75 years since Bretton Woods: Malcolm McKinnon reflects on changes in the global monetary and financial system, and New Zealand's place in it, since the ground-breaking Bretton Woods conference of July 1944.

• Author: McKinnon, Malcolm
• Position: ANNIVERSARY - Conference news

The United Nations monetary and financial conference was held in the US state of New Hampshire in July 1944. The colloquial name for the monetary and financial system it established, Bretton Woods, was taken from the meeting place of the conference.

The conference established two organisations: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD, commonly World Bank). The IMF's primary purpose was international monetary stability; the World Bank's was infrastructure loans.

The United States, at that time by far the world's leading economic power and its only major creditor, wanted a monetary system that would prevent the instability of the inter-war years by adopting fixed exchange rates (linked to both gold and the US dollar) and restricting import and exchange controls.

The Soviet Union and its allies did not participate in the new system, but other countries had little choice if they wanted to maintain economic ties with the United States and access its financial resources.

The Bretton Woods system was, however, overwhelmed--the world faced a global 'dollar shortage' owing to the massive trade imbalances between the United States and the war-devastated economies of Asia and Europe. Compensating capital flows were insufficient; Wall Street, the US financial centre, was conservative. The imbalance was only overcome thanks to massive US aid, and high levels of importing by the United States.

By the later 1960s the opposite problem had developed: thanks in part to massive federal spending both domestically and on the war in Vietnam, the United States itself ran balance of payments deficits.

On 15 August 1971 US President Richard Nixon unilaterally pulled the plug on the Bretton Woods system, breaking the link between the US dollar and gold. Even so, the United States continued to run balance of payments deficits and on occasion demanded currency realignments, for example the Plaza Accord 1985 when the Japanese yen was sharply revalued.

At the end of the Cold War (1989-91) and Chinas turn to capitalism 'with socialist characteristics', all the Soviet successor states and China joined the IMF and the World Bank.

The IMF retained its role as a lender to countries facing balance of payments difficulties. The financing was conditional: recipients had to engage in 'structural adjustment', which usually stressed market deregulation.

The global financial crisis (2008-11) triggered a change in the...