Bretton Woods and Europe’s Postwar Reconstruction

Paulina Restrepo-Echavarria (right), a senior economist at the Federal Reserve Bank of St. Louis, talks with host Christine Smith of the St. Louis Fed.

As World War II raged on, delegates of 44 countries met at a resort in Bretton Woods, N.H., to lay out plans for reconstructing the international financial system once the global conflict ended. The July 1944 conference led to the Bretton Woods system, in which countries fixed their exchange rates to the U.S. dollar and the U.S. pegged the dollar to gold. The system would last less than three decades.

In a 2019 Timely Topics podcast episode, St. Louis Fed Senior Economist Paulina Restrepo-Echavarria discusses the Bretton Woods agreement, the establishment of an international monetary system, European reconstruction, and winners and losers from Bretton Woods. (Read the transcript.)

Bretton Woods in a Nutshell

The international agreement came about because of fears about the postwar world, with the European economy in ruins and no trust in governments and the markets, Restrepo-Echavarria noted.

Fixing foreign currencies to the U.S. dollar would prevent any government from doing voluntary devaluations. From World War I to World War II, countries had used devaluations as a way to take advantage of trade with other countries, she said.

“And the fact that the U.S. dollar was pegged to gold also kind of gave an anchor to the whole economy,” the senior economist said. “It was kind of a way of enforcing that no one would deviate in some sense from the agreement.”

Capital Flows and Europe

So what was the impact of Bretton Woods on the global economy? In research done with Mark L. J. Wright, research director at the Minneapolis Fed, and Lee Ohanian, professor at the University of California–Los Angeles, Restrepo-Echavarria examined how the Bretton Woods system affected capital flows and the global economy

Although productivity was growing faster in Europe than in the U.S., Europe did not benefit as much from international capital flows as one would have expected, she observed.

“When we look at capital flows to Europe and the U.S., the U.S. received more capital flows than Europe did,” she said. “And that goes against economic theory, because economic theory would predict that capital should flow to the areas or regions where productivity growth is largest.”

Basically, Europe self-funded its reconstruction, she said.

“And what we find is that if there hadn’t been these capital controls or if it hadn’t been for Bretton Woods, then sure enough, Europe would have received much more capital inflows and, as such, would have been able to reconstruct much faster,” she said.

Additional Resources

• Timely Topics: A New Look at the Bretton Woods Agreement
• On the Economy: The COVID-19 Recession in Historical Perspective
• On the Economy: What Explains the Link between Finance and Development?