Bretton Woods Agreement
What Is the Bretton Woods Agreement and System?
Historical Sign in Bretton Woods, New Hampshire
The Bretton Woods Conference is the name given to the international conference held at Bretton Woods, New Hampshire in order to discuss the formation of a new international monetary system. The Bretton Woods Era is the international monetary system following the conference that lasted from 1944-1971. The conference, lasting from July 1 to July 21, 1944, involved 44 countries and was predominantly led by the United States.1 The meeting established the International Monetary Fund (IMF) and the International Bank of Reconstruction and Development (part of the World Bank today).The Bretton Woods international monetary system was characterized by an adjustable fixed-exchange rate regime in which currencies were in terms of U.S. dollars and U.S.dollars were redeemable for gold at a rate of $35.00 per ounce. Today the Bretton Woods conference is viewed as one of the most productive international economic conferences in modern history 2
Pre-Bretton Woods System
Before exploring the characteristics of the Bretton Woods Conference, it is important to understand the political and economic climate which led to the conference.Bretton Woods was not the first attempt at international monetary soundness. In fact, from 1870 to 1914, countries fixed their currencies to a specified amount of gold which caused exchange rates to stay within a “band” thus creating stability. Additionally, these rates were unable to be adjusted.3 . This era was known as the “Gold Standard Era”. Yet this gold standard eventually failed because the onset of World War I created a greater need for liquidity in order to pay for war costs. Countries started to print more money and since they did not have the gold in their reserves to exchange with which to back their newly created money, they took their currencies off of the gold standard. However, the ability of this system to temporarily stabilize exchange rates established the idea to use gold in the Bretton Woods Era. 4
Continuing on the political and economic climate prior to July 1, 1944, there are four interrelated problems that led to the Bretton Woods Meeting: restrictive trade and exchange policies after WWI, worldwide economic depression during the 1930s, the rise of economic nationalism, and the outbreak of WWII. 5 The period after WWI and before the Bretton Woods Conference was also characterized by “beggar-thy-neighbor” policies, which are policies that are implemented to benefit a nation at the expense of other nations. For instance, countries would devalue their currencies in order to make their exports appear cheaper and favorable. An example of this is Franklin Roosevelt’s decision to let the dollar drop in gold value in early 1933 and 1934 in order to make imports less appealing to create domestic jobs. Beggar-thy-neighbor policies resulted in nations retaliating, creating a vicious cycle that inarguably intensified the Great Depression throughout the United States and Europe. 6 In 1933, after World War I, a World Monetary Conference was held in London in order to address the restoration of the gold standard and the reduction of barriers to trade; however, the conference failed due to a lack of cooperation amongst the countries 7.
Preparing for Bretton Woods
The first World Monetary Conference might have failed due to lack of cooperation, but the onset of World War II changed the attitudes of countries. The intense fear of repeating the post-World War I economic tragedy of financial instability and the Great Depression elicited creative planning and cooperation from the Allies to restore stability in the global economy. The world felt that it should not return to the laissez-faire chaos of the 1930s when exchange rates floated freely. For example, Roberto Campos who was a young delegate from Brazil at the Bretton Woods Conference describes the expectations that the economic community had of the Bretton Woods Conference by saying, "The hope was that we would put an end to the era of confrontation in monetary and foreign exchange matters that characterized the 1930s. The fear was the return of the twin devils that also plagued the 1930s: depression and competitive currency devaluations." 33
In early 1941, Harry Dexter White, an American economist appointed by U.S. Secretary of the Treasury Henry Morgenthau Jr., began planning a system that would stabilize exchange rates and provide long-term capital for reconstruction after the War was over. On December 14, 1941, one week after Pearl Harbor, Morgenthau officially asked White to draft a post-War stability plan that would include all the Allies. By May of 1942, Morgenthau sent White’s plan to President Roosevelt, requesting that an international conference to be held to discuss White’s plan 8. It is important to note that at the same time an economist of the British Treasury, John Maynard Keynes, began circulating a British plan for a post-War international monetary system. The United States wanted to work together with Great Britain in order to establish stability in the global economy; however, the United States and Britain have differing objectives. The United States wanted fixed exchange rates and open trade while Britain wanted to keep its autonomy in economic policy, movable exchange rates, trade controls and tariff arrangements27. Thus in an effort to make the White plan acceptable by their British counterparts the U.S. Treasury Department made six drafts from November to December until a final version was deemed acceptable by both parties. Britain and the USA were not able to compromise on trade policies; however, they were able to compromise on exchange rates. This explains the reason that the Bretton Woods Conference focused on exchange rates rather than trade in the post-War world. Furthermore, the U.S. Treasury knew that their ideas would fail unless accepted by U.S. legislators. White, with this acknowledgement, began sending his plan to members of U.S. Congress9.
Choosing the official site for the conference was not haphazard. Morgenthau wanted a quiet place away from the wartime chaos of Washington. More importantly, Morgenthau realized that one of the key factors in Woodrow Wilson’s failure to pass the League of Nations in Congress was due to Wilson’s lack of attempts to “sell” his idea to the Republicans. Senator Charles Tobey of New Hampshire was an isolationist Republican on the Banking and Currency Committee; however, Tobey requested that the conference be held in New Hampshire in order to give himself more publicity for the upcoming election. Thus Morgenthau and White saw accepting the Bretton Woods location as a way to potentially gain the support of isolationists such as Tobey. With a consensus reached between White and Keynes’ plans and a location selected, on May 25, 1944 the U.S. finally sent out invitations to 44 governments to attend the Bretton Woods Conference on July 1, 194410.
At the Conference
Video Footage on the Bretton Woods Conference from Google Bretton Woods footage begins at 2:50
Approximately 730 people attended the Bretton Woods conference and 44 different countries were represented, mostly the Allies of World War II. Interestingly, these nations were being referred to as the "United Nations". Morgenthau invited the Soviet Union to the conference; however the Russians were apprehensive to permanently adhere to the principles of the conference. Thus they sent only a small delegation, which did not include the commissar of finance 11. One might assume that this move was done to demonstrate the involvement of the USSR in world affairs, yet to also refrain from showing too much involvement with the United States and United Kingdom. The main representatives of the U.S. delegation were as follows: Morgenthau, Fred Vinson (head of the Office of Economic Stabilization), Dean Acheson (State Department representative), Marriner Eccles (chairman of the Federal Reserve), Harry White, Senator Tobey, and Senator Robert F. Wagner (chairman of the Senate Committee on Banking and Currency). The Conference was broken down into three commissions, Commission I, Commission II and Commission III. Commission I pertained to the formation of the International Monetary Fund was headed by Harry White. Commission II pertained to the formation of the International Bank for Reconstruction and Development and was headed by John Maynard Keynes. Commission III pertained to other means of international financial cooperation and was headed by Eduard Suarez of Mexico. However, Commission I and II were the only commissions that achieved substantive work at the Bretton Woods Conference 12.
Countries Present at the Bretton Woods Conference
United States, United Kingdom, USSR, Canada, Australia , New Zealand, South Africa, India, Belgium ,Czechoslovakia, Denmark,Greece,Luxembourg, the Netherlands, Norway, Poland, Yugoslavia, France, China, the Philippines, Egypt, Ethiopia, Iran, Iraq, Liberia, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, Venezuela28
John Maynard Keynes and Henry Dexter White at the Bretton Woods Conference
Commission I: International Monetary Fund
Commission I of the Bretton Woods Agreement dealt with the International Monetary Fund. The Articles of Agreement of the IMF defined the agreements of the new international monetary system of fixed exchange rates. Despite the failure of the gold standard in the past, the countries attending the Bretton Woods Conference still desired fixed exchange rates. The idea formulated by Harry White prior to the conference was to reinstate the system of fixed exchange rates, but this time the fixed exchange regime would permit a short-term economic adjustment. The anchor to this newly formulated system was the U.S. dollar, which would be convertible into gold at a price of $35.00 per ounce. Thus countries would then list their exchange rates in terms of the U.S. dollar, which in turn could be converted to gold. Why did the U.S. dollar play the role of the anchor during in this regime? After World War II the United States held the largest amount of the world’s supply of gold due to its dominant position in the global economy, making U.S. dollar the ideal currency to use in the Bretton Woods system. The U.S. dollar consequently became known as the international reserve currency, as well as a symbol of global economic interdependency and the strength of the U.S. economy 13.
http://www.imf.org/external/np/exr/center/mm/eng/mm_sc_04.htm The Articles of Agreement of the IMF defined the agreements of the new international monetary system characterized by the fixed exchange rate arrangements. As mentioned previously one of the differences between the Bretton Woods system and the gold standard of the past was the ability to make short-term economic adjustments if a country faced fundamental disequilibrium. In this context, “fundamental disequilibrium” is used to describe persistent deficits or surpluses in a country’s balance of payments at the fixed exchange rate. The Bretton Woods system required an overseer of this system to help countries make adjustments to their balance of payments surpluses or deficits at the prevailing fixed exchange rate. The solution agreed upon at the Bretton Woods conference was the International Monetary Fund (IMF). The IMF was to serve as the “lender of last resorts” and indirectly as a watchdog to see that domestic economic policies were consistent with exchange rate stability 14.
United States: Post War King of Gold Source: International Monetary Fund Website
Commission II: International Bank for Reconstruction and Development
Another development of the Bretton Woods meeting was the International Bank for Reconstruction and Development (IBRD). Although this bank was not directly related to the international monetary system, the founders of the Bretton Woods agreement intended for it to promote economic development. Therefore, the IBRD was established to make long-term loans to developing countries in order to help these countries build their infrastructures15.
Obtaining Approval Post-Conference
After the conference ended on July 21, 1944, Congress needed to approve U.S. participation in the IMF and IBRD. U.S. Congress’ decision was to be the deciding factors in making the Bretton Woods plan a reality since the United States was to be the main player. In addition, the IMF could only be formed if other nations agreed to the articles of the IMF. These other nations, however, were forced to wait until U.S. Congress made their final decision about their participation in the fund. Fearing congressional rejection of the Bretton Woods agreements, Secretary Morgenthau and other U.S. planners decided to inform the public of the great benefits to be received by forming the IMF and IBRD by preparing radio scripts, pamphlets, articles and short films. Taking their argument to the public was a bold, yet brilliant move. How were they able to talk to the public about such complicated economic ideas? Instead of talking about the intricate details of balance of payments and exchange rates, Morgenthau and his team told the American public that the IMF and IBRD would meet the need of world security and trade expansion. Additionally, the Treasury officials claimed that the IMF was essential for American prosperity and high employment. Furthermore, it would allow the United States to play the role of the world leader in international cooperation in the postwar world. On July 31, 1945, over a year after the end of the conference, President Harry S. Truman signed the Bretton Woods Act. By December 31, 1945, 35 countries signed on to the Articles of Agreement subsequently breathing life into the IMF 18 months after the Bretton Woods conference 16.
Delegates at the Bretton Woods Conference, taken from United Nations website
After the Bretton Woods Conference
One might question why the initial “Gold Standard” failed and why the 1933 World Monetary Conference lacked sufficient cooperation. Perhaps the system failed and the countries at the World Monetary Conference never reached an agreement due to the fact that the world had not yet experienced the intensity of a depression like the Great Depression or threat of a second world war. As the Great Depression intensified and WWII began, nations were filled with fear that the economic horrors would worsen if monetary coordination was nonexistence amongst nations. Thus, Bretton Woods brought about an intense desire for coordination and expedited results. One could argue that the long term success of the Bretton Woods System was due to a climate such as the one present during its formation and reign.
Did the Bretton-Woods conference meet its objectives to stabilize exchange rates and enhance economic growth? For two decades into the Bretton Woods Era, the system appeared to be working magnificently. Exchange rates were stable, countries’ economies grew rapidly and unemployment stayed low. The rate of inflation was lower on average for every industrialized nation (except for Japan), and inflation variability and persistence were lower as well 30. For these reasons, the two decades post-WWII were known as a golden age due to the unparalleled degree of trade and growth31. However, there were innate problems with the Bretton Woods system which caused its eventual demise. The adjustable-peg function of the system meant that a currency could be revalued or devalued if it were considered to be in trouble. This elicited private speculation by providing spectators with the incentive to sell a currency on the forwards spots market if they felt this currency was perceived to be in need of adjustment. explanation Speculation meant that it was almost impossible for financial authorities to hold fixed exchange rates 17.
Another problem with the system was that countries such as Japan and Germany began running large balance-of-payment surpluses as they started accumulating international reserves. Japan and Germany could have appreciated their currencies in order to water-down these surpluses; however, appreciating their currencies would mean that their exports were not as appealing in the international market. Since both Japan and Germany were pushing for export-led economic growth, they did not have the incentive to do so. Nor did the IMF have the governing power to make both Germany and Japan appreciate their currencies 18.Dollar-denominated surpluses in other parts of the world meant a growing deficit in the U.S. balance of payments (i.e. dollar denominated assets to other nations are liabilities to the United States). The United States attempted to solve the problem of draining dollars by enacting three policies: Tied Aid, Interest Equalization Taxes and Voluntary Capital Control Program. The Tied Aid program combined the use of credits, loans, or guarantees offered by the Export-Import Bank of the United States with concessional financing or grants in order to offer or arrange for financing for the export of United States goods and services 29. The Interest Equalization Taxes were special taxes that made it more expensive for non-U.S. citizens to buy U.S. stocks and bonds or to borrow U.S. dollars. The Voluntary Capital Control Program was designed by President Johnson to discourage U.S. businesses from investing and spending abroad. These programs worked temporarily and by 1965 the U.S. balance of payments deficit was at its lowest levels since the establishment of the Bretton Woods system 19.
However, the U.S. government’s attempts to reduce the balance of payments deficit long term were thwarted by other events that leaked U.S. dollars abroad. U.S. involvement in Vietnam, increases in U.S. citizens traveling abroad, increases in U.S. private investment abroad and a fading U.S. trade surplus caused U.S. dollars to go abroad and thus the U.S. balance of payments deficit intensified 20. On March 17, 1968, the U.S. stopped redeeming privately held dollars for gold and left the markets to freely determine the price of private gold. This created a two-tier gold price system, in which the price of gold amongst the governments would still be $35 an ounce 21. The two-tier gold price system did not solve the problem, and the U.S. current account deficit continued. By 1971 the dollar assets held by foreign central banks were more than three times the U.S. holdings of $35 per ounce of gold rate 22. The U.S. had the choice to shrink its economy or to impose exchange controls; however, the U.S. opted to change the rules of the international monetary system completely. In August 1971, President Richard Nixon “closed the gold window” for foreign central banks. In other words, he suspended the ability of the U.S. dollar to be convertible into gold, ending the Bretton Woods system of adjustable fixed-exchange rates 23.
After the end of the Bretton Woods System, countries now had the opportunity to pursue independent policies. The end of the Bretton Woods System, however, did not mean that end of economic coordination and discourse amongst nations. In fact, a positive influence that came out of Nixon's decision to close the gold window was the forcing of key industrial nations to work together in a "Group of Seven" in order to coordinate monetary and fiscal policies in an attempt to maintain currency stability 32 Therefore, the end of the Bretton Woods System birthed a new definition for "interdependency". The United States' resignation from the Bretton Woods System and the subsequent agreement to work with other nations gave the message to the international community that the United States no longer wished to be the sole conductor in the orchestrating of global economic and monetary policy. At the same time, it is certain that the United States and the rest of the world did not want to repeat the "beggar-thy-neighbor" policies and economic instability of the 1930s. Thus, nations had to, and one could argue are still trying, to construct economic policy that finds the perfect balance in between the rigidity of the Bretton Woods System and the disharmony of the inter-war period.
Despite the end to the Bretton Woods Era, one must agree that the Bretton Woods system proved to be a success. The main objective of the Bretton Woods Conference was to prevent another economic nightmare like the one that existed in the period between World War I and the start of World War II by creating stability in the global economy and promoting international economic cooperation. Inarguably the Bretton Woods system was successful in doing this. The global economy grew at unprecedented rates post-WWII and there has not been a major world war since the Bretton Woods Conference 24.
Moreover, the Bretton Woods Conference and system led to more global interdependency through its creation of the International Monetary Fund and the International Bank for Reconstruction and Development (World Bank). Arthur de Souza Costa, the delegate from Brazil at the Bretton Woods Conference, said at the end of the conference in regard to the IMF and IBRD, “the two institutions which will result from our labors at Bretton Woods are the expression of a success attained by concerted effort, inspired by a single ideal that happiness be distributed throughout the face of the earth” 25. Today, despite the collapse of the fixed-exchange regime of the Bretton Woods system, the IMF promotes international financial stability and the World Bank works to reduce poverty and to promote long-term economic growth. Without the Bretton Woods Conference, these two institutions would not have been created, thus the conference is viewed today as one of the most successful economic conferences in modern history 26.
1 Garritsen de Vries "Bretton Woods and the Birth of the IMF" 13
2 Pugel 503
3 Pugel 497
4 Hubbard 515
5 Kirshner x
6 Pugel 502
7 IMF website
8 Garritsen de Vries "Bretton Woods and the Birth of the IMF" 10
9 Garritsen de Vries "Bretton Woods and the Birth of the IMF" 7
10 Garritsen de Vries "Bretton Woods and the Birth of the IMF" 9
11 Garritsen de Vries "Bretton Woods and the Birth of the IMF" 11
12 World Bank website
13 Isard 28
14 Hubbard 516
15 Isard 28
16 Garritsen de Vries "Bretton Woods and the Birth of the IMF" 17
17 Pugel 505
18 Garritsen de Vries "Bretton Woods Fifty Years Later" 131
19 IMF website
20 IMF website
21 Pugel 506-507
22 IMF website
23 Pugel 507
24 Kirshner xi
25 World Bank website
26 World Bank website
27 Economist Article "Bretton Woods revisted: A Gift From the Cold War"
28 Garritsen de Vries "Bretton Woods and the Birth of the IMF" 10
29 Cornell Law School website
30 Schwartz, Anna "Do We Need a new Bretton Woods?"
31 "Bretton Woods Revisited: A Gift From the Cold War"
32 Friedman, Thomas "The World: Nixon Legacy Devalued By a Cold War Standard"
33 Campos, Robert 151
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