The Bretton Woods system of fixed exchange rates (Bretton Woods 1) collapsed, in some sense, when Western Europe decided it was no longer willing to hold its reserves in dollars, and demanded gold instead.
The Bretton Woods system was based on the gold-dollar standard: the world, or at least the free-world, pegged to the dollar, and the dollar was pegged to gold. Initially, the system worked because the US held most of the world’s gold at the end of World War 2. But dollar reserves grew quickly along with an expanding global economy, and dollar reserves exceeded the US gold stock by 1966.
No problem. The world’s central banks agreed that they would not convert their dollars into gold, and the system kept going. After all, the countries holding dollar reserves were also, by and large, allies of the United States military allies, and no one was all that keen to end an international monetary system that had underpinned Europe and Japan’s spectacular recovery from World War 2.
Alas, though, the alliance (or coalition?) supporting Bretton Woods 1 eventually frayed: the countries that defected from the financial coalition propping up Bretton Woods 1 tended to be countries that concluded their broad national interests would be better served with a higher degree of political independence. West Germany held on to its dollar until the end. De Gaulle’s France, famously, moved out of NATO’s integrated military command, and if not NATO per se; worried about the “exorbitant privilege” the US got by virtue of issuing the international reserve currency, and converted its dollar reserves into gold before Germany and the UK.
Fast forward thirty years. An influential group of economists argue that a new Bretton Woods 2 ties together the countries of the Asian-Pacific to the US. Critics challenge parts of the analogy: there are fewer constraints on the anchor currency in Bretton Woods 2 than in the Bretton Woods 1, since the dollar is no longer tied to gold; many Asian countries do not formally peg to the dollar, even if they intervene heavily; etc. But even critics of the analogy — and critics of the argument that Bretton Woods 2 provides a stable international monetary order — recognize than Asian reserve accumulation has played a critical role in the financing the US current account deficit — hell, even the AP now has noticed.
Can we also learn something from the political events that defined the end of Bretton Woods 1? After all, the system came apart because key members of the alliance supporting the dollar eventually concluded that the broader US-led system was no longer serving their political as well as economic interests.
Asian central banks, fortunately, cannot demand that the US exchange their dollars for gold — or even for another reserve currency. The US has not promised to maintain the dollar’s value vis a vis the euro, or supply euros or any other asset on demand. On the other hand, just as every individual central bank had an incentive to convert its dollars into gold before other central banks, central banks now — at least the smaller central banks – have an incentive to be among the first, not among the last, to shift the composition of its reserves. Any country that stops adding to its dollars reserves as rapidly, whether because it is diversifying its reserves or intervening less, effectively shifts the burden of financing the US onto the other members of the cartel. So there are certain parallels.