July 6, 2024


July 6, 2024

BRICS versus Bretton Woods

Exactly 80 years ago this month, delegates from 44 countries convened in the White Mountains of New Hampshire. Their mission: to figure out a way to pull the world out of a protracted period of brutal war and economic hardship.

Now known as the Bretton Woods Conference, the United Nations Monetary and Financial Conference took place at The Mount Washington Hotel in the first three weeks of July 1944.

Completed in 1902 with the help of 250 highly skilled masons and woodworkers who were shipped in from Italy for the job, The Mount Washington was the most luxurious hotel of its day. With a superstructure built of steel, which was unusual for the era, the hotel was an appropriate choice for the event. The ambition of the conference was to create an enduring architecture for the global economy out of the wreckage of World War II.

The Mount Washington Hotel - Bretton Woods, NH

The war was far from over when the conference took place. Germany would not surrender until May of the following year, and Japan’s surrender would not come until September. Yet world leaders understood the urgent need to make preparations for a post-war economic system.

After all, the collective failure to develop a workable international economic order after World War I was one of the main reasons the world once again erupted in violence less than three decades later. In The Economic Consequences of the Peace, published just five months after the end of the first world war, John Maynard Keynes prophesied all of this.

If the European civil war is to end with France and Italy abusing their momentary victorious power to destroy Germany and Austria-Hungary now prostrate, they invite their own destruction also, being so deeply and inextricably intertwined with their victims by hidden psychic and economic bonds. - John Maynard Keynes, 1919

At the conclusion of World War I, under the threat of a naval food blockade that the Germans would be powerless to prevent, the Allied Powers compelled Germany to sign the Treaty of Versailles. The treaty required enormous reparations payments and led to massive and unrealistic debt obligations.

Keynes’ point was not that the aggressor nations of World War I didn’t deserve punishment. It was that the punishment was so extreme and so devastating that it would set in motion a chain of events that would ultimately harm the victors.

As Keynes predicted, Germany’s struggle to repay its debts was destabilizing. In the 1920s, the debt burden contributed significantly to the hyperinflation of the Weimar Republic. European economic instability would also contribute, a decade later, to the Great Depression, which was exacerbated by the breakdown of trading relations among major economic powers.

The Depression led one country after another to detach their currencies from the gold standard and pursue “beggar thy neighbor” currency devaluations in a futile effort to prop up collapsing demand. Fascism would eventually rise in Europe in response to the economic chaos.

With the second world war winding down, Keynes did not want to see the same mistakes made. Even as the war still raged, as one of the world’s most respected economists and the lead representative of the United Kingdom, he and others had been lobbying for collective action.

Following a number of precursor meetings, in July 1944, more than 700 finance ministers and technocrats gathered in the safety and splendor of the Granite State to hatch plans for a stable and secure post-war financial system.

Keynes and U.S. Treasury Secretary Morgenthau confer at Bretton Woods

A new economic order

Keynes brought his world-renowned intellect to New Hampshire, but Great Britain was no longer the dominant economic power. Over the course of just a few short years, everything had changed.

While the various European powers were bombing each other into smithereens and running up enormous debts, the United States was supplying them with arms and equipment and industrializing at an unprecedented pace. By the conclusion of the war, nearly 70% of the total supply of gold in the world owned by central banks belonged to the United States.

Keynes was highly influential and had a number of ideas that would not only help the world but help restore the prestige of the British Empire. The Americans, however, were naturally more concerned with American interests. Led by Dexter White, the director of monetary research at Treasury, the U.S. was focused on currency convertibility to pave the way for easy access to export markets.

The final outcome of Bretton Woods was largely a hybrid of proposals by Keynes and Dexter. One idea that Keynes sought to advance but could not get over the finish line was the “bancor,” a supranational currency (similar to today’s Euro) which through the creation of international banking institutions would effectively become the global reserve currency.

The United States, now the largest, healthiest economy in the world and owner of most of the world’s gold reserves, had a different idea.

In the end, the U.S. proposal would prevail. A new monetary system would be introduced at Bretton Woods that made the U.S. dollar the global reserve currency.

Two new institutions

During the depression, the gold standard was effectively abandoned as countries sought to weaken their currencies to spur export demand. One of the key goals of Bretton Woods was to resurrect some variation of the gold standard in order to put the world back on a path of monetary stability.

This was accomplished through the formation of the International Monetary Fund (IMF). Bretton Woods also put in motion the International Bank for Reconstruction and Development (IBRD), which would later evolve into the World Bank, and become a major provider of financing for developing countries.

Under the historical gold standard, nations would resolve trade deficits through the transfer of gold between central banks. Under the new Bretton Woods regime, the U.S. dollar would become the currency used to settle these imbalances.  

With the assistance of stabilization mechanisms provided by the IMF, participating countries would have their currencies convertible into U.S. dollars at fixed exchange rates (within narrow trading bands). U.S. dollars would in turn be convertible into gold at a fixed price of $35 per ounce.

The reign of King Dollar

After Bretton Woods, the U.S. dollar was essentially as good as gold. This helped usher in a quarter century of economic stability, prosperity, progress and, with some exceptions, such as the Korean War, peace.

The architects of the post-WWII global economy learned from history. Rather than drive the populations of the defeated nations into the ground, these countries were pacified and then rebuilt. The Marshall Plan was implemented through the institutions formed at Bretton Woods and required countries benefiting from American aid to accept the new currency regime.

In the popular imagination (which has been to large extent shaped by counterculture activists of academia and Hollywood), the 1950s and early 1960s are often seen as an era of conformity and shallow consumerism (Stepford Wives and TV dinners). But this period was in reality an era of unprecedented economic and technological progress, marked by consistently high rates of real GDP growth and low unemployment.

Many historians refer to the post-war economic boom as the “Golden Age of Capitalism.” The systems developed at Bretton Woods created an environment for innovation and investment.

Europe and Japan were rebuilt. Eisenhower developed the interstate highway system. There were extraordinary advances in transportation and communications that leveraged technologies developed during the war. Nuclear power plants were constructed. Men were sent to the moon.

And then it fell apart

This golden age would not last forever. Although the Soviets sent a large delegation to Bretton Woods (including several beautiful women who were believed to be “honey traps”) and had many of their demands met, they ultimately never signed onto the final arrangements.

In the decades following the end of the war, the Soviets transitioned from allies to adversaries. Just as the national debts required to fund World War I disrupted the Victorian era gold standard that prevailed through the turn of the century, the United States had to print a lot of money to fund its activities in Vietnam. LBJ’s spending on Great Society programs didn’t help the debt situation either.

With so many dollars in circulation internationally, foreign investors grew more inclined to own gold rather than dollars at $35 per ounce. There was a run on gold. The situation reached a boiling point in mid-August 1971.

After meeting with his top economic advisors and Fed Chair Arthur Burns at Camp David, Nixon announced on the evening of August 15, 1971 that the “gold window” would be closed. This meant, at least for the time being, foreign central banks would not be able to redeem their U.S. dollars for gold bars.

Nixon Ends Bretton Woods International Monetary System

Nixon closes the gold window (8/15/1971)

It would be a few more years until the key element of Bretton Woods, U.S. dollar convertibility into gold at a fixed rate, would completely die. A series of efforts were made to adjust exchange rates and reset the dollar-gold peg. First, they tried $38. Then $42.

By early 1973, it became apparent that these efforts were futile. Gold was worth much more than dollars. From a foreign exchange perspective, Bretton Woods was over.

With the demise of dollar-gold convertibility, the U.S. dollar was now backed by nothing. Foreign exchange rates began to float freely. A period of inflation and economic stagnation ensued, producing the concept of “stagflation.” By January 1980, when the Soviets invaded Afghanistan, the price of gold moved from $35 before the peg broke to over $650 per ounce, a nearly 20-fold increase.

Enter Ronald Reagan

Nearly a decade into the new era of fiat money, Americans faced a sustained period of economic adversity of a sort which had not been experienced since before World War II. The country would never go back to the gold standard, but with the inauguration of Ronald Regan a year after gold peaked, monetary stability would be restored.

While many economic historians justifiably allocate significant credit to then Fed Chair Paul Volcker for breaking inflation’s back with consistently high interest rates, from a longer term perspective, Reaganomics transformed the American economy in a way that simply made gold less important.

Through a policy program that promoted tax cuts, deregulation, entrepreneurship and military strength, the Reagan Revolution reinvigorated the American economy, brought us into the computer age, and ushered in another multi-decade period of relative peace and prosperity.

Starting in the 1980s, investors were no longer interested in dollars because they could be converted into gold bars. Dollars now provided access to the dynamic American economy, including the American stock market.

During Reagan’s eight years in office, the S&P 500 nearly tripled, producing annualized returns of over 12.5% per year. Inflation averaged 4.6%. In the prior eight years, inflation averaged 8.9% and the S&P 500 generated a total return of 31%, a substantially negative result in real terms.

Reagan helped lay the foundation for another sustained period of prosperity and relative peace that resembled the post-war economic boom. This would extend through multiple Presidencies, including his successor, George H. W. Bush, and even Bill Clinton, an economic centrist.

While the price of gold soared in the 1970s after the peg broke, it would give up most of those gains over the next two decades. Having peaked above $650 per ounce in early 1980, gold would trade below $300 per ounce by the end of the 1990s.

Tony Blair’s Chancellor of Exchequer Gordon Brown famously sold half his country’s gold reserves in the late 1990s at the very bottom, perhaps on the assumption that peace and prosperity would last forever. Unfortunately for the U.K., this was a bad bet.

The 2000s saw a re-emergence of war, financial instability and geopolitical rivalries that would once again call into question the international economic order. And once again, the gold price communicates the story. Since the end of the 20th century, gold has risen nearly ten-fold.

As we examine the trajectory of gold over the last quarter century, we notice the usual culprits. The debt burdens of war (Afghanistan, Iraq), financial recklessness (2008 Global Financial Crisis), excessive borrowing and inflationary money printing (Covid stimulus), and once again, war (Ukraine).

It is against this backdrop of inflation, monetary volatility, and geopolitical tensions that nations around the world are yet again gathering to develop a stable and secure system, in which gold likely will play a critical role, to protect their collective economic interests.

But this time, it is not the United States leading the creation of a regime that will cement its position as a the global economic hegemon. It’s dozens of other countries—including friends, enemies and everything in between—who are supporting a new monetary regime that is intended to undermine American economic hegemony.

Rise of the BRICS

Wall Street loves its acronyms. Especially, initialisms—acronyms that sound like words. For a while, we had FAANGs (Facebook, Apple, Amazon, Netflix, Google), which represented the leading mega-cap tech stocks. During the European sovereign debt crisis, we were introduced to PIIGS (Portugal, Ireland, Italy, Greece and Spain).

So it may be no surprise that the term BRIC was coined, or at least popularized, by a Goldman Sachs strategist named Jim O’Neill back in 2001. In a paper entitled Building Better Global Economic BRICs, O’Neill noted that major developing countries like Brazil, Russia, India and China not only had large populations but faster growth rates than the United States and European Union. He argued that international policy-making associations, like the G-7, should be expanded to accommodate these countries.

Many people may think of BRICS in this original context (a term used to identify important emerging market countries). But BRICS over the past two decades, especially in recent years, has evolved into something much more significant. BRICS now represents a full-fledged economic organization, with institutions and ambitions that parallel those created by Western powers at Bretton Woods in 1944.

If you can’t join them, beat them

It is important to understand who is responsible for the transition of BRICS from a clever term in a Goldman strategy paper to a major geopolitical force. It was the same country that sent a delegation to New Hampshire but ultimately removed themselves from the final arrangements: Russia.

As described in Russia, BRICS and the Disruption of the Global Order by political scientist Rachel Salzman, now at the Wilson Center, it was Vladimir Putin himself who organized the first meeting of the foreign ministers of Brazil, Russia, India and China on the sidelines of the UN General Assembly in 2006.

Later, in 2008, at Russia’s behest, the heads of state of each of these four countries met at the sidelines of the G-8 summit in Japan. There, they agreed to meet again the following year in Ekaterinburg, Russia. They have met annually ever since.

The most recent gathering of BRICS countries began on June 10, 2024 in Nizhny Novgorod, Russia. The BRICS association now encompasses many more nations than the original four. South Africa has officially become the “S” in the acronym. Numerous countries are pursuing or considering membership, while Iran, Egypt, Ethiopia and the United Arab Emirates formally joined at the beginning of this year.  

Sergey Lavrov has been Russia’s foreign minister under Putin since 2004. While he does not get enormous attention in Western media, he may be one of the most important and influential diplomats in modern history. No doubt he has been instrumental, likely the driving force, behind the development of the BRICS as a political entity.

Lavrov opened the meeting with a moment of silence for the recently deceased President of Iran, who perished in a helicopter crash. He then proceeded to blast the United States and outline his vision for a “new international order.”

New globally significant political decision-making centres are emerging among the countries of the Global South and Global East, the Global Majority countries… The transition to a new international order (we had the chance to see it) will take an entire historical era and be a thorny path. The United States and its allies keep trying to retain their elusive dominance and to slow down the objective processes leading to multipolarity. They are weaponising economic tools and using sanctions pressure and financial blackmail to force sovereign states into choosing specific development models and trade partners. The West is not above using military force… Recent international developments have revealed the true colours of those who have so far claimed an almost exclusive right to define “universal values” acting under the guise of the “rules-based order.” The proponents of this concept are trying to impose rules and interaction mechanisms that benefit only them…. - Sergey Lavrov, 6/10/2024

Lavrov (left) chums it up with fellow BRICS foreign ministers

Notwithstanding the situation in Ukraine, Russia has been playing host to some of the most populous and strategically important countries in the world. Meanwhile, a waitlist forms for BRICS membership, now including longtime U.S. ally Thailand.

Saudi Arabia also attended the meeting in Russia and is contemplating joining. Unofficial reports have surfaced recently that Saudi is walking away from an informal or secret “petrodollar” deal with the U.S. that was struck shortly after the breakdown of Bretton Woods and committed the Saudis to transact in U.S. dollars. Whatever the real story is, it is clear that Saudi Arabia is quite keen to do business with BRICS countries (who are generally less interested in the Europe-led decarbonization agenda).

This all paints a starkly different picture from the one Secretary of State Anthony Blinken painted one year ago in Finland, where he seemed to take credit for turning Russia into a pariah state.

Today, Russia is more isolated on the world stage than ever…. President Putin, for years, sought to divide the West from the rest, claiming that Russia was advancing the best interests of the developing world. Today, thanks to openly declaring his imperial ambitions and weaponizing food and fuel, President Putin has diminished Russian influence on every continent. - Anthony Blinken, 6/2/2023

Russia has chairmanship of the BRICS throughout 2024, and there will be a meeting of heads of state in Kazan, Russia in October. Among the crucial topics that are expected to be addressed is the ongoing work of the BRICS to develop a new international monetary system.


In many ways reminiscent of what was worked out in New Hampshire 80 years ago, the parties want to develop mechanisms that will facilitate smooth and stable financial interactions among members countries. As Russia recently described it, work continues on “development of a platform for payment in national currencies in mutual trade.”

One possibility that has been widely discussed is the formation of a BRICS currency, perhaps not unlike the “bancor” that Keynes originally proposed and the Americans rejected. This could be a gold-backed supranational currency  that would facilitate trade flows between member nations, possibly even involving fixed exchange ratios. It could even take the form of a digital currency, using blockchain technology.

Simmering resentments

As a political body, BRICS grew out of multiple grievances of its member states towards Bretton Woods institutions like the IMF, which award more voting power to a country like France than a country like India, which has significantly higher share of global GDP.

Emerging market countries that are dependent on the dollar also tend to resent the wild fluctuations in interest rates that have characterized American monetary policy going as far back as the late-1990s technology bubble. As the Fed jerks interest rates up and down in response to various crises, this has had disruptive impacts on foreign exchange rates for these countries.

Most recently, the actions of the United States and NATO allies to freeze and effectively confiscate Russian assets (both public and private) and weaponize the SWIFT payment system have raised alarm.

As the Western establishment pushes a narrative that Putin’s Russia is a dangerous aggressor, comparable to the Third Reich, with ambitions of European conquest, BRICS countries, who feel bullied by the U.S. themselves, seem to take a more cynical view of American policy.

While opinions about Russia’s actions in Ukraine may vary, there is a lot of sympathy for the Russian perspective. Many BRICS countries seem to grasp Russia’s argument that it is defending its core security interests by preventing NATO from taking effective military control of Ukraine, which sits at Russia’s doorstep. Even countries that are closely aligned with the U.S. like India immediately refused to participate in the oil boycott.

Although the key feature of the Bretton Woods system, the convertibility of the U.S. dollar into gold, ended in the 1970s, the system has otherwise remained largely intact. The U.S. has not lost ground as the global reserve currency thanks to the continued importance of the U.S. economy and American businesses, the lack of viable alternatives, the persistent power of Bretton Woods institutions like the IMF and World Bank, and inertia.

The developing world has wanted to extricate itself from Western financial dominance for years. It will be an uphill battle, but the weaponization of the financial system against Russia may ultimately prove to be the major catalyst for the emergence of a competing system. Certainly, China, with eyes on Taiwan, would like to put itself in a position where it can survive economically even if there is a massive sanctions regime imposed against it.

Speaking of China, Shanghai in 2021 became the permanent headquarters of the BRICS’ own version of the World Bank, which is called the New Development Bank—”a multilateral development bank established by Brazil, Russia, India, China and South Africa (BRICS) with the purpose of mobilising resources for infrastructure and sustainable development projects…”

New Development Bank HQ in Shanghai

The economic center of gravity is gradually moving towards the BRICS. BRICS membership is not only expanding, BRICS economies have higher growth rates. BRICS countries today represent over one-third of global GDP and more than 40% of the total global population. On average, BRICS economies are growing at over 3.5% versus the G-7 at approximately 1%.

Investment implications

The economic world order that was created in the aftermath of World War II is now being directly challenged. Gold has benefited from the shift away from U.S. dollars, as BRICS countries in particular prepare for their participation in a new monetary architecture that is not vulnerable to American foreign policy initiatives.

Growth in central bank gold reserves (Source: Atlantic Council)

The stated objective of the BRICS is to usher in a multi-polar world order in which American influence is diminished. It is conceivable that we could see a similar pattern play out as we witnessed with the breakdown of the Bretton Woods system in the 1970s. This resulted in many years of elevated inflation and rising commodity prices.

The cleavage of the world into two quasi-independent monetary/trading blocs also raises the risk of military confrontation in the sense that America may no longer be able to deter bad behavior through the threat of economic retaliation. To the extent this increases the likelihood of aggressive military action (such as an invasion of Taiwan), this also favors ownership of gold and other scarce resources.  

It is still early days for BRICS as a political and economic force, but investors should stay attuned to developments. There is potentially enormous historical significance to the geopolitical realignment that is now very clearly underway. The threat posed by the rise of the BRICS is arguably underappreciated in the United States, where we have grown quite accustomed to our position of dominance over the past 80 years.


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