till WWII - 'Begger thy neighbour' policies .Rampant devaluation of currencies to make exports cheaper .
1941 Atlanic Charter , precursor to the Bretton Woods
1945 End WWII and Brewtton Woods agreement signed
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states
The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments.
Throughout the war, the United States envisaged a postwar economic order in which the U.S. could penetrate markets that had been previously closed to other currency trading blocs, as well as to expand opportunities for foreign investments for U.S. corporations by removing restrictions on the international flow of capital. Without a strong European market for U.S. goods and services, most policymakers believed, the U.S. economy would be unable to sustain the prosperity it had achieved during the war.
U.S. allies—economically exhausted by the war—accepted this leadership. They needed U.S. assistance to rebuild their domestic production and to finance their international trade; indeed, they needed it to survive.
Before the war, the French and the British were realizing that they could no longer compete with U.S. industry in an open marketplace. During the 1930s, the British had created their own economic bloc to shut out U.S. goods. Churchill did not believe that he could surrender that protection after the war, so he watered down the Atlantic Charter's "free access" clause before agreeing to it.
A system of fixed exchange rates managed by a series of newly created international institutions using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency was set up.The strength of the U.S. economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold.
After the end of World War II, the U.S. held $26 billion in gold reserves, of an estimated total of $40 billion (approx 65%).The design of the Bretton Woods System was that nations could only enforce gold convertibility on the anchor currency—the United States’ dollar. Gold convertibility enforcement was not required, but instead, allowed. Nations could forgo converting dollars to gold, and instead hold dollars. Rather than full convertibility, it provided a fixed price for sales between central banks.
1946 - Marshall Plan
The Marshall Plan was the program of massive economic aid given by the United States to favored countries in Western Europe for the rebuilding of capitalism1947-58 Implememntation of Marshall planFrom 1947 until 1958, the U.S. deliberately encouraged an outflow of dollars, and, from 1950 on, the United States ran a balance of payments deficit with the intent of providing liquidity for the international economy. From 1948 to 1954 the United States gave 16 Western European countries $17 billion in grants.
1960- Tiffin's Dilemma
In 1960 Robert Triffin noticed that holding dollars was more valuable than gold was because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. What would later come to be known as Triffin's Dilemma was predicted when Triffin noted that if the U.S. failed to keep running deficits the system would lose its liquidity, not be able to keep up with the world's economic growth, and, thus, bring the system to a halt. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability. In the 1960s and 70s, important structural changes eventually led to the breakdown of international monetary management. One change was the development of a high level of monetary interdependence. The stage was set for monetary interdependence by the return to convertibility of the Western European currencies at the end of 1958 and of the Japanese yen in 1964. Convertibility facilitated the vast expansion of international financial transactions, which deepened monetary interdependence.By 1968, the attempt to defend the dollar at a fixed peg of $35/ounce, the policy of the Eisenhower, Kennedy and Johnson administrations, had become increasingly untenable. Gold outflows from the U.S. accelerated, and despite gaining assurances from Germany and other nations to hold gold, the profligate fiscal spending of the Johnson administration had transformed the "dollar shortage" of the 1940s and 1950s into a dollar glut by the 1960s. In 1967, the IMF agreed in Rio de Janeiro to replace the tranche division set up in 1946. Special Drawing Rights were set as equal to one U.S. dollar, but were not usable for transactions other than between banks and the IMF. Nations were required to accept holding Special Drawing Rights (SDRs) equal to three times their allotment, and interest would be charged, or credited, to each nation based on their SDR holding. The original interest rate was 1.5%.
1971 - Collapse of Bretton Woods
The early 1970s, as the Vietnam War accelerated inflation, the United States as a whole began running a trade deficit (for the first time in the twentieth century). The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar had lost faith in the ability of the U.S. to cut budget and trade deficits.In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window," making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the "Nixon Shock".The shock of August 15 was followed by efforts under U.S. leadership to develop a new system of international monetary management. Throughout the fall of 1971, there was a series of multilateral and bilateral negotiations of the Group of Ten seeking to develop a new multilateral monetary system.On 17 and 18 December 1971, the Group of Ten, meeting in the Smithsonian Institution in Washington, created the Smithsonian Agreement which devalued the dollar to $38/ounce, with 2.25% trading bands, and attempted to balance the world financial system using SDRs alone. It was criticized at the time, and was by design a "temporary" agreement. It failed to impose discipline on the U.S. government, and with no other credibility mechanism in place, the pressure against the dollar in gold continued.This resulted in gold becoming a floating asset, and in 1971 it reached $44.20/ounce, in 1972 $70.30/ounce and still climbing. By 1972, currencies began abandoning even this devalued peg against the dollar, though it took a decade for all of the industrialized nations to do so. In February 1973 the Bretton Woods currency exchange markets closed, after a last-gasp devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime.
1973
The denomination of oil in dollars after the 1973 Middle East oil crisis.
1974
US manages to save $ as the only currency of trade for Oil.
1979
Second Oil Shock
1989
Emergence of deregulated global financial markets after the Cold War that made cross-border flow of funds routine.
A number of economists (e.g. Doole, Folkerts-Landau and Garber) have referred to the system of currency relations which evolved after 2001, in which currencies, particularly the Chinese renminbi (yuan), remained fixed to the US Dollar as Bretton Woods II. The argument is that a system of pegged currencies is both stable and desirable, a notion that causes considerable controversy.
"Bretton Woods II", unlike its predecessor, is not codified and does not represent any kind of a multilateral agreement. It contains the following key elements:
The United States imports considerable amounts of goods, particularly from East Asian export-oriented economies such as China, Japan and various other Southeast-Asian countries.
Since China and Japan don't have much demand for U.S.-produced goods, United States runs large trade deficits with both countries.
Under normal circumstances, trade deficits would correct themselves through depreciation of the dollar and appreciation of the yen and the renminbi. However, Chinese and Japanese governments are interested in keeping their currencies low with respect to the dollar to keep their products competitive. To achieve that, they are forced to buy large quantities of U.S. treasury securities with freshly-printed money.
Similar mechanisms work in the Eurozone with the euro and its satellite currency (Swiss franc). The Eurozone is somewhat less coupled to the U.S. economy, so the euro has been allowed to appreciate considerably with respect to the dollar.
2007
As of 2007, $ still has the largest share (65.7%) of foreign reserve holdings, with the euro some distance behind at 25.2%.However since 2000, the dollar share is falling and the euro share is rising, though the trend is very gentle.
