Business strategy behind Bretton Woods Agreement

America proposed a new financial system that would save the globe from financial chaos caused by the World War II and to bring back stability after the oncoming cessation of hostilities.  The selected occasion was Bretton Woods in New Hampshire. The year was 1944. Here are the beans:

Representatives of more than 40 countries met in Bretton Woods during July 1 to 22, 1944 to hammer out an agreement to ensure stability in finance and development in the post war period. Deliberations finally brought out an understanding where gold was the basis of the US Dollar and participating countries must ensure that their currencies are pegged to US Dollar. In addition the agreement proper, two new institutions were launched: The International Monetary Fund (IMF) and the World Bank.

This agreement was initialled on conclusion of the parley. There were two naysayers. The Soviet Union which agreed previously failed to ratify it stating that the two institutions created by this process are branches of the Wall Street of New York. Another party that expressed discontent was France although it finally agreed to get along. Surprisingly, Great Britain threw her total support behind this covenant. Both the Soviet and France read through the script and detected American business strategy. Let me highlights the limbs of this business strategy:

1. Firstly, it was intended to break the power of both Pounds Sterling and the French Franc. America at the close of the WWII was in deep trouble as regards to her domestic economy. In fact US entered the war not to help the Allies but to shape her domestic compulsions to become a superpower in line with what Great Britain has done previously.  British colonies are large and widespread where the demand for Sterling was strong. So was in the case of Franc whose use in Francophone Africa and Islands in faraway Pacific relying on the Franc for financial transactions.

2. Promoting US Dollars and replacing slowly and gradually Sterling as the world’s trade and reserve currency was the primary goal. In order to achieve this ambitious task US Dollar need to be dressed up and sold to the global market as a strong medium of exchange and store of value. The credibility factor remained that Dollar can be converted anytime to gold on the formula of 35 US Dollars to a Troy Ounce.

3. Both the IMF & World Bank would deal in US Dollars for accepting deposits, lending and to hold reserves within these institutions humorously referred to as ‘two sisters of Bretton Wood’.

4. America would begin a programme where she can import more than her exports, consume more than her production effectively making the global population to subsidize American living at the former’s expense.

For nearly two and half decades this business strategy succeeded bringing enormous investments, wealth and capability into American shores during 1945 till 1970.  Then came 1971 and President Nixon!

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail: cosmicgems@gmail.com

Blog:   Business Strategist