In 1944, the Bretton Woods conference decided that the dollar would replace the British pound as the standard global currency.
By John B. Judis
Economists know the fatal flaw in our international monetary system — but they can’t agree on how to fix it.
John B. Judis is a senior editor at the New Republic and a visiting fellow at the Carnegie Endowment for International Peace.
The past few months have been a crash course in the abstract and obscure instruments and arrangements that have derailed the world’s economy. From mortgage-backed securities to credit default swaps, the international monetary system is in big trouble.
For decades, the United States has relied on a tortuous financial arrangement that knits together its economy with those of China and Japan. This informal system has allowed Asian countries to run huge export surpluses with the United States, while permitting the United States to run huge budget deficits without having to raise interest rates or taxes, and to run huge trade deficits without abruptly depreciating its currency. Quite a few bankers, international economists, and high officials such as U.S. Federal Reserve Chairman Ben Bernanke think this informal system contributed to today’s financial crisis. Worse, they fear that its breakdown could turn the looming downturn into something resembling the global depression of the 1930s.
The original Bretton Woods system dates from a conference at a New Hampshire resort hotel in July 1944. Leading British and American economists blamed the Great Depression and, to some extent, World War II on the breakup of the international monetary system in the early 1930s, and they were determined to create a more stable arrangement in which the dollar would replace the British pound as the accepted global currency.
The dollar became the accepted medium of international exchange and a universal reserve currency. If countries accumulated more dollars than they could possibly use, they could always exchange them with the United States for gold. But with the United States consistently running a large trade surplus — meaning that countries always needed to have dollars on hand to buy American goods — there was initially little danger of a run on the U.S. gold depository.


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