Bretton Woods Conference
The Bretton Woods Conference, held in July 1944 in Bretton Woods, New Hampshire, was a pivotal meeting aimed at establishing a stable post-World War II economic framework. As the Allies recognized their impending victory, the United States and Great Britain sought to prevent a return to the economic turmoil of the Great Depression. Central to the discussions were two key figures: British economist John Maynard Keynes, who advocated for a system that would preserve Britain's economic ties within its empire, and American economist Harry Dexter White, who proposed a model fostering low tariffs and flexible international currency exchanges.
The conference resulted in the creation of significant financial institutions, namely the International Monetary Fund (IMF) and the World Bank, designed to promote economic stability and development. A contentious topic was the allocation of financial quotas among participating countries, with the U.S. holding the largest share, which solidified its dominant role in the IMF. The agreements reached at Bretton Woods laid the groundwork for international monetary relations for several decades, establishing the U.S. dollar as the primary global reserve currency.
However, the reliance on dollar liquidity and the U.S. balance of payments deficits eventually led to monetary challenges, culminating in the system's collapse. Overall, the Bretton Woods Conference was instrumental in shaping the modern international economic landscape, reflecting both the aspirations and complexities of global financial cooperation.
Bretton Woods Conference
The Event Meeting of financial leaders of Allied governments designed to create a monetary arrangement for the postwar world
Date July 1-21, 1944
Place Bretton Woods, New Hampshire
The goal of this international meeting was to devise a postwar system that would ensure vibrant world trade and healthy economies. The agreement resulting from the meeting provided the basis for the postwar fixed exchange-rate system and the establishment of the International Monetary Fund and the World Bank.
As World War II progressed, it became increasingly evident that the Allies would win, and the governments of the two primary Western allies, the United States and Great Britain, were anxious to create a postwar economic system that would not fall back into the Great Depression that had engulfed the 1930’s. Economists in particular believed that a major factor in the economic climate that had led to the Depression was the failure of sustained world trade. High levels of trade required institutions that could act to maintain stable monetary exchange rates to defuse economic dislocations. To achieve this goal, Britain and the United States arranged for the meeting at Bretton Woods, New Hampshire, that would lead to the creation of the International Monetary Fund (IMF) and the World Bank (which would later evolve from a body designed to rebuild the war-shattered economies of the West to a body designed to promote economic development in underdeveloped economies). The Bretton Woods Agreement was essentially the brainchild of two economists: the world-renowned John Maynard Keynes, who represented the British government at the negotiations, and Harry Dexter White, a little-known American economist employed by the U.S. Treasury.
Keynes was concerned to preserve what he believed was the mechanism that would enable Britain to rebuild its economy after the war, particularly its close economic ties to the countries that had constituted its empire, bound together by preferential tariffs called “imperial preference.” White believed that the world needed a system with low tariffs and free-flowing funds from one country to another, anchored in relatively fixed exchange rates.
The Conference
Keynes, who had been representing the British government in negotiating a system of payments for the war materials that Britain needed to continue fighting in World War II, was very familiar with the various positions of the U.S. government on international trade. He held doggedly to British arguments on future trade relations between an economically battered Britain and a triumphant United States. White, who was thoroughly familiar with American politics, held out for positions that would not require congressional approval, in particular one giving the president the authority to negotiate trade agreements.
The negotiations were divided into two parts called Commissions. “Commission I” dealt with the creation of the International Monetary Fund, which would monitor, and occasionally intervene, to ensure that international currencies remained stable. “Commission II” dealt with the conditions needed for future economic development, which would be the responsibility of the new World Bank. White chaired Commission I and guided negotiations leading to the creation of the International Monetary Fund. Keynes chaired Commission II, which looked at the needs for a healthy postwar international economy in which there was still room for imperial preference tariffs.
The Quota Issue
One of the most contentious issues at Bretton Woods was the question of quotas—the sums that participants would have to provide to finance the IMF (and, subsequently, the World Bank). The largest quota was that assigned to the United States. Great Britain and its colonies were assigned half the U.S. quota. The U.S. quota of about $2.5 billion secured leadership in the IMF for the United States. The quotas were supposedly based on the relative national incomes of the participant countries. To ensure some flexibility, IMF members that had used currency devaluation to solve their economic problems during the 1930’s were permitted to adjust their foreign exchange rates by 10 percent, provided they notified the IMF of their intent. Greater rate changes would disqualify countries from further participation in the IMF.
The dominant role of the United States in funding the IMF effectively ensured that the IMF’s administrators would be based in the United States, despite Keynes’s attempts to have them based in London. He believed that basing the IMF or World Bank in London would assist in the recovery of Britain’s position as a leader in world trade.
Impact
The Bretton Woods Agreement created the institutions that were to persist for more than half a century dealing with international monetary relations and international development. They presupposed the dominance of the dollar in international trade, a situation that persisted for about twenty-five years. As other currencies—such as the revived British pound and the German mark—achieved important positions in international trade, adjustments would be made.
The United States took on the role of supplying additional liquidity to the world by running balance of payment deficits on a continuous basis. The U.S. dollar rapidly became the world’s major vehicle for payment and reserve currency, or currency used to support the value of the domestic currency. Through these continuous balance of payments deficits, U.S. dollars sent abroad to buy goods and services and for investment purposes did not return. The rest of the world used additional U.S. dollar holdings for monetary reserves and to supplement world liquidity.
As deficits in the United States balance of payments became chronic, this would lead to a weakening of the U.S. dollar. Monetary crises would follow, and confidence in the dollar would wane. Eventually, the ability of the U.S. Treasury to convert U.S. dollars into gold would become difficult and the Bretton Woods system would collapse.
Bibliography
Acheson, A. L. Keith, John F. Chant, and Martin F. J. Prachowny, eds. Bretton Woods Revisited. Toronto: University of Toronto Press, 1972. Primarily addresses the problems that arose when the dollar no longer dominated foreign exchange rates.
Bakker, A. F. P. International Financial Institutions. London and New York: Longman, 1996. Provides a good summary of the roles of the various institutions, especially the IMF, governing foreign trade and monetary exchange.
Best, Jacqueline. The Limits of Transparency: Ambiguity and the History of International Finance. Ithaca, N.Y.: Cornell University Press, 2005. Analysis of international finance revolving around the Bretton Woods Agreements, which are the subject of three of the book’s seven chapters.
Kirschner, Otto, ed. The Bretton Woods-GATT System: Retrospect and Prospect After Fifty Years. Armonk, N.Y.: M. E. Sharpe, 1996. Includes contributions by individuals who have had experience with world trade.
Scammell, W. M. International Monetary Policy: Bretton Woods and After. New York: John Wiley & Sons, 1975. This easy-to-understand work examines the development of the system, the changes in the environment, and the role the International Monetary Fund played up to 1973. Contains a good discussion of the merits and shortcomings of both the Bretton Woods system and the International Monetary Fund.
Sidelsky, Robert. John Maynard Keynes: Fighting for Britain, 1937-1946. London: Macmillan, 2000. This third volume of a lengthy biography of Keynes contains far and away the best detailed description of the negotiations that took place at Bretton Woods.