As for the particular new post-war monetary and economic systems, there was one for the US-led camp and
one for the Soviet-led camp, though there were also some non-aligned countries that had their own non-aligned
currencies that were not widely accepted. Those countries in the US camp—which consisted of 44 countries—
gathered in Bretton Woods, New Hampshire, in 1944 to make a monetary system that put the dollar and gold at the
center of it. The Soviet Union created its own monetary system built around its currency, the ruble. It was a much
less significant monetary system.
The Bretton Woods Agreement put the dollar in the position of being the world’s leading reserve currency.
This was natural because the two world wars made the US the richest and most powerful country by far. It
earned this money via its large exports, and by the end of World War II it had amassed the greatest
gold/money savings ever. That savings accounted for around two-thirds of the world’s government-held
gold/money and was equivalent to eight years of import purchases. Even after the war, it continued to earn a
lot of money by continuing to export a lot. In other words, the US was very rich.
By comparison, other countries were broke, which made it difficult to buy what they needed from the US
and other countries. Besides not having any money Europe and Japan had virtually nothing to sell after the war
because their economies were destroyed. As a solution, and to fight the spread of communism, the US offered
massive aid packages to Western Europe and Japan (known as the Marshall and Dodge plans) which were
a) good for these devastated nations, b) good for the US economically because these countries used the
money to buy US goods, c) good for the US’s geopolitical influence abroad, and d) good for reinforcing the
dollar’s position as the world’s dominant reserve currency because they increased its usage. All leading
central banks in history have followed variations on this process. Most recently China’s Belt and Road
Initiative has offered similar advantages to China.
As for monetary policy, from 1933 until 1951 the amount of money, the cost of money (i.e., interest rates), and
where that money went was controlled by the Federal Reserve to serve the greater objectives of the country rather
than to let the free market allocate money and credit.3 More specifically it printed a lot of money to buy debt,
capped interest rates that lenders could charge, and controlled what money was allowed to go into, so high
inflation did not drive interest rates to unacceptable heights and there were no investment options more attractive
than the debt the government wanted people to save in.
Following a brief post-war recession that was due to the government’s war spending declining, the US entered a
prolonged period of peace and prosperity because the new and mutually reinforcing Big Cycles transpired. Most
importantly a new debt cycle began with the new monetary system, wealth and values gaps were reduced so the
environment was one of greater unity in pursuit of peace and prosperity, and there was a dominant power that
nobody wanted to fight. Also, stock prices were very cheap. As a result, the US economy and markets were very
strong for many years to come.
During the post-war adjustment period between mid-1945 and mid-1947 over 20 million people were released
from the armed forces and related employment so unemployment rate rose from 1.9% to just 3.9%.4 At the same
time pent-up demand and savings to finance that demand had built up so the removal of rationing laws, which had
limited people’s ability to buy consumer goods, fueled a consumer spending surge. Cheap mortgages were also
available for veterans, which led to a housing boom that fueled the expansion. There was a return to profit making
activities, which raised the demand for labor so employment was very strong. Exports were strong because the US
government (via the Marshall and Dodge plans) helped build the market for US goods abroad to be strong. Also
the US private sector went global and invested abroad from 1945 through the 1970s. That environment was great
for business, profits, and stocks because American corporations were extremely profitable after the war at the same
time that stocks were very cheap in relation to bonds (e.g., stock earnings and dividend yields were a lot higher
than bond yields). Stocks were cheap because those who went through the depression and war years were very
risk-averse, so they significantly preferred a safe income stream to a risky one. This set of conditions made a
multi-decade prosperity and bull market in stocks that reinforced New York’s dominance as the world’s financial
center, bringing in more investment and further strengthening the dollar as a reserve currency.
This peace and prosperity also provided the funds to improve education, invent fabulous technologies (e.g., go to
the moon), and do a lot more. In other words, post-war the United States was in one of those great mutually and
self-reinforcing Big Cycle upswings. It was popularly believed in the mid-1960s that economics was a science so
we could expect economic prosperity and the stock market always went up with wiggles around the uptrend so one