Global Trade And The Currency Market

The global economy facilitates the fluid movement of products and services around the globe, a trend that has continued virtually uninterrupted since the end of World War II. It is unlikely that the architects of this system could have envisioned what it would become when they met in the New Hampshire resort of Bretton Woods in July 1944, but much of the infrastructure they brought into existence continues to be relevant in today's global market. Even the name "Bretton Woods" lives on in a modern guise, characterized by the economic relationship the U.S. has with China and other rapidly developing economies. Read on as we cover the modern history of global trade and capital flows, their key underlying economic principles and why these developments still matter today.

In the Beginning
The delegates from the 45 allied powers who attended the Bretton Woods conference in 1944 were determined to ensure that the second half of the 20th century would look nothing like the first half, which consisted mostly of devastating wars and a worldwide economic depression. The World Bank and the International Monetary Fund would ensure global economic stability. (For more insight, check out What Is The International Monetary Fund? and What Is The World Bank?)

In order to facilitate a fair and orderly market for cross-border trade, the conference produced the Bretton Woods exchange rate system. This was a gold exchange system that was part gold standard and part reserve currency system. It established the U.S. dollar as a de facto global reserve currency. Foreign central banks could exchange dollars for gold at the fixed rate of $35 per ounce. At the time, the U.S. held more than 65% of the world's monetary gold reserves and was thus at the center of the system, with the recovering countries of Europe and Japan at the periphery. (To learn more, read The Gold Standard Revisited.)

All Together Now
For a time, this seemed like a win-win opportunity. Countries like Germany and Japan, in ruins after the war, rebuilt their economies on the backs of their growing export markets. In the U.S., growing affluence increased the demand for an ever-growing array of products from overseas markets. Volkswagen, Sony and Philips became household names. Predictably, U.S. imports grew and so did the U.S. trade deficit. A trade deficit increases when the value of imports exceeds that of exports, and vice versa. (To learn more, read Current Account Deficits.)

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