The Federal Reserve System in the United States (the Fed) is one of the most critical players in the global economy. No wonder every investor, politician, business in the world will be watching every move of the Fed and its current chairman Jerome Powell. Thanks to the dollar, global economic growth is tied to the prospect of the US economy. But why and how did that happen?
The Bretton Woods Conference in 1944 is considered the birthplace of the current international monetary system of the global economy. It is a system that established the rules governing the commercial and financial relations between the industrial countries, namely the US, Canada, Western European countries, Australia and Japan. The agreement also established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), today part of the World Bank. More importantly, the same agreement coined the US dollar hegemony as a global currency thanks to owning two-thirds of the world’s gold reserve when the agreement was signed. However, that means the US has to inject enough currency units through a trade deficit to ensure elasticity for the global economy’s growth. According to Bretton Woods, every dollar was gold-backed until 1971 when the US decided unilaterally to terminate convertibility to gold.
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