# From Bretton Woods to the euro: monetary regimes around Japan

The wider monetary order around the Japan story: Bretton Woods, the Nixon shock, Smithsonian rates, floating currencies, Maastricht, the ECB, the euro, and central-bank credit contraction in Europe.

*This story parallel: The world trade and money order*
*This story parallel: Building Europe: from coal and steel to union*
*This story part of: Princes of the Yen: Japan built, bubbled, and broken*
*This story part of: Money and finance*
*Keynesian economics: demand, depression, and the fight over full employment parallel this story*

## 1 July 1944 — Bretton Woods Conference sets the postwar monetary order

Delegates from forty-four nations agreed to fix exchange rates to the US dollar, which was convertible to gold. The conference also created the International Monetary Fund and the World Bank.

*Source: Creation of the Bretton Woods System*

## c. 1944 — The US dollar becomes the world's reserve currency

Under the Bretton Woods system the dollar became the anchor of global trade and central bank reserves. It kept that role after 1971, giving the United States broad influence over world finance.

## 1971 — End of the Bretton Woods system

Under the Bretton Woods system, which lasted until 1971, much of the world had fixed exchange rates with the U.S. dollar, forcing other countries to accept dollars at given rates while the United States printed large amounts of them.

> "At the time, much of the world had fixed exchange rates with the U.S. dollar under the Bretton Woods system (until 1971)."
> — Princes of the Yen

## August 1971 — Nixon shock ends dollar-gold convertibility

In August 1971, after France demanded conversion of its dollars into gold, the United States suspended the convertibility of dollars into gold, collapsing the fixed exchange rate system and sending the dollar sharply lower.

> "Consequently, in August 1971, in what is often called the “Nixon shock,” the United States had to suspend the convertibility of dollars into gold. The fixed exchange rate system collapsed and the U.S. dollar fell sharply on world markets."
> — Princes of the Yen

## December 1971 — Smithsonian Agreement fixes the yen at 308 per dollar

After the yen rose following the Nixon shock, the short-lived Smithsonian Agreement of December 1971 fixed the yen at 308 to the dollar.

> "Then, the yen rose, triggering the short-lived Smithsonian Agreement, which fixed it at ¥308/$ in December 1971."
> — Princes of the Yen

## 1972 to 1973 — Japan's first bubble economy in land and stocks

Overdone BoJ monetary stimulus after the Nixon shock fueled speculative land purchases and a stock boom, with land prices exploding in 1972 and 1973 and the Nikkei rising from 3,000 in March 1972 to 5,000 by year-end.

> "Land prices exploded in 1972 and 1973. Capital gains on land holdings produced substantial paper profits."
> — Princes of the Yen

## 1973 — Currencies begin to float

After the fixed-rate system broke down, major economies let their currencies float against one another with values set by markets. Floating exchange rates became the norm for the world's leading currencies.

## 1992 — "One Market, One Money" study published

In 1992 the European Commission published its commissioned study "One Market, One Money," which purported to demonstrate that central bank independence leads to low inflation and served as the scientific basis for the Maastricht Treaty.

> "Published in 1992 under the name “One Market, One Money,” the study purported to demonstrate that central bank independence leads to low inflation.14"
> — Princes of the Yen

## 1992 — Maastricht Treaty lays foundations for European monetary union

The Maastricht Treaty of 1992 laid the foundations for monetary union in Europe and defined the role of a totally independent European Central Bank, becoming the model for central bank independence worldwide.

> "The most forceful case in favor of central bank independence was made in the Maastricht Treaty of 1992, which laid the foundations for monetary union in Europe."
> — Princes of the Yen

## 1997 to 1998 — Asian currency crisis erupts

In 1997 the currencies of key Southeast Asian countries collapsed by 60 to 80 percent against the dollar, and Thailand, Korea, and Indonesia, facing possible national default, sought IMF emergency funding; their economies deteriorated throughout 1998.

> "In 1997, the currencies of the key Southeast Asian countries could not maintain their fixed exchange rates with the U.S. dollar. They collapsed by between 60 and 80 percent within the year."
> — Princes of the Yen

## 1 January 1999 — European Central Bank begins operations

The European Central Bank, described by the Maastricht Treaty as independent of any government or elected assembly, started operations as scheduled on January 1, 1999.

> "The treaty described the role and function of the European Central Bank (ECB), which started operations as scheduled, on January 1, 1999, and which is legally the most independent central bank in the world."
> — Princes of the Yen

## 2001 — German economy slows down

When the German economy visibly slowed in 2001, politicians including finance minister Hans Eichel wanted stimulatory policies but found monetary policy in the hands of the independent ECB and fiscal policy constrained by the stability and growth pact.

> "When the German economy started to slow down visibly in 2001, German politicians, including finance minister Hans Eichel, increasingly felt the need to implement stimulatory policies.5"
> — Princes of the Yen

## 2002 — ECB orders record shrinkage of Bundesbank credit creation

In 2002 the ECB ordered the Bundesbank to shrink its credit creation by record amounts; as money circulating in the economy shrank, demand fell and Germany moved into recession.

> "It ordered the Bundesbank to shrink its credit creation by record amounts in 2002. As the amount of money circulating in the economy shrank, demand fell and the economy moved into recession."
> — Princes of the Yen

## 1 January 2002 — Euro cash introduced; national currencies abolished

On January 1, 2002, new euro paper money and coins were introduced across most of Europe as twelve countries, including Germany with its deutsche mark, gave up their national currencies.

> "On January 1, 2002, new paper money and coins were introduced in most of Europe. What still seemed an unlikely scenario to many observers as recently as the mid-1990s happened without major obstacles or upsets: Twelve European countries gave up their national currencies."
> — Princes of the Yen