I lived in New Hampshire for over 20 years. That is the place where we raised our six children. We were also very fortunate to have also lived in Europe for many years. While living in NH, I was always intrigued with the story of a small resort village, Bretton Woods, and the global impact it had on Europe and the rest of the world. Bretton Woods institutions were created in 1944 during the United Nations Monetary and Financial Conference at the Mount Washington Hotel (The Bretton Woods Committee, n.d.). The Bretton Woods institutions created an international basis for exchanging one currency for another. It also led to the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, now known as the World Bank (Stephey, 2008) and the General Agreement on Tariffs and Trade (GATT)—the precursor to the World Trade Organization (WTO). In addition to establishing the World Bank, the Committee chose the U.S. dollar as the pillar of international monetary exchange. The meeting provided the world post World War II currency stability which was desperately needed.
The Bretton Woods system itself may have collapsed in 1971, when President Richard Nixon severed the link between the dollar and gold — a decision made to prevent a run on Fort Knox, which contained only a third of the gold bullion necessary to cover the amount of dollars in foreign hands. By 1973, most major world economies had allowed their currencies to float freely against the dollar. It was a rocky transition, characterized by plummeting stock prices, skyrocketing oil prices, bank failures and inflation (Stephey, 2008). However you spin it, Bretton Woods established the United States as the leader and the leader of the new post Second World War economic order.
Times have changed since 1944. Then, it was manufacturing and agriculturally driven economy. Today, it’s all about technology and innovation. As countries increasingly recognize that innovation drives long-run economic growth, a fierce race for an innovation advantage has emerged. During the past decade alone, over three dozen countries have created national innovation agencies and strategies. Going forward, the challenge will be to balance countries’ pursuit of the highest possible standard of living for their citizens in a way that promotes, rather than distorts, global innovation (Ezell, 2011).
Since economic stability was paramount as the Second World War was ending, a change in the way countries did their business had to change as well. Investors had to re-think the way things were and determine how they were going to play in the new global economy. Gold was the most important element of the Bretton Woods system. As a monetary anchor, it provided stability for the dollar as a global reserve currency. With the demise of gold convertibility under Bretton Woods, global price stability began to unravel. After being detached from its official price of $35 per ounce in 1971, gold rose by more than 2,000% over the next 10 years. Investors typically migrate to gold when currencies no longer function as good stores of value (Minerd, 2012). As the world moved forward from the mid-forties through the fifties and to the sixties patriotism was strong and at times too strong. The cry was “Buy America” or better stated buy, only American goods and products. It would be unheard of for an American to purchase a foreign automobile; it was considered “un-American”. This attitude did not help move investors towards the global market that was there waiting for them to capture. Despite Bretton Woods, American investors were slow to move money or work off-shore.
However, since the late 1960’s, several major developments led to the rapid expansion of capital flowing overseas. One is the rapid developments in micro-computing and telecommunications technologies. Another was the financial deregulation in the major countries and innovations in the supply of financial instruments. Another is the growth of investment demand and related developments in financial markets in China, India, and the middle-income developing countries (Dobson, Gyohten, & Frenkel, 1995). These factors have led to improved access to more capital enabling investors to take advantage of the global market and thus lifting the global economy.
Another outcome of Bretton Woods was the GATT and eventually the WTO. The WTO is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business ("WTO | What is the WTO?”, n.d.). But has the WTO been a friend or foe to foreign investors? Prior to the Uruguay Round negotiations, the linkage between trade and investment received little attention in the framework of the GATT ("WTO | Trade and investment", n.d.,). Just prior to the formation of the WTO, GATT tackled the issue of foreign investments within local concerns. A under GATT and as an outcome of the Uruguay negotiations, an agreement was reached on Trade Related Investment Measures (TRIMs). The purpose of the TRIMS was to mandate that the same rules apply to both domestics investors as foreign investors. Remember, direct foreign investments were becoming quite significant in the late 1980’s and early 1990’s. Countries were not all playing fairly in the new world of trade liberalization. Countries receiving foreign investments were establishing barriers and restricting investments that were intended to grow their domestic industries. The objectives of the TRIMS Agreement, as defined in its preamble, include “the expansion and progressive liberalization of world trade and to facilitate investment across international frontiers so as to increase the economic growth of all trading partners, particularly developing country members, while ensuring free competition” ("WTO | Trade and investment", n.d.,). TRIMS is arguably not a particularly consequential agreement. It does not for example prohibit measures such as regulation of the hiring practices of foreign investors, or technology transfer or joint venture requirements, all time honored…instruments of industrial promotion (Joseph, 2013).
As I mentioned earlier this semester, back when Europe switched from country independent currencies to the Euro, I lived in France. It was strange when I had to start calculating the exchange rate between the U.S dollar and the Euro after many years of calculating from the French franc to the U.S. dollar and vice versa. At the same time, I had to investigate my international investments and determine if my portfolio had to be adjusted. I was confident my European investments would balance themselves out after a moderate transition period. However, I didn’t know if my Asian investments would be impacted. It seems though that the Asians didn’t even notice that Europe moved to a single currency. There wasn’t the slightest ripple in my Asian portfolio.
My experience is a very small and insignificant example of the how currency and exchange rates been impacted over the years. Exchange rate uncertainty is a major risk to foreign investors. Bretton Woods resulted in the member states agreeing to fix their exchange rates by tying their currencies to the U.S. dollar. American politicians, meanwhile, assured the rest of the world that its currency was dependable by linking the U.S. dollar to gold; $1 equaled 35 oz. of bullion (Stephey, 2008). As previously mentioned, President Richard Nixon severed the link between the dollar and gold. This action caused a situation where countries whose currencies were aligned with the U.S. dollar now had some intrinsic value related to its currency. Since the collapse of the Bretton Woods system, IMF members have been free to choose any form of exchange arrangement they wish (except pegging their currency to gold): allowing the currency to float freely, pegging it to another currency or a basket of currencies, adopting the currency of another country, participating in a currency bloc, or forming part of a monetary union ("About the IMF: History: The end of the Bretton Woods System (1972–81)", n.d.,).
Investing in this “floating currency” exchange market can be extremely risky. Due to our global economy and the interdependence nations have on the success or failure of the financial system, exchange rates can be affected by external events that are perceived to have no impact on a particular nation however the impacts could be felt globally. As an investor, one must protect their investments from foreign exchange and currency risks. Holding an optimal international portfolio, in other words holding more global diversity in your portfolio versus domestic, comes with some risks. It is both the foreign exchange fluctuation and the currency where your portfolio is based that causes the greatest risks in your optimal international portfolio selection. (Mathur, 2013)
Exchange rates fluctuation can be attributed many factors. Obviously, some may just be monetary but political events can also affect the exchange rates. If you are holding Israeli new shekels and there is the threat of military conflict, holding funds in Israel one may want to transfer their holdings to the U.S. dollar of the European euro. In the last few months you would be forgiven for thinking the apocalypse had arrived. First Australia was hit with floods of "biblical" proportions as termed by the Queensland state treasurer, then fellow antipodean New Zealand was rocked by an earthquake of 6.3-magnitude in what the Prime Minister called its "darkest day". And on Friday, investors awoke to news that an earthquake of 8.9-magnitude had hit north-east Japan and triggered a tsunami in its wake. Following the quake, which was the biggest the nation had experienced in at least a century, the Nikkei 225 tumbled 1.7% and the yen dropped as much as 0.4% on average against its top counterparts. It stuck just before the closing bell in Tokyo at 06:45 GMT. It is clear; the best way for investors to mitigate risks against losses in such situations is to have a truly diversified portfolio (Armstrong, 2011).
Another outcome of Bretton Woods was the formation of the World Bank. The delegates who assembled at Bretton Woods encountered great difficulty in finding a name for their creation. The UK representatives thought it should be called “the International Corporation for Reconstruction and Development”. El Salvador proposed “the International Guarantee and Investment Association.” France preferred the title “International Financial Institution for Reconstruction and Development.” Whatever it was to be called, it has become to be known in fact as the World Bank (Mason & Asher, 1973).
Since the onset of the World Bank the world has changed in remarkable ways. The world was nearing the end of World War II, the dollar was king, the U.S and their allies were thinking about reconstruction. No one could have imagined how different the world is today. Technology and innovation has replaced the factory and farm fields. Emerging nations are finding ways to make their mark on the global economy. Banks are global and monetary transactions take the blink of the eye to be executed. The World Bank has brought together the first world nations and has provided loans to third world nations while trying to make a positive impact on global poverty, population, development, and the environment. No institution before it ever made such impacts on our world. Some may disagree and state that the World Bank has been a failure, I do not agree. It started to help reconstructed war-torn Europe and to maintain peace after two devastating wars within a half century. Europe is now united and highly developed. War has not returned to Europe at the scale which was experienced in the 20th Century. Now add the work accomplished in Africa and other poor regions throughout the world and its obvious there has been success. But, there is some much more to accomplish. The world leaders must continue to support the economic growth world-wide. Emerging and third world nations must be empowered to pull themselves up and sustain levels of economic growth.
The global economy is alive and well. The world is shrinking and its citizens have access to each other at the touch of a screen. The challenges of currency exchange and free trade must be studied and routes to success must be planned. We cannot let greed take full control. As citizens of this new world, we must find ways to come together for our mutual success. Bretton Woods was the right decision for the right time. With the fear that a new currency could displace the dollar in our oil industry, the U.S. must change their ways and become much more disciplined in their financial housekeeping. We are the world military power, we must again become the world economic power.

References
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Dobson, W., Gyohten, T., & Frenkel, J. (1995). Surveillance and the international monetary system. In Fifty years after bretton woods: The future of the IMF and the world bank: Proceedings of a conference held in madrid, spain, september 29-30, 1994 . International Monetary Fund.
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Stephey, M. J. (2008, October 21). A Brief History of Bretton Woods System - TIME. Retrieved February 1, 2014, from http://content.time.com/time/business/article/0,8599,1852254,00.html
The Bretton Woods Committee (n.d.). About the bretton woods institutions | The bretton woods committee. Retrieved from http://www.brettonwoods.org/page/about-the-bretton-woods-institutions
WTO | Trade and investment. (n.d.). Retrieved from http://www.wto.org/english/tratop_e/invest_e/invest_info_e.htm
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