Bretton Woods System (English)

International Trade and Monetary System, Trailblazer of the Neoliberal Globalization

An Article in the Compendium of Market-Based Social-Ecological Economics


Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium
Click here for the German-language version: Bretton-Woods-System (deutsch)

Table of Contents

  1. Abstract
  2. Introduction
  3. Historical Context
  4. The Bretton Woods Agreement
  5. The Boom During the Post-War Period
  6. The Failure of the Bretton Woods Agreement
  7. The Emergence of Present-Day Neoliberalism
  8. The Systemic Crisis of Present-Day Neoliberalism
  9. Economic Assessment
  10. Conclusion

1. Abstract

Given the devastations caused by the current neoliberal system, a review of the post-war period can be tempting to value the Bretton Woods System as a timeless sustainable model. However, on closer examination of the historical events, this assessment proves to be questionable. It is therefore advisable to analyse both the failure of the Bretton Woods System and the current neoliberal devastations to provide a sound basis to blueprint the cornerstones of a truly sustainable future order.

2. Introduction

BrettonWoodsHotelThe Bretton Woods System is an international trade and monetary system dating back to an agreement that was signed in Bretton Woods, New Hampshire, United States, in 1944, and constituted the reorganization of the world economy after the Second World War (the photo shows the conference hotel). The system was committed to economic autonomy of the nation states and fixed exchange rates between them with the US dollar as a reserve currency. It was upgraded by the Havana Charter, signed in 1948, and subsequently targeted towards a multilateral »trade liberalization« for the first time in economic history, and thus led to the »General Agreement on Tariffs and Trade« (GATT) and later to the World Trade Organization (WTO).

The system failed after almost 30 years, when the US shifted its double deficit (current account and budget), piled up during the Vietnam War, upon its citizens and trading partners in the early 1970s by means of inflationary policy and by ending the dollar’s convertibility into gold. Subsequently, flexible exchange rates evolved, followed by the deregulation of financial markets, thereafter triggering a process of deregulation of goods and services markets at the beginning of the 1980s, and ultimately giving birth to the neoliberal doctrine of radical »market liberalization« with all its presently perceived excesses.

3. Historical Context

The negotiations at Bretton Woods were basically motivated by the lessons learned from the worldwide trade policy chaos after the Great Depression and the Second World War, but also by the special frustrations of the US due to the protectionism of the 1920s and 1930s. Much to the amazement of the European participants, the preparations and the actual negotiations of the agreement were, from the outset, strongly influenced by the expansionism and ingenious lobbying of US industrialists and investors. They forcefully demanded global export markets and called for unlimited imports of raw materials to initiate, in their view, a post-war economic recovery starting from the United States and in exchange with a resurgent Europe. Although nobody could anticipate at that time how the coming world events would play into the hands of the Western industrial countries, the agreement laid the foundation for the neoliberal globalization unleashed thirty years later (complimentary, I recommend the article Economic Globalization).

4. The Bretton Woods Agreement

The Bretton Woods Agreement was signed by 44 countries in July 1944 and entered into force in 1946. In the meantime and as agreed, the International Monetary Fund (IMF) and the World Bank (IBRD) were established as specialized agencies of the United Nations. Initially the IMF was entrusted with the task of setting up an international payment system and ensuring the scheduled convertibility of currencies; later its focus shifted to granting short-term loans to overcome economic crises. The World Bank was engaged in financing the reconstruction of Europe in the first years, and then concentrated on long-term financial assistance for developing countries. The Federal Republic of Germany eventually joined the agreement in August 1952.

With the agreement the so-called gold-exchange standard was introduced as part of the monetary policy with the US dollar as a reserve currency (as a compliment see the articles Money and Monetary Policy and Money Creation and Destruction). In detail this means …

  • that the exchange rates of other currencies against the US dollar were determined periodically,
  • that the central banks of other currency areas had to agree to stabilize the respective rates against the US dollar within a range of one percent, and
  • that the US had to commit itself to exchange US dollars from the reserves of foreign central banks at a fixed parity into gold at any time on demand.

In 1948, the Bretton Woods Agreement was supplemented by the Havana Charter, including the explicit arrangement to promote multilateral »trade liberalization« as a desirable goal – as already mentioned above, for the first time in economic history. In the same year and at the initiative of the US, the General Agreement on Tariffs and Trade (GATT) entered into force as a concrete embodiment of the Havana Charter and complementary to the IMF and the World Bank. Thus, the crucial first step towards »trade liberalization« was taken – at first again in the interests of US American players.

The fact that the US did not join the GATT indicates the country’s intention to stay in the background for now until the rest of the world had entered into widely indissoluble multilateral commitments on tariff reductions and the removal of other barriers for the targeted free trade. Consequently, the GATT’s responsibilities were then transferred without change to the newly established World Trade Organization (WTO) in 1995, but now with the participation of the US and after the trade in goods had been largely »liberalized« (see also the article World Trade Organization (WTO)). At the same time – and at the insistence of the US – negotiations for the »liberalization« of trade in services were initiated, resulting in the Agreement on Trade in Services (GATS).

5. The Boom During the Post-War Period

As early as in the 1950s, the goals targeted in Bretton Woods such as economic growth, full employment and prosperity were actually achieved – at least in the Western industrialized countries. In the first three post-war decades these countries experienced  an unprecedented boom. In the Federal Republic of Germany, and later also in Japan, the boom developed into an »economic miracle« (»Wirtschaftswunder«) exerting a stabilizing effect on the social peace and the young democratic institutions of the two countries. In the Federal Republic, the high growth rates resulted from the rebuilding of public, economic and private structures destroyed during the Second World War, and were accomplished due to (1) a potential of well trained and motivated workers, (2) an environment still being perceived as unimpaired, and (3) the perception of unlimited availability of natural resources.

However, most developing countries and former colonies lagged far behind the levels achieved in the western world. Especially countries with a damaged primary sector (agriculture, crafts, small businesses and retailers) were not able to break down the obstacles to industrialization – despite international financial assistance. Their hope for broad-based prosperity remained unfulfilled. Contrary to the declared goals of the Bretton Woods Agreement, the antagonisms between developed and developing countries even increased – a trend that was reinforced by subsequent events and is still continuing today.

6. The Failure of the Bretton Woods Agreement

By the late 1960s, the new economic order experienced an unexpected setback due to the high costs of the Vietnam War and the subsequent increase of the US current account and budget deficits. As a consequence of the external and fiscal imbalance, the dollar reserves of the central banks of the other Bretton Woods signatories increased such that the US could no longer meet its obligations to exchange dollars for gold. In the early 1970s President Nixon found himself forced to (1) terminate the commitment to exchange dollars for gold on demand, and (2) to reduce the US’s double deficit by means of expansionary monetary policy (i.e. growth of the money supply with subsequent currency devaluation, in short: inflation).

The decline in the dollar’s domestic purchasing power was followed by a disproportionate depreciation of its external value, since foreign central banks sold their dollar reserves that were no longer backed by gold. After several rescue attempts the Bretton Woods System finally failed in 1973. Hence, the gold-exchange standard failed as well, and what is more: gold lost its prominent role as a reserve currency and intergovernmental means of payment. Only with the financial market crisis emerging in 2008, and the subsequent general economic crisis, central banks reduced their hitherto carried out gold sales​​, so that gold again plays a certain, but subordinate role as the last currency reserve ever since.

7. The Emergence of Present-Day Neoliberalism

A new era began. The strict rules of the Bretton Woods System could not be restored under the pressure of the embarking free play of market forces. Following the »trade liberalization« sought by the autonomous signatories of the Bretton Woods Agreement, a second decisive step towards the neoliberal globalization was taken – this time rather involuntarily: The exchange rates were »liberalized«. In addition, so-called euro markets evolved, allowing dollar-owners to invest their money at favorable rates in Europe. The growing liquidity of these markets was increasingly deployed by governments, banks and other enterprises, and eventually formed a useful basis for the deregulated or »liberalized« financial markets that exist today:

The increase in cross-border freedom for entrepreneurs and investors was inevitably accompanied by a declining influence of national regulation and control. The economic autonomy of the nation-states – after all, one of the conditions formulated at the Bretton Woods conference for an orderly world trade – began to crumble. With this, the acute phase of the neoliberal globalization began:

The restrictions on capital movements were gradually reduced in the course of this development by all OECD countries until the early 1990s. The cross-border direct investments enabled by the free movement of capital developed into a de facto freedom of establishment due to the pressure of corporate expansionism, and bestowed a new form of competition upon the regions and nation-states: the so-called locational competition. In the 1980s, the developing and emerging economies got in line with the process of »liberalization«, followed by the post-communist states in the 1990s.

8. The Systemic Crisis of Present-Day Neoliberalism

The incipient acceptance of the so-called liberalization of world trade in the 1990s ironically also marks the beginning of the end of the hopes raised by the new kind of globalization. After more than forty years of uninterrupted growth, the major markets of industrialized countries reach the point of saturation. The stagnation of trade, temporarily offset by growth in trade with less developed countries and by technological innovations, becomes an uncontroversial certainty at the turn of the millennium.

The protagonists of the novel freedoms then endeavor to find a way out of the ideological crisis, since a world without economic growth seems inconceivable to them. And so they upgrade the emerged free trade doctrine with a growth paradigm, thus executing the third step towards the neoliberal globalization – probably the most fateful. The date is highly symbolic, because the new millennium now also marks an economic turning point: Ever since, slowing growth is basically interpreted as a symptom of insufficient »liberalization« that has to be countered by increased »liberalization«.

In the Western industrialized countries, the declining economic growth eventually falls below a critical threshold, revealing for the first time that the neoliberal system cannot meet its social and environmental commitments in case of stagnation. According to the logic of the system, the »liberalization« efforts are intensified, forcing the world economy deeper and deeper into a state of depression with global mass unemployment, poverty and environmental pollution.


For a deeper insight into the neoliberal economic doctrine, I recommend the articles Neoliberal Vicious Circle, Neoliberal Economic Doctrine, Neoliberalism – old and new, Excesses of Capitalism and World Trade Organization (WTO).

9. Economic Assessment

The core concept of the Bretton Woods System, namely to lower the obstacles to international trade in order to spread prosperity and welfare around the globe, seems perfectly logical from the viewpoint of the initial situation. Even the US egoisms are not likely to change this viewpoint, if one considers them as the necessary driving force to overcome the state of shock after the Second World War. Furthermore, one must consider the US-conducted democratization of those countries which were deeply rooted in authoritarian traditions, first and foremost the defeated nations Germany and Japan – and not to forget: the financial aid of the Marshall Plan for a wartorn Europe.

As mentioned above, the explicit commitment of the Bretton Woods System to national economic autonomy is the essential difference compared to the current neoliberal economic doctrine. That is, the general political and economic self-determination of nation states was still regarded as an inseparable whole at that time. As shown, the gold-exchange standard and the unavoidably highlighted role of one single country as a guardian of the reserve currency, in this case the US, prooved to be a congenital defect, despite everything.

The frequently expressed opinion, a return to the Bretton Woods System would eradicate the neoliberal aberrations and confusions, can obviously not be reconciled with the historical facts. However, even today the US dollar serves as a (quasi) reserve currency, not following international agreement, but because the »liberalization« of national markets has led to open global markets on which the competitive positions of market participants and their products can only be determined with reference to a single monetary benchmark. Accordingly, this benchmark creates the basis for economic transactions around the globe. As more transactions are settled in dollars than in any other currency, the dollar is »naturally« playing the role of reserve currency.

In short, economies compete with each other on the monetary base of absolute price advantages in US dollars, regardless of the currently prevailing exchange rates between national or supranational currencies against the dollar, and regardless of the other bilateral exchange rates. Provided competing products have the same quality, the producer with the lowest dollar price will always gain the upper hand in global competition, not only regardless of exchange rates, but also irrespective of the differing production conditions and productivity levels. In other words, the globally extremely differing productivity levels are not reflected in the prices and can not be purposefully neutralized in terms of prices because of chaotic and unpredictable exchange rates. This unsubstantiated neoliberal pricing offers strong incentives for price dumping, creates an anarchic form of global competition, and has devastating consequences, as shown in the next section.

10. Conclusion

A reintroduction of the rules laid down in the Bretton Woods Agreement would certainly make the global economy dependent on US politics again, and the story of economic failure would be repeated. On the other hand, maintaining the present neoliberal system would mean ongoing global price dumping and predatory competition, and in addition, the perils of US current account and budget deficits would perpetuate the risky claims of national central banks against the US.

Price dumping is realized mainly by reducing social and environmental standards. Companies are forced by the subsequent predatory competition to further reduce their unit costs by so-called economies of scale and scope (see the article Scale Economies and Productivity). They achieve this mainly through mergers and acquisitions, thereby accelerating the neoliberal process of concentration (accumulation) of entrepreneurial capital, a process that eventually leads to globally widespread desolation of traditional economic structures.

The global consequences of the neoliberal doctrine must be borne in mind: unemployment, poverty and environmental degradation as a result of deluted economic structures and disrupted regional economic cycles. Thus the globalized economy withdraws more and more into an abstract transnational sphere that has little or no connection to the social and ecological reality (see also the article Transnational Corporations). The indispensable primacy of politics over the economy turns into the opposite. Few economic winners are contrasted with masses of incapacitated losers. And because the increasingly globalized economic cycles erode due to globally declining purchasing powers, the neoliberal system is in a systemic process of self-destruction.

The challenge is therefore to draw lessons from the history of economics and economic policy. With the maxims of freedom, self-determination and democracy, and with the goal of general prosperity and sustainable welfare, a promising economic order is emerging as far as is humanly possible:

Economic freedom must be guaranteed by a market economy that steers the access to the productive factors (labor, natural resources and capital) onto a socially and ecologically profitable path, in other words: towards sustainable social welfare.

The economic self-determination must be guaranteed on the basis of national or supranational autonomy, and be granted to all economic agents in a subsidiary manner (bottom-up) by means of (tax) incentives, so that widespread cross-linked subsidiary structures and economic cycles can emerge (again) – even across national borders – as opposed to the centralized structures enforced by today’s neoliberalism.

The subsidiary economic structures must be congruent with the subsidiary political structures that have been declared in the European treaties, so that citizens can take democratically legitimized decisions at all levels.

Finally, the natural differences in productivity throughout the world must be neutralized in terms of prices by bilaterally agreed fixed exchange rates, so that foreign trade and international competition can take place on the basis of relative price advantages instead of absolute advantages, and bring about global progress and mutually generated gains in prosperity rather than dumping and displacements.

For more on this topic see Future-Proof Foreign Trade, Comparative Advantage – Upgraded and Sustainable Social Welfare.

In addition, I recommend the articles Economic Globalization, Factors of Production, Factor Price Equalization, Economic Subsidiarity, Economic Dumping and Economic Competition.

Click here for the German-language version: Bretton-Woods-System (deutsch)


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