1. Historical Context
As World War II drew to a close in 1944, Allied countries needed to rebuild the conflict-ravaged global economy and avoid the destructive competitive devaluations that aggravated the Great Depression of the 1930s.
2. The Breakdown Event
Delegates from 44 allied nations met at the Mount Washington Hotel in Bretton Woods. An intense intellectual debate broke out between the famous British economist John Maynard Keynes, who proposed a neutral international reserve currency called 'Bancor', and Harry Dexter White, representative of the USA, who pushed to place the dollar as the central axis of the financial system. With the US holding the largest gold reserves in the world at the time, the US position prevailed. A system of fixed exchange rates was established where all global currencies were pegged to the US dollar, and the dollar was in turn backed by physical gold at a rate of $35 per ounce.
3. Global Economic Impact
This conference gave birth to the International Monetary Fund (IMF) and the World Bank. Bretton Woods institutionalized the global hegemony of the United States and made the dollar the undisputed world reserve currency for the trade of raw materials and hydrocarbons.
Key Financial Lesson (Psychology of Money)
The global monetary architecture always reflects the distribution of geopolitical and military power. The rules of international money are written by the winners of major geopolitical conflicts to consolidate their economic hegemony.
4. Practical Case or Real Life Example
In 1971, faced with a shortage of gold to cover the dollars printed to finance the Vietnam War, President Richard Nixon unilaterally suspended the convertibility of the dollar into gold (the 'Nixon Shock'), giving way to the current fiat money system.