Bretton Woods – The Birth of the American Empire
The Louisiana Purchase and westward expansion. The 1913 Federal Reserve Act. The Monroe Doctrine. The Ford Model T. The Nixon shock in 1971. The global realignment after World War One and the decline of the British empire. The end of the Cold War. It is no easy task defining when the American Empire began but while its exact origins are debatable, I contest that the meeting at Bretton Woods, New Hampshire, is where the global American Empire was truly born. It was here in the White Mountains of the Granite State that the elites gathered and designed the broader framework for an American dominated international order that is still largely in place today. Global governance, multilateral financial institutions whose jurisdiction goes beyond national borders, fully integrated markets, the central role of the U.S. dollar in trade and finance and American dominance all began to take shape here.
It was here that the broader framework for the American-led global system that we have today was originally conceived. The new global system was built on the strength of the U.S. dollar and was anchored by the industrial, economic and military supremacy of the United States. From this point onwards, America assumed the grand position of guarantors of both the world’s monetary system and of global peace and the American Century was truly underway.
Part One: The Bretton Woods System
The Bretton Woods system is named after a meeting at the Mount Washington Hotel in Bretton Woods, New Hampshire, in 1944. As World War II was drawing to a close, delegates from 44 allied countries negotiated for a month and established the dollar as the global reserve currency and defined a new structure for international trade, finance and governance.[1]
The system advanced several main objectives:
1) establishing the dollar as the world’s reserve currency under a system of fixed exchange rates, anchored by the dollar’s convertibility into gold at a fixed rate;
2) to rebuild the international trading system and create a fully integrated global economy based on free markets and mutual trust;
3) the founding of the Bretton Woods institutions (the World Bank and the International Monetary Fund).
Under the Bretton Woods system, all currencies were pegged to the U.S. dollar and the dollar was tied to gold (see graph below). It was believed that having the dollar anchored to gold provided a safety net as it meant that all signatory nations could exchange their dollars for gold at a fixed rate of $35 per ounce, on demand, if they so desired. The point being that if the dollar was ever in trouble it could be exchanged for gold, the dollar was “as good as gold”. It should also be pointed out that only dollars could be traded for gold. The IMF would oversee the fixed exchange rate system.
Trade imbalances were corrected by gold reserve exchanges between nations or by loans from the IMF. Member states agreed to maintain their currencies within one per cent of their exchange rate, although they were allowed to change the par value of their currencies by 10% should circumstances produce a 'fundamental disequilibrium', anything more than this would require IMF approval. This was a fixed rate system that allowed for some adjustment in the exchange rates should economic problems arise in the future.
The transfer of gold from Europe to the United States during the Second World War both to pay for artillery, munitions, and other military supplies, as well as depositing their gold and other assets in the U.S. for safe-keeping and higher returns, meant that a return to the gold standard for Europe was impossible as it had, quite literally, run out of gold. The U.S. dollar was pyramided on top of the world’s largest gold reserves ever amassed in the modern era and these were the foundations that the Bretton Woods system was built on.[2] From the beginning, this new system created a strong, global demand for U.S. dollars and for debt securities denominated in gold-backed U.S. dollars as well; this gave the United States a huge advantage in being able to monetise its debts; running huge budget deficits to fulfil its broader, geopolitical aims and to build its global empire.
The system meant that, ultimately, the U.S. would be responsible for providing liquidity to the global economy with the Federal Reserve assuming the defacto role as the lender of last resort for the world economy.[3] It also meant that the United States had to guarantee two reserve assets at the same time: the dollar and gold. Both points would prove to be a source of instability further down the line.[4]
The IMF’s original purpose was to maintain the newly formed fixed exchange rate system. The IMF was also tasked with overseeing the stability of the market, to achieve this it would bridge any temporary imbalance of payments that member states might have and correct any currencies that would appreciate and depreciate to levels deemed too large and thus potentially destabilising to the broader system. The IMF ensured that member states did not engage in the kind predatory economic practices that would threaten the stability of the system as a whole. It made sure that countries maintained a healthy balance of payments with one another. Lastly, the IMF oversaw a vast fund made up of capital subscriptions from each nation, the fund comprised of both gold and the member states’ own currencies.[5]
The IBRD (International Bank for Reconstruction and Development) founded at Bretton Woods would eventually become part of the World Bank Group, an umbrella organisation that consists of several subsidiary legal and financial entities, of which the World Bank itself is one. Its stated purpose was to aid the redevelopment of Europe in the aftermath of WWII and foster economic growth through lending.[6] Loans were made to poor countries that could not obtain the necessary finance through commercial lending channels although, crucially, the Bank can demand policy changes and reforms from recipient countries. Membership in the IBRD was conditional on being a member of the IMF and to be a member of the IMF you had to agree to its capital subscriptions.
The General Agreement on Tariffs and Trade (GATT) was first proposed at Bretton Woods but would not be fully ratified until late 1947 in Geneva. The GATT provided the framework for open markets and free trade and eventually became the World Trade Organisation (WTO) in 1995.
I have covered the Bretton Woods Institutions here, separately, and in greater depth.
The Bretton Woods accords advanced the Wilsonian belief that trade would bring peace and prosperity with the United States at the centre. The Atlantic Charter of 1941 expanded on this idea and stated firmly that all nations should collaborate together “securing, for all, improved labour standards, economic advancement and social security.” In truth, Franklin Roosevelt, Henry Morgenthau, Harry Dexter White and others had been advancing a system very similar to the one proposed at Bretton Woods years before the conference took place.[7]
Following the two world wars and the Great Depression, it was widely believed that the newly created Bretton Woods agreement and corresponding institutions would collectively promote both world trade and peaceful cooperation, boosting prosperity and living conditions in the process. Global peace would be achieved through mutually beneficial trade that would increase economic prosperity thus reducing tensions between nations the world over.[8] If governments could not guarantee peace, then the market would.
Central Role of the Dollar
In this series I advance the idea of how the dollar is the foundation of the U.S. empire. These foundations were conceived at Bretton Woods. With the advent of the Bretton Woods system, countries now settled their international accounts exclusively in dollars. As I outlined above, global currencies were pegged to the dollar and the dollar was pegged to gold at a fixed rate. In a sense, all currencies were now defined in relation to the U.S. dollar. Global domination is a union between military power and economic strength and by pegging other currencies to the dollar, the U.S. now had considerable leverage and control over the other nations as well as in world affairs more generally.
Only the United States was given the authority to print the dollar, audits or supervision of the Federal Reserve were strictly prohibited (as they have been until recently). The U.S. pledged to secure every overseas dollar with gold transferred to other national banks on demand. Originally, Washington promised not to print too much money but this was on the old honours system. The terms of the Bretton Woods accords meant that the U.S. had to concede that the dollar would be allowed to accumulate outside U.S. borders and beyond its control.
America had leverage at both ends of the system. Many feared the U.S. devaluing the dollar, thus making their dollar assets less valuable and reducing its purchasing power in the process. Devaluing would negatively impact Europe’s exports to the United States, making them more expensive and slowing down growth in Europe as a result. The threat of devaluation was like a sword of the Damocles hanging over Europe. To allay these concerns, presidential candidate John F. Kennedy was compelled to issue a statement late in 1960 that if elected he would not attempt to devalue the dollar. The fact is that as so much U.S. debt was in the hands of foreign entities the temptation to inflate away their debts and obligations by devaluing was always there (and still is to this day). Conversely, as other currencies became stronger relative to the value of the dollar, they were forced to revalue in order to maintain parity with the U.S. dollar; West Germany revalued twice, in 1961 and 1969, under mounting pressure from Washington, citing fears that the system may be in serious danger if they didn’t. West Germany had little choice. Revaluing meant German exports would be more expensive and thus less competitive and this would obviously have a negative impact on West Germany’s economy as a result; in effect, Bonn was being punished for its success.
I maintain that America’s military, economic, political and cultural dominance is predicated on the dollar’s status as the world reserve currency. The dollar was granted this status at Bretton Woods. Without this, it would not be so powerful and influential on the world stage as it is today. Broadly speaking, the two main components to the dollar system are 1) its position as the world reserve currency, 2) its status as a fiat currency. In this article I will be focusing on the first of these two parts as this relates directly to the outcome of the Bretton Woods conference.
The American empire is intimately tied to the dollar’s position as the world reserve currency, this position, under a fiat system, allows Washington to both assemble a formidable military to pursue its geopolitical goals as well as allowing America to continue its current levels of debt, spending, and consumption. World reserve currency status means that the U.S. dollar is the chosen medium of exchange for goods, services, commodities, trade, travel, investments and central bank holdings the world over. It means that it is the strongest, most liquid currency in circulation. Currently, the U.S. runs enormous deficits and its national debt continues to soar: its total national debt is over $31 trillion, its debt to GDP ratio stands at an eye-watering 124%, while its trade deficit for 2021 was $859 billion, but these structural imbalances are sustainable if the dollar system continues and the U.S. dollar remains the world reserve currency.
The dollar system and the dollar’s position as the world reserve currency confers numerous advantages and privileges to the United States that other countries simply do not have. Ultimately, this system allows the U.S. to maintain all these deficits and spending because demand for the dollar is permanently high and the interest rates it pays on its debts are almost permanently low as a result. The steadily declining interest rate on a 10-year U.S. treasury bond is evidence of this as, over time, what came to be known as petrodollar recycling pushed down interest rates for the U.S. (see the graph below). Petrodollar recycling is the process by which OPEC nations take a portion of the profits from their oil sales and reinvest them into the market for U.S. debt securities, such as treasuries and bonds (that can be exchanged for dollars later), in perpetuity.
It also needs to be stated that a similar arrangement now takes place with other nations as well, especially China and Japan who hold the largest volume of U.S. debt instruments.
The market for U.S. debt securities is a central component of the dollar system. The system is designed in such a way as to absorb excess dollars in perpetuity and to ensure that demand for the dollar is ever present; and as long as it continues the U.S. can borrow indefinitely as a result.
The network effect of this system is that when countries buy U.S. treasuries and bonds they are subsidising U.S. debt and consumption in the process. The dollar-based system we have ensures that demand for the dollar is ever-present, it is built into the global economic system at virtually every level: countries need dollars in international markets (trade, investments, commodities etc) and for their reserves and to do this they must run a trade surplus indefinitely. This holds true for every country except the United States, who can print the dollar at will, essentially by decree. It is estimated that around $6.6 trillion are traded on the foreign exchange markets daily, with the U.S. dollar being used in 85 percent of all foreign exchange transactions worldwide, whilst the petrodollar agreement (in which oil is priced and traded in dollars only) consolidates demand for the U.S. dollar.[9] The dollar has an important role in determining global commodity prices as it is the benchmark pricing mechanism for most commodities whilst the shadow banking system runs primarily on dollars and is estimated to be worth $52 trillion (several times that of actual goods and services). This is why it is no exaggeration to say that the world runs on dollars because, to all intents and purposes, it does. The network effect of all this means that the volume and frequency with which the dollar is traded makes it the most liquid currency in circulation, it is a self-reinforcing cycle that ensures that the dollar is the most stable currency with the greatest purchasing power as well, meanwhile dollar-denominated assets, government-backed debt securities such as bonds and treasuries, are safe and reliable investments and, as such, the corresponding market for these assets is estimated to be the most liquid and reliable financial market in the world today. Domestically, the U.S. can issue cheap credit with low interest rates attached. Lastly, when there is a global recession or economic downturn, investors buy dollar-denominated assets as these are seen as safe havens for capital, adding further liquidity to the dollar and raising its value. This gives Washington considerable leverage in international affairs and to pursue its broader geopolitical goals, whilst maintaining its current levels of debt, spending and consumption, without having to worry about the crippling effects of hyperinflation and a ruinous devaluation of its currency.
Fundamentally speaking, this means is that the United States can print, borrow, and spend its own currency, the currency whose value only it can determine and that only it can issue freely, for use in international money markets to purchase all the goods, services, commodities, natural resources and raw materials it needs, as well as allowing it to pursue its broader geopolitical goals because of the many structural advantages I have outlined above. Other countries simply cannot do this, they have to operate with restraint and cannot compete with the United States on anything like an even playing field because of the strength and liquidity of the U.S. dollar and also because their currencies are not backed by the infinite demand that the dollar has (a point once famously made by the French finance minister, Valéry Giscard d’Estaing).
Under this system, the United States is not forced to consume and spend less, produce more, be more competitive or run a more even trade deficit as other countries must. And this is all made possible by the fact that the dollar is the world reserve currency, a position it assumed at the Bretton Woods conference, a position it has not vacated since. Fast forward to today and the U.S. dollar is still the world reserve currency. World trade, international finance, and the global economic system all centre around the dollar because of this.
It is worth noting that there was an alternative arrangement to the dollar-based system put forward at the conference. John Maynard Keynes proposed something called the ICU (International Clearing Union) a bank that would print its own currency, called the “bancor”, exchangeable for national currencies at a fixed rate and it could also measure the balance of trade between countries.[10] Keynes proposed that neither gold or national currency would be used in international trade any longer. However, Harry Dexter White, the American representative and a senior U.S. Treasury department official, rejected this proposal outright and said that the U.S. dollar should be used as the system’s reserve currency instead.[11] America had all the leverage and so the ICU would be replaced with the IMF, an institution that reflected the interests of the U.S. more than the ICU did.[12]
Central Role of the United States
At the time of the Bretton Woods meeting, America’s military, industrial and economic supremacy was beyond question. Europe, on the other hand, was burdened by empire, devastated by war, and paralysed by debt. Mainland America was untouched by the events of World War II and it was clearly the most stable of all the allied nations. Additionally, the U.S. had two thirds of the world’s gold reserves at the time (during the war many European nations exchanged their wealth into dollars and gold, depositing it in U.S. banks for safe keeping). As such, the United States assumed the role of the primary creditor of the system, a system that was largely engineered by the U.S. to serve its interests, based around the dollar, overseen by multilateral institutions designed and located in Washington, wherein the U.S. had a controlling influence, whose other significant members were firmly under its sphere of influence.
Henry Morgenthau and Harry Dexter White led the U.S. delegation and by the time Morgenthau delivered the closing address the two had secured highly favourable terms and conditions for Washington, firmly establishing the United States at the center of the new international order. American hegemony was gradually taking shape and there was little standing in its way.
The Soviet Union was among the first nations to question the foundations of the system. Though present at the meeting, Moscow did not ratify the final agreements and would later denounce the World Bank and IMF as “branches of Wall Street”. For Moscow, the World Bank was “subordinated to political purposes which make it the instrument of one great power”. The Soviet Union saw no distinction whatsoever between the United States, Wall Street the World Bank and the IMF.
Another country that was very much at odds with the system was France. In France, the Bretton Woods system was called America's “exorbitant privilege" by the French finance minister Valéry Giscard d'Estaing (whom I referenced earlier) as it resulted in an "asymmetric financial system" where non-U.S. citizens subsidise the American people, corporations, and government. President Charles de Gaulle called the system “abusive and dangerous” and proposed returning to a gold-based system and discarding the dollar altogether.[13] France understood fully the power and privilege that the dollar gave America and the danger it posed to other countries. Additionally, de Gaulle was highly critical of American influence in Latin America and of the Vietnam War; ultimately, he wanted Europe to decouple from the United States and dedollarising was a big part of that. In February 1965, de Gaulle chose to exchange France’s U.S. dollars for gold at the official exchange rate, sending an armed convoy across the Atlantic to collect their gold and escort it back to France.[14]
What de Gaulle was alluding to was that, from this moment onwards, much of western Europe was now absorbed into the broader American empire; Germany, France, the UK, and other nations simply became vassal states under Washington’s domain. De Gaulle saw American influence as malevolent and destabilising, and he was highly suspicious of the U.S. and UK axis in the world. De Gaulle was also becoming closer with Konrad Adenauer, the West German Chancellor, in order to begin to reshape the traditionally hostile and fractious relationship France and Germany had had going back centuries.[15] More worryingly for Washington, he also wanted closer ties with the Soviet Union and in 1966 the French-Soviet Joint Declaration sought to establish closer diplomatic ties in politics, science, and technology. In a famous speech given at Strasbourg in 1959, de Gaulle spoke of a Europe “from the Atlantic to the Ural” which outlined his position in no uncertain terms: de Gaulle wanted a Europe independent of American interference.[16]
Not long after the accords, the Marshall Plan would spearhead the redevelopment of Europe’s infrastructure, industry and economy, allocating billions of dollars in grants to rebuilding the continent but this came at a cost as it meant that Europe assumed a permanently deferential position in its relationship with the U.S., giving Washington the upper hand in trade, diplomacy, finance and foreign policy negotiations whenever the two crossed paths in the future. The Marshall Plan was done to establish markets for U.S. goods and capital to circulate in: the rationale behind it was that once Europe’s economy and infrastructure were rebuilt the demand for U.S. manufactured goods would rise. Also, under the auspices of the IMF, the U.S. indirectly controlled their exchange rates as well (refer to the previous example of West Germany). If all that wasn’t enough, Europe’s gold was stored at the Bullion Depository, better known as Fort Knox, in Kentucky and at the Federal Reserve Bank in New York.
There are numerous other examples that further demonstrate U.S. power and control in the post-Bretton Woods realignment. At the time, Britain and Keynes were happy to go along with Washington’s proposals at the meeting because they believed that the ‘special relationship’ between the two countries would mean that London would receive preferential treatment in the new international order (incidentally, so too did Harold Macmillan, Britain’s Chancellor at the time). But this was not so. As a precondition to Marshall Plan aid, the U.S. demanded that existing British currency controls be scrapped allowing for current account convertibility of pound sterling into dollars. This led to a run on the pound as foreign holders of sterling rushed to swap pounds for dollars which in turn saw Britain’s foreign currency reserves decline dramatically (the Bank of England saw $1 billion of reserves leave in the first month) leaving the country in a perilous position. Britain’s deferential position would again be exposed by America when, during the infamous Suez Crisis in 1955, president Eisenhower threatened to sell sterling bond holdings if Britain did not withdraw; doing so would have flooded the market with pound sterling once again and would cause yet another run on the pound leading to a devaluation of the currency that could potentially bring about economic ruin for Britain (Chancellor Macmillan told prime minister Anthony Eden that they would be unable to bring in essential food and energy supplies if the pound was devalued). The Suez Crisis is widely believed by many to mark the end of Britain’s status as a major global power. Essentially, if Britain pursued policies deemed not in America’s best interests, Washington had all the leverage it needed to bring it back into line.
In his book A Century of War, F. William Engdahl points out that following Congress’ approval of Marshall Plan aid to Europe, American oil conglomerates charged exorbitant prices for oil, more than doubling the price from $1.05 per barrel to $2.22 between 1945 and 1948. Additionally, Marshall Plan aid could not be used to build oil refining capacity either.[17]
American help came with conditions and was made on the proviso that U.S. interests be given precedence over the interests of other nations. By being able to control exchange rates (essentially, currency manipulation), being at the centre of infrastructure redevelopment with the Marshall Plan in Europe and the Dawes Plan in Japan, having its own currency installed as the world’s reserve currency, the power that the U.S. acquired as a result of the Bretton Woods accords is almost impossible to understate.
Ironically, nothing underlined America’s dominant position more than when the Bretton Woods system officially ended. When President Nixon abolished convertibility of overseas dollars into gold in August 1971 the fiat era was born, as the dollar became a floating, fiat currency so did all the other currencies in the world; the dollar-based system meant that all the other currencies had to float in order to keep pace with the U.S. dollar. As a result, the world was sucked into the vortex of debt accumulation, deficit spending, monetary inflation, and all the instability and problems that this brings. I have two articles about the Nixon shock that deal with the significance of this event in considerable detail.
Conclusion
This piece started with three broad objectives from the Bretton Woods conference. However, the outcomes of the conference reflected a far different reality from these stated objectives, these are:
1) installing the dollar as the world’s reserve currency – a position it maintains to this day;
2) rebuilding the global economy with the U.S. firmly at its centre;
3) the founding of the Bretton Woods institutions (the World Bank and the IMF) that would steadily go on to become proxies for U.S. power and influence abroad;
4) establishing the Federal Reserve as the central bank for the world, responsible for providing liquidity for the global economy.
Over time, the dollar’s status as the world reserve currency would lay the foundations for not only the global economic system but also for the global American empire more broadly, allowing the U.S. to dominate world trade and international finance unlike any superpower before it. This is why the Bretton Woods conference is such a significant event in world history. The foundation of American power is the U.S. dollar and the dollar’s central role in trade, finance and world affairs more broadly, and this all began at Bretton Woods.
Today it is popular to assert that "Bretton Woods is over and the world has moved on” but that is simply not the case as the dollar remains the global reserve currency and many of the structures and edifices of U.S. power that were first conceived at the meeting are still in place today. The Bretton Woods system was the first example of a fully integrated, international monetary order intended to govern monetary relations among independent nations, and by positioning itself at the very centre of this new system, the U.S. had successfully seized its geopolitical moment where U.S. power was now formalised in the eyes of the world. After Bretton Woods, the ratification of the United Nations charter in 1945 and North Atlantic Treaty (NATO) in 1949 would further consolidate U.S. power and influence as the United States would gradually build both its formal and informal empire across the globe, piece by piece. Whether it be where to station a missile defence system, the upper hand in trade deals, determining exchange rates, building a military base, requesting military support for overseas interventions or where to build oil refineries America unquestionably held, and still holds, the upper hand.
By becoming the sole creditor to the new global monetary system, by tying all other currencies to the dollar and governing the institutions that would oversee this apparatus, the U.S. had centralised power in a way like never before. As I will cover in future articles, developing liquid financial markets, mainly the market for U.S. treasuries and bonds, along with the advent of the petrodollar system, would be a significant extension of their power, helping the United States to consolidate their position as the uncontested global superpower, a position it still holds today. And this all started at Bretton Woods.
Notes
[1] Clark, W. (2005) Petrodollar Warfare: Oil, Iraq and the Future of the Dollar. New Society Publishers. p.17-18
[2] Rothbard, M. (2015) What Has Government Done to Our Money? Mises Institute. P.99
[3] Prins, N. (2019) Collusion: How Central Bankers Rigged the World. Illustrated. Bold Type Books. p.88
[4] Eichengreen, B. (2012) Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. Reprint. Oxford University Press. p.50
[5] Australianvoice (2015) How Does the US Empire Control the World? Petrodollars Rule, Ok! (Part 1). Available at: https://australianvoice.livejournal.com/12523.html.
[6] Wolff, M. (2018) Bretton Woods Institutions & Neoliberalism: Historical Critique of Policies, Structures, & Governance of the International Monetary Fund & the World Bank, with Case Studies. Amsterdam, Netherlands: Amsterdam University Press. p.29-31
[7] Wolff, M. (2018) Bretton Woods Institutions & Neoliberalism: Historical Critique of Policies, Structures, & Governance of the International Monetary Fund & the World Bank, with Case Studies. Amsterdam, Netherlands: Amsterdam University Press. p.12
[8] Wolff, M. (2018) Bretton Woods Institutions & Neoliberalism: Historical Critique of Policies, Structures, & Governance of the International Monetary Fund & the World Bank, with Case Studies. Amsterdam, Netherlands: Amsterdam University Press. p.18-19
[9] bitcoinmagazine.com (2021). Available at: https://bitcoinmagazine.com/culture/the- hidden-costs-of-the-petrodollar.
[10] Prins, N. (2019) Collusion: How Central Bankers Rigged the World. Illustrated. Bold Type Books. p.97
[11] bitcoinmagazine.com (2021). Available at: https://bitcoinmagazine.com/culture/the-hidden-costs-of-the-petrodollar
[12] Eichengreen, B. (2012) Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. Reprint. Oxford University Press. p.47
[13] Eichengreen, B. (2012) Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. Reprint. Oxford University Press. p.52
[14] Money: De Gaulle v. the Dollar (1965). Available at: https://content.time.com/time/subscriber/article/0,33009,840572,00.html.
[15] Engdahl, W. (2012) A Century of War: Anglo-American Oil Politics and the New World Order. New-Revised-Unabridged. Progressive Press. p.129-130
[16] Times, N.Y. (1966) PARIS AND MOSCOW PLAN TO CONSULT ON REGULAR BASIS; Joint Declaration at End of De Gaulle Visit Will Also Set a “Hot Line” Link PARIS AND MOSCOW PLAN TO CONSULT. Available at: https://www.nytimes.com/1966/06/29/archives/paris-and-moscow-plan-to-consult-on-regular-basis-joint-declaration.html.
[17] Engdahl, W. (2012) A Century of War: Anglo-American Oil Politics and the New World Order. New-Revised-Unabridged. Progressive Press. p.108