During the Bretton Woods era, the global economy grew rapidly. Keynesian economic policy has allowed governments to mitigate economic fluctuations and recessions have been generally weak. However, tensions began to manifest in the 1960s. Persistent, albeit low, global inflation has made the price of gold too low in real terms. A chronic U.S. trade deficit drained U.S. gold reserves, but the idea of devaluing the dollar against gold was strongly opposed. In any event, this would have required an agreement between the surplus countries in order to increase their exchange rates against the dollar in order to obtain the necessary adjustment. Meanwhile, the pace of economic growth has meant that the level of international reserves has generally become insufficient; The invention of the “Special Drawing Right” (SDR) did not solve this problem.
While capital controls had not yet been carried out, they were significantly lower in the late 1960s than in the early 1950s, increasing the prospects for capital flight or speculation against currencies deemed weak. As chief international economist at the U.S. Treasury, Harry Dexter White designed the U.S. Cash Access Project in 1942/44, which rivaled Keynes`s plan for the British Treasury. Overall, White`s system tended to favour incentives to create price stability in the world`s economies, while Keynes wanted a system that promoted economic growth. The “collective agreement was a huge international undertaking,” which took two years before the conference to prepare for it. It consisted of numerous bilateral and multilateral meetings to find a common basis for determining the policies that would be behind the Bretton Woods system. A second example of central bank coordination on reserve policy is the central bank gold agreement. A number of central banks, particularly in industrialized countries, aim to get rid of their large reserve stocks in the form of gold.
Knowing that a simultaneous sale of gold lowered its price, they agreed to coordinate their gold sales. The first central bank gold agreement was signed in 1999 by 14 European central banks to limit the amount of gold that will be sold over the next five years. The signatories accounted for about 50% of the world`s official gold stocks. This agreement was renewed in 2004, 2009 and 2014. Although currency accumulation has similar price effects – it lowers the interest rate in the reserve country and thus reduces the yield on foreign exchange reserves – central banks do not coordinate their reserve policy when it comes to reserve currencies.6 The Bretton Woods rules set out in articles of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) that provided for a firmer exchange rate system. The rules also aimed to promote an open system by requiring members to convert their respective currencies into other currencies and to make free trade. The agreement created the World Bank and the International Monetary Fund (IMF), U.S.-backed organizations, to oversee the new system. The essence of the agreements was that the IMF would help Member States manage the balance of payments in a manner consistent with stable exchange rates and provide loans if necessary.