In 1944 in the sleepy New Hampshire town of Bretton Woods 730 delegates from allied nations met to discuss and set world monetary policy. Previous to the meeting economic policies were determined by a myriad of individual, and often conflicting, treaties and trade agreements and progress was often hampered by tradition. During the great depression inflation made the currencies of many countries worthless which only exacerbated the effects of the global depression. The intent of the conference was to rebuild the world monetary system with some semblance of predictability and security. The conference was the beginning of the International Monetary Fund which was to set monetary policy for decades to come. The nations involved agreed to allow free markets to work with minimal government intervention, limit trade barriers, and accept the intervention of the IMF to regulate the finances of member nations. Many nations involved would have preferred more regulation of markets and state intervention in their respective economies but the devastation of the war prompted the signing of the Bretton Woods agreement. The US demanded, and got, a leadership role in the IMF. Following the war the west experienced a period of unprecedented growth led by the US economy. One of the most important aspects of the agreement was tying currencies to a gold standard. This kept nations from assigning an arbitrary value to their currency to manipulate trade or invalidate debts. The agreement worked well until--- The United States had pegged its currency to gold valued at $35 dollars an ounce. A problem arose when the supply of dollars grew faster than US gold holdings. Several currencies were forced to devalue themselves but the US stubbornly held to the $35 per ounce figure even though US gold reserves did not match obligations. In the 60's the difference between the number of dollars circulating and US gold holdings put a severe strain on the world monetary system established at Bretton Woods. In 1968 the IMF met in Rio de Janeiro and created a new document stating that nations had to hold their US debts. The documents could not be exchanged for gold and were used to prop up a shaky system. In 1971 the US was for the first time since WW2 suffering a trade deficit and inflation ravaged the economy. On August 15, 1971 President Nixon changed world monetary policy forever. Nixon took US currency off the gold standard and for the first time the US dollar and gold were subject to market forces. Within a year gold prices doubled and the US dollar became the world's reserve currency. The move met with worldwide disapproval. Fast forward to the Bush administration. As a result of deregulation and mismanagement by administrations from Reagan on the US finds itself in the middle of the worst crisis since the great depression. The crisis quickly spread and many European leaders laid the blame squarely at the feet of the United States. Said German finance minister, Peer Steinbrick, "The United States is solely to be blamed for the financial crisis. They are the cause for the crisis, and it is not Europe and it is not the Federal Republic of Germany." This sentiment was echoed by other European leaders. In addition to frictions over the Iraq war the current economic meltdown is adding to the already negative perception of the US and its policies around the world. The US dominance of the world's financial system is because US banks comprise the world's largest national unit. US banks have more links through the global system than the banks of any other country. Without the participation of US banks the world's financial system does not function. The Bush administration announced it would host a conference later in the year that some have dubbed Bretton Woods 2. At present it is unclear if members of the new administration will participate. The conference would be the first in a proposed series of global summits on the financial crisis. The first meeting will take place shortly after the US election and will focus on principles of reform needed to repair the world's financial system. Many economists are openly saying that the world markets have calmed somewhat from the volatility of the past two weeks and the US dollar remains strong on Forex markets against other world currencies. During the past two weeks Forex markets provided investors with one of the few opportunities for profit.
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