The U.S. dollar took over the role that gold had played under the gold standard in the international financial system . Meanwhile, to bolster confidence in the dollar, the U.S. agreed separately to link the dollar to gold at the rate of $ 35 per ounce. At this rate, foreign governments and central banks could exchange dollars for gold. Bretton Woods established a system of payments based on the dollar, which defined all currencies in relation to
SECTION 50
#17327652158485512-456: The U.S. to open global markets, it first had to split the British (trade) empire. While Britain had economically dominated the 19th century, U.S. officials intended the second half of the 20th to be under U.S. hegemony . A senior official of the Bank of England commented: One of the reasons Bretton Woods worked was that the U.S. was clearly the most powerful country at the table and so ultimately
5618-589: The United States which were uniquely exposed because of the structuring of German post-WWI reparations. At the Lausanne Conference of July 1932 , an agreement was outlined on a three-year suspension of German reparations, but that was rejected by the U.S. Congress in December 1932, triggering defaults by France and the UK on interallied war debts. Ultimately, losses of U.S. investors into German debt amounted to 13 to 16 percent of U.S. 1931 GDP, and
5724-475: The United States, a fact that contributed to the supremacy of the United States. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system. Member countries could only change their par value by more than 10% with IMF approval, which was contingent on IMF determination that its balance of payments was in a " fundamental disequilibrium ". The formal definition of fundamental disequilibrium
5830-502: The amount of money would act to reduce the inflationary pressure. Supplementing the use of gold in this period was the British pound . Based on the dominant British economy, the pound became a reserve, transaction, and intervention currency. But the pound was not up to the challenge of serving as the primary world currency, given the weakness of the British economy after the Second World War. The architects of Bretton Woods had conceived of
5936-453: The bank holiday restrictions were fully lifted and the Überweisungsverband was disbanded. Then on 28 July 1931, the Akzept- und Garantiebank AG (later known as Akzeptbank ) was set up to make interbank bills acceptable as collateral by the Reichsbank through credit enhancement. Its capital of 200 million Reichsmark was subscribed (albeit at 25 percent) by the government (40 percent),
6042-537: The banking and currency crises of 1931 instigated an international "scramble for gold". Sterilization of gold inflows by surplus countries [the U.S. and France], substitution of gold for foreign exchange reserves, and runs on commercial banks all led to increases in the gold backing of money, and consequently to sharp unintended declines in national money supplies. Monetary contractions in turn were strongly associated with falling prices, output and employment. Effective international cooperation could in principle have permitted
6148-421: The charter called for freedom of the seas (a principal U.S. foreign policy aim since France and Britain had first threatened U.S. shipping in the 1790s), the disarmament of aggressors, and the "establishment of a wider and more permanent system of general security". As the war drew to a close, the Bretton Woods conference was the culmination of some two and a half years of planning for postwar reconstruction by
6254-433: The conference but later declined to ratify the final agreements, charging that the institutions they had created were "branches of Wall Street". These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement. According to Barry Eichengreen, the Bretton Woods system operated successfully due to three factors: "low international capital mobility , tight financial regulation , and
6360-622: The contractionary forces in world price levels (see Eichengreen "How to Prevent a Currency war" ). In the 1920s, international flows of speculative financial capital increased, leading to extremes in balance of payments situations in various European countries and the US. In the 1930s, world markets never broke through the barriers and restrictions on international trade and investment volume – barriers haphazardly constructed, nationally motivated and imposed. The various anarchic and often autarkic protectionist and neo-mercantilist national policies – often mutually inconsistent – that emerged over
6466-563: The controversies over war reparations, implying that the "appearance of prosperity" and visible public investment should be avoided, weighed negatively on key economic sectors such as the automobile market and infrastructure works. Economic historian Peter Temin concludes that Brüning "ruined the German economy — and destroyed German democracy — in the effort to show once and for all that Germany could not pay reparations." It remains debated, however, to which extent an alternative strategy of expansion would have been viable. Harold James notes that
SECTION 60
#17327652158486572-444: The convertibility of their respective currencies into other currencies and to free trade. What emerged was the " pegged rate " currency regime. Members were required to establish a parity of their national currencies in terms of the reserve currency (a "peg") and to maintain exchange rates within plus or minus 1% of parity (a "band") by intervening in their foreign exchange markets (that is, buying or selling foreign money). In theory,
6678-402: The developed states. Employment, stability, and growth were now important subjects of public policy. In turn, the role of government in the national economy had become associated with the assumption by the state of the responsibility for assuring its citizens of a degree of economic well-being. The system of economic protection for at-risk citizens sometimes called the welfare state grew out of
6784-539: The dollar convertible to gold bullion for foreign governments and central banks at US$ 35 per troy ounce of fine gold (or 0.88867 gram fine gold per dollar). It also envisioned greater cooperation among countries in order to prevent future competitive devaluations , and thus established the International Monetary Fund (IMF) to monitor exchange rates and lend reserve currencies to nations with balance of payments deficits. Preparing to rebuild
6890-438: The dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold. The rules of Bretton Woods, set forth in the articles of agreement of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), provided for a system of fixed exchange rates. The rules further sought to encourage an open system by committing members to
6996-514: The dollar, itself convertible into gold, and above all, "as good as gold" for trade. U.S. currency was now effectively the world currency, the standard to which every other currency was pegged. The U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Additionally, all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into
7102-481: The dominant economic and financial position of the United States and the dollar ." On 15 August 1971, the United States ended the convertibility of the US dollar to gold , effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency . Shortly thereafter, many fixed currencies (such as the pound sterling ) also became free-floating, and the subsequent era has been characterized by floating exchange rates . The end of Bretton Woods
7208-461: The end of 1945, there had already been major strikes in the automobile, electrical, and steel industries). In early 1945, Bernard Baruch described the spirit of Bretton Woods as: if we can "stop subsidization of labor and sweated competition in the export markets", as well as prevent rebuilding of war machines, "oh boy, oh boy, what long term prosperity we will have." The United States could therefore use its position of influence to reopen and control
7314-614: The exchange rate and necessitate costly market interventions that risked depleting a country's foreign exchange reserves). The Bretton Woods Conference led to the establishment of the IMF and the IBRD (now the World Bank ), which remain powerful forces in the world economy as of the 2020s. A major point of common ground at the Conference was the goal to avoid a recurrence of the closed markets and economic warfare that had characterized
7420-481: The exit of Germany from the gold standard on 15 July 1931, followed by the UK on 19 September 1931, and extensive losses in the U.S. financial system that contributed to the Great Depression . The causes of the crisis included a complex mix of financial, fiscal, macroeconomic, political and international imbalances that have nurtured a lively debate of historiography . Germany's banking sector shrank dramatically from 1913 to 1924 but expanded rapidly again in
7526-490: The first half of the decade worked inconsistently and self-defeatingly to promote national import substitution , increase national exports, divert foreign investment and trade flows, and even prevent certain categories of cross-border trade and investment outright. Global central bankers attempted to manage the situation by meeting with each other, but their understanding of the situation as well as difficulties in communicating internationally, hindered their abilities. The lesson
7632-667: The funds to support allies such as France during the War; the Allies could not pay back Britain, so Britain could not pay back the U.S. The solution at Versailles for the French, British, and Americans seemed to entail ultimately charging Germany for the debts. If the demands on Germany were unrealistic, then it was unrealistic for France to pay back Britain, and for Britain to pay back the US. Thus, many "assets" on bank balance sheets internationally were actually unrecoverable loans, which culminated in
7738-416: The gold standard. A country with a deficit would have depleted gold reserves and would thus have to reduce its money supply . The resulting fall in demand would reduce imports and the lowering of prices would boost exports; thus, the deficit would be rectified. Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend. This decrease in
7844-569: The importation of half of the nation's food and nearly all its raw materials except coal. The British had no choice but to ask for aid. Not until the United States signed an agreement on 6 December 1945 to grant Britain aid of $ 4.4 billion did the British Parliament ratify the Bretton Woods Agreements (which occurred later in December 1945). Free trade relied on the free convertibility of currencies. Negotiators at
7950-722: The international economic system while World War II was still being fought, 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, also known as the Bretton Woods Conference . The delegates deliberated from 1 to 22 July 1944, and signed the Bretton Woods agreement on its final day. Setting up
8056-478: The interwar period had yielded several valuable lessons. The experience of World War I was fresh in the minds of public officials. The planners at Bretton Woods hoped to avoid a repetition of the Treaty of Versailles after World War I, which had created enough economic and political tension to lead to WWII . After World War I, Britain owed the U.S. substantial sums, which Britain could not repay because it had used
8162-406: The interwar period, and the failure to perceive that those national goals could not be realized without some form of international collaboration—all resulted in "beggar-thy-neighbor" policies such as high tariffs , competitive devaluations that contributed to the breakdown of the gold-based international monetary system, domestic political instability, and international war. The lesson learned was, as
8268-424: The interwar years, it was felt, had been greatly exacerbated by the absence of any established procedure or machinery for intergovernmental consultation. Monetary system A commodity money system is a type of monetary system in which a commodity such as gold or seashells is made the unit of value and physically used as money. The money retains its value because of its physical properties. In some cases,
8374-597: The largest problem banks, namely Danat-Bank, Dresdner Bank, Landesbank der Rheinprovinz as well as Bremen 's Schröder-Bank [ de ] , and lent to the Deutsche Girozentrale to support the network of savings banks . The Reichsbank's subsidiary Deutsche Golddiskontbank acquired equity in the ailing joint-stock banks, and consequently became the owner of a 91-percent stake in Dresdner Bank (in which Danat-Bank had been forcibly merged),
8480-536: The later 1920s, with fivefold growth of aggregate bank assets between 1924 and 1930. The banks were generally undercapitalized and overstretched following rapid balance sheet expansion in the late 1920s, with a preponderance of short-term debt, much of it foreign. Germany was the world's largest capital importer between 1924 and 1929, with U.S. banks lending massively to German counterparts and U.S. investors buying German bonds in large volumes. By mid-1928, 42 percent of deposits at joint-stock banks were foreign, and
8586-454: The legacy of the hyperinflation episode of the early 1920s implied that public borrowing and spending could not be an appropriate strategy for crisis resolution, in Germany as in other Central European Countries including Austria, Hungary, and Poland. The financial crisis sharply exacerbated the economic downturn that had started before mid-1931. The German turmoil of July 1931 generated powerful spillover impact on other countries, particularly
8692-416: The living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace. The developed countries also agreed that the liberal international economic system required governmental intervention. In the aftermath of the Great Depression , public management of the economy had emerged as a primary activity of governments in
8798-469: The more developed market economies agreed with the U.S. vision of post-war international economic management, which intended to create and maintain an effective international monetary system and foster the reduction of barriers to trade and capital flows. In a sense, the new international monetary system was a return to a system similar to the pre-war gold standard, only using U.S. dollars as the world's new reserve currency until international trade reallocated
8904-400: The national experts disagreed to some degree on the specific implementation of this system, all agreed on the need for tight controls. Also based on experience of the inter-war years, U.S. planners developed a concept of economic security—that a liberal international economic system would enhance the possibilities of postwar peace. One of those who saw such a security link was Cordell Hull ,
9010-402: The past this problem had been solved through the gold standard , but the architects of Bretton Woods did not consider this option feasible for the postwar political economy. Instead, they set up a system of fixed exchange rates managed by a series of newly created international institutions using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency . In
9116-408: The principal architect of the Bretton Woods system New Dealer Harry Dexter White put it: the absence of a high degree of economic collaboration among the leading nations will … inevitably result in economic warfare that will be but the prelude and instigator of military warfare on an even vaster scale. To ensure economic stability and political peace, states agreed to cooperate to closely regulate
9222-399: The production of their currencies to maintain fixed exchange rates between countries with the aim of more easily facilitating international trade. This was the foundation of the U.S. vision of postwar world free trade , which also involved lowering tariffs and, among other things, maintaining a balance of trade via fixed exchange rates that would be favorable to the capitalist system. Thus,
9328-463: The reserve currency would be the bancor (a World Currency Unit that was never implemented), proposed by John Maynard Keynes; however, the United States objected, and their request was granted, making the "reserve currency" the U.S. dollar. This meant that other countries would peg their currencies to the U.S. dollar, and—once convertibility was restored—would buy and sell U.S. dollars to keep market exchange rates within plus or minus 1% of parity. Thus,
9434-438: The rules of the world economy, so as to give unhindered access to all nations' markets and materials. United States allies—economically exhausted by the war—needed U.S. assistance to rebuild their domestic production and to finance their international trade; indeed, they needed it to survive. Before the war, the French and the British realized that they could no longer compete with U.S. industries in an open marketplace . During
9540-596: The share was 18 percent of all deposits in the German banking sector in 1929. This unusual feature of the German financial system was a direct legacy of the hyperinflation of 1921-1923 , which durably impaired the role of capital markets and made the country abnormally dependent on short-term foreign lending. Many German companies routinely parked their money in foreign subsidiaries that in turn lent to their German parent. Similar patterns could be observed in other Central European countries that had suffered from hyperinflation, particularly Austria , Hungary , and Poland , to
9646-575: The true state of banks' financial condition was systematically deficient. Conversely, the issue of foreign lending was heavily politicized in Germany and its importance correspondingly overestimated, not least because much of the "foreign capital" invested in Germany was actually round-tripping by German investors e.g. via the Netherlands and Switzerland for tax avoidance . Incipient financial instability occurred in Spring 1929, due to frictions in
9752-542: The way out of the trade deficit was to devalue the currency. But Britain could not devalue, or the Empire surplus would leave its banking system. Nazi Germany also worked with a bloc of controlled nations by 1940. Germany forced trading partners with a surplus to spend that surplus importing products from Germany. Thus, Britain survived by keeping Sterling nation surpluses in its banking system, and Germany survived by forcing trading partners to purchase its own products. The U.S.
9858-426: The world depression was a structurally flawed and poorly managed international gold standard. ... For a variety of reasons, including a desire of the Federal Reserve to curb the U.S. stock market boom, monetary policy in several major countries turned contractionary in the late 1920s—a contraction that was transmitted worldwide by the gold standard. What was initially a mild deflationary process began to snowball when
9964-627: The world's gold supply. Thus, the new system would be devoid (initially) of governments meddling with their currency supply as they had during the years of economic turmoil preceding WWII. Instead, governments would closely police the production of their currencies and ensure that they would not artificially manipulate their price levels. If anything, Bretton Woods was a return to a time devoid of increased governmental intervention in economies and currency systems. The Atlantic Charter , drafted during U.S. President Franklin D. Roosevelt 's August 1941 meeting with British Prime Minister Winston Churchill on
10070-436: Was able to impose its will on the others, including an often-dismayed Britain. At the time, one senior official at the Bank of England described the deal reached at Bretton Woods as "the greatest blow to Britain next to the war", largely because it underlined the way financial power had moved from the UK to the US. A devastated Britain had little choice. Two world wars had destroyed the country's principal industries that paid for
10176-616: Was concerned that a sudden drop-off in war spending might return the nation to unemployment levels of the 1930s, and so wanted Sterling nations and everyone in Europe to be able to import from the US, hence the U.S. supported free trade and international convertibility of currencies into gold or dollars. When many of the same experts who observed the 1930s became the architects of a new, unified, post-war system at Bretton Woods, their guiding principles became "no more beggar thy neighbor" and "control flows of speculative financial capital". Preventing
10282-735: Was devolved in West Germany to the Länder , until a national banking supervisor was re-established in 1962 as the Bundesaufsichtsamt für das Kreditwesen [ de ] , which again cooperated closely with the Deutsche Bundesbank . Another decree on 6 October 1931 granted legal personality to the Sparkassen and reinforced their public supervision. The financial crisis of 1931 has long been identified as
10388-557: Was echoed in reference works such as those by Karl Erich Born [ de ] or Gerd Hardach [ de ] , and more recently by Thomas Ferguson and Peter Temin . By contrast, historian Harold James has argued in 1984 that a domestic crisis of public finances was at the core of the German sequence, noting that domestic deposit flight predated the exodus of foreign investors in Germany by several critical weeks. Isabel Schnabel in 2004 identified it as twin crises in currency and banking markets respectively, namely
10494-463: Was formally ratified by the Jamaica Accords in 1976. There was a high level of agreement among the powerful nations that failure to coordinate exchange rates during the interwar period had exacerbated political tensions. This facilitated the decisions reached by the Bretton Woods Conference . Furthermore, all the participating governments at Bretton Woods agreed that the monetary chaos of
10600-489: Was located in the Soviet Union , which would later emerge as a Cold War rival to the United States and Western Europe. The only currency strong enough to meet the rising demands for international currency transactions was the U.S. dollar. The strength of the U.S. economy, the fixed relationship of the dollar to gold ($ 35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made
10706-535: Was never determined, leading to uncertainty of approvals and attempts to repeatedly devalue by less than 10% instead. Any country that changed without approval or after being denied approval was denied access to the IMF. Maintaining the fixed exchange system required countries to maintain sufficient foreign exchange reserves to intervene in markets and prevent fluctuations away from the pegged rate. This also meant that international movement of capital could not be too large (because that might lead to large fluctuations in
10812-411: Was not spared by the banking crisis, against a long-established view that the country had been spared. That view was distorted by the lack of accessible data beyond the country's four largest banks which were comparatively unscathed, and could only be corrected with the rediscovery of a unique collection of balance-sheet data of most French banks gathered by Crédit Lyonnais between 1901 and 1939, known as
10918-559: Was overruled by the Americans, Keynes was later proved correct by events. Today these key 1930s events look different to scholars of the era (see the work of Barry Eichengreen Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 and How to Prevent a Currency War ); in particular, devaluations today are viewed with more nuance. Ben Bernanke 's opinion on the subject follows: ... [T]he proximate cause of
11024-450: Was restructured in early 1932 as the Banque Nationale pour le Commerce et l'Industrie . In Spain, Banco de Cataluña [ es ] failed on 7 July 1931 together with two subsidiaries, Banco de Reus de Descuentos y Préstamos and Banco de Tortosa [ es ] , causing a credit contraction in the whole of Catalonia . Germany made "standstill agreements" with major creditor countries in August and September, following
11130-542: Was that simply having responsible, hard-working central bankers was not enough. Britain in the 1930s had an exclusionary trade bloc with nations of the British Empire known as the Sterling Area . If Britain imported more than it exported to such nations, recipients of pounds sterling within these nations tended to put them into London banks. This meant that though Britain was running a trade deficit, it had
11236-468: Was widely viewed as a pillar of financial stability given its history of market dominance and prudent management led by the Rothschild family . Its traditional strength, however, ironically became a vulnerability as the government leaned on it to absorb struggling banks, including Allgemeine Bodencreditanstalt and Union-Bank. Its governance was also disrupted by the emergence of the Bank of England as
#847152