The Bretton Woods Conference

The Bretton Woods Conference Liji George 3/15/2010

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Contents 1.

Introduction Introduction .................... .............................. ............ .. ........................ ................................ ........ ..................... ................................ ........... ..................... .............................. ......... 3

2.

The Bretton Woods Conference Conference...................... ................................ .......... ..................... ............................... ............ ....................... ................................ ......... . 3

3.

2.1.

The International Economic System ..................... ............................... ............ .................... .............................. ............ .. ................... ................... 3

2.2.

The Conference.................... .............................. ............ .. ..................... ............................... ............ ....................... ................................ ......... .................. .................. 4

2.3.

The Two ideas.................... ............................... ............. .................... .............................. ............ .. ....................... ................................ ......... .................... .................... 4

2.4.

The dominant dominant role of the USA ...................... ................................ .......... ..................... ............................... ............ ....................... ............................ ..... 5

Development Development at the Bretton Woods ..................... ................................ ........... .................... ............................... ............. ........................ .......................... .. 5

3.1.

Under the agreement at Bretton Woods .................... ............................... ............. .................... .............................. ............ .. ............ ............ 6

3.2.

Purpose of IMF.......... IMF..................... ..................... ............ ...................... ................................ .......... ..................... ................................ ........... ................... ................... 6

3.3.

Purpose of World Bank .................. .............................. .............. .. .................... ............................... ............. ........................ ................................ ........ ...... 6

4.

Crisis of the system.................... ................................ ............ ..................... ............................... ............ ....................... ................................ ......... .................... .................... 7

5.

Relevance Today............. Today....................... ................... ......... ...................... ................................ .......... ........................ ................................ ........ .................... ........................ .... 7

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1. Introduction

The mor e the mark ets grow, t he less er the control. The less er the control, t he gr eater is the yearning to control it. On e such control measur e was undertak en in 1944 w hen 44 nations came together to bring back ord er in a c haotic financial world. The gestation of t he Br etton woods conf er ence arose in the minds of two men of  diff er ent t emper and background but equal brillianc e and arroganc e. They wer e the Britis h economist John Maynard K eynes and Henry D exter white of the US tr easury. The United Nations monetary and financial conf er ence bett er known as t he Br etton Woods Conf er ence, established a curr ency r egime and two pow erful institutions, t he international monetary fund and t he World Bank.

2. The Bretton

2.1.

Woods Conference1

The International

Economic System

Aft er

World War I most countri es wanted to r eturn to t he old financial security and stable situation of pr e-war times as soon as possibl e. Discussions about a r eturn to the gold standard b egan and by 1926 all l eading economi es had r e-established the syst em, according to which every nation¶s circulating money had to be back ed by r es er ve ves of  gold and for eign curr encies to a certain extent. But s everal mistak es in impl ementing the gold standard (mainly t hat a weak ened Gr eat Britain had to tak e the leading part and t hat a number of main curr encies w her e over - or under valued) l ed to a collaps e of  the economic and financial r elations, peaking in t he Gr eat De pr ession in 1929. E very singl e country tried to incr eas e the competitiveness of its ex port products in order to r educe its payment balanc e deficit by deflating its curr ency. This strat egy only l ed to succ ess as long as a country was d eflating fast er and mor e strongly t han all ot her nations. This fact r esult ed in an int ernational deflation competition that caused mass un employment, bankruptcy of  enterpris es, t he failing of  cr edit institutions, as w ell as hyper inflations in t he countries conc erned.

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In the 1930s s everal conf er ences dealing with the world monetary probl ems caus ed by the Gr eat De pr ession had ended in failur e. But aft er World War II t he need for a stabilising syst em that avoided the mistak es, which had been made earlier, becam e evident. Plans wer e made for an innovative monetary syst em and a super vising institution to monitor all actions. First negotiations took plac e under wartime conditions.

2.2.

The

Conference

Br etton Woods r ef ers to t he international monetary syst em adopt ed in July 1944 t hat established rules for r e  building the post-war  economic order. The scenario discuss ed her e is when World War is still not o ver; d espit e of thes e 730 delegates from 44 Allied nations att ended the conf er ence at the Mount Washington Hotel in Br etton Woods,   N.H., to cr eate a new monetary structur e for t he financial and commercial r elations among the world¶s leading economi es. The goal was to a void a r e play of the economic disasters of t he 1930s. John Maynard K eynes who stat ed: ³ W e, the delegat es of t his Conf er ence, Mr  Pr esident, have been trying to accomplis h somet hing very difficult to accomplish.[...] It has been our task to find a common m easur e, a common standard, a common rul e acce ptable to each and not irksom e to any.´ 2 This stat ement outlines t he difficulty of  cr eating a syst em that every nation could acc e pt.

ideas The ideas of Jo hn Maynard K eynes and Harry D exter White have been described as very diff er ent from each other on s everal occasions but in fact t her e ar e extraordinary similarities. According to t he White plan, a Bank for R econstruction (today t he World Bank) and an Int ernational Stabilisation Fund s hould be established. The K eynes plan called for t he same. 2.3.

The Two

The only diff er ence was t hat K eynes want ed to vest the IMF with possibilities to cr eate money (a fact t hat can easily be understood in t he background of Gr eat Britain¶s suff ering from t he deflation polici es in t he Inter -War period) and wit h the authority to tak e actions on a muc h larger scale. In cas e of balanc e of payments imbalances John Maynard K eynes r ecommended that both sides, de  btors and cr editors, s hould change their polici es. Countries with payment surplus es should incr eas e their imports from t he deficit countries and t her e  by cr eate a for eign trade 2

see Moggeridge, 22 July 1944, p. 103

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equilibrium. Harry D exter White, on t he other  hand, saw an imbalanc e as a probl em only of t he deficit country. Economists today agr ee that White was mistak en and K eynes was mor e farsighted.3

However, K eynes¶ plan was n ever discuss ed seriously at Br etton Woods and t he  participants agr ee eed on t he White plan. The United States defined the value of its dollar  in t erms of gold, so t hat one ounc e of gold was equal to $ 35. All other members had to define the value of their money according to what was called the ³par  value syst em´ in terms of U.S. dollars or gold.

2.4.

The

dominant role of t he USA

The USA has been and still is t he dominating power of t he Br etton Woods syst em. Aft er World War II t he United Stat es was t he country wit h t he biggest economic  pot ential. The U.S. dollar was t he curr ency with the most purchasing power and it was the only curr ency that was back ed by gold. Additionally, all European nations t hat had  been involved in World War II w er e highly in de bt and transf err ed large amounts of  gold into t he Unit ed States, a fact t hat contribut ed to t he supr emacy of t he USA. Thus, the U.S. dollar was strongly appr eciated in t he r est of t he world and t her efor e becam e the k ey curr ency of the Br etton Woods syst em. The headquarters of t he two main institutions (t he IMF and the World Bank) ar e situated in Was hington D.C. The dominant rol e of the USA alr eady became appar ent when the American ideas of t he Br etton Woods syst em gained mor e acc e ptanc e than those of Gr eat Britain. The plans of the Britis h economist John Maynard K eynes wer e r eje eject ed and t he model of t he American economist White was fa vour ed.

Some delegates grumbl ed t hat the United States was using its n ew superpower status to push its own int er ests ² lik e global fr ee ee trade ² and that it was slow to compromis e. At one point, the Britis h r e pr es entative, the economist John Maynard K eynes, wrote that the Americans ³plainly int end to force their own conc e ptions through, r egardl ess of t he r est of us.´ ( The Soviet Union was at t he conf er ence but r efused to  join t he I.M.F.) But t he allies needed American help to r e build their war -ra vaged economies, and w hat emerg ed was a consensus among t hem that would last until 1971.

3. Development

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at t he Bretton Woods

see J. Bradford DeLong, 2000

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Under t he agreement at Bretton Woods :

  ² Countries wer e to maintain an exchange rate in which the values of t heir  curr encies could fluctuat e only within a narrow rang e around a fixed value based on gold. Gold's value was set in terms of t he U.S. dollar.  ² Two organizations wer e set up to help govern t he international monetary syst em:  the International Monetary Fund which would addr ess t emporary imbalances of payments  the International Bank for Reconstruction and Development , w hich is now the chief agency of t he World Bank  Group.

3.2.

Purpose of IMF

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:

The purpos es of t he IMF ar e:  T o promot e int ernational monetary coop eration by establishing a global monitoring agency that super vis es, consults, and collaborat es on monetary  problems.  To facilitat e world trade ex  pansion and ther e  by contributes to t he promotion and maintenance of high levels of  employment and r eal income.  T o ensur es exc hange rat e stability to a void comp etitive exc hange de pr eciation.  T o eliminates for eign exc hange r estrictions.  To assist in cr eating syst ems of paym ent for multilat eral trade.

3.3.

Purpose

of World Bank 5:

The goals of World Bank ar e:  T o improve the living standards.  to eliminate the worst forms of po verty.  To support t he r estructuring proc ess of  economi es.  T o provide capital for producti ve investments.  T o encourages for eign dir ect investment by making guarant ees or acce pting  partnerships wit h investors. ee  p payments in developing countri es balanced and fost ers int ernational  T o k ee trade. It is active in mor e than 100 developing economi es.  T o off er financial s er vices, analytical, advisory, and capacity building.

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www.imf.org www.worldbank.org

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Crisis of t he system

In the 1960s and 1970s enduring imbalanc es of payments betw een the West ern industrialised countries weak ened the syst em of Br etton Woods. One substantial  problem was t hat one national curr ency (t he U.S. dollar) had to be an int ernational ve curr ency at t he same time. This made the national monetary and fiscal policy r eser ve of t he United States fr ee ee from external economic pr essur es, w hile hea vily influencing those external economi es. To ensur e international liquidity the USA wer e forc ed to run deficits in t heir balance of payments, otherwise a world inflation would ha ve been caused. However, in t he 1960s t hey ran a very inflationary policy and limit ed the convertibility of t he U.S. dollar because the r es er ve ves wer e insufficient to meet the demand for t heir curr ency. The other member countri es w er e not willing to acc e pt the high inflation rat es t hat t he par  value syst em would have caused and ³t he dollar  ended up being weak and unwant ed,  just as pr edicted by Gr es ham¶s law: Bad mon ey drives out good money.´8 The syst em of Br etton Woods collaps ed. Another

fundamental probl em was t he delayed ad justment of t he parities to changes in the economic environment of t he countries. It was always a gr eat political risk for a government to ad just the parity and ³ each change in the par  value of a ma jor curr ency tended to become a crisis for t he whole syst em.´9 This led to a lack of trust and destabilising speculations. In March 1973 the par  value syst em was abandoned and t he member countri es agr ee eed on permitting diff er ent kinds of ways for d etermining t he exchange value of a nation¶s money. The IMF r eq equir ed that the countries no longer bas ed this value on gold and that it was common knowl edge how each nation determined its curr ency¶s value. Today many large developed countries allow t heir curr encies to float fr ee eely, which means t hat only supply and d emand at t he mark et det ermine what it is wort h. Some nations try to influ ence this proc ess by buying and s elling their own curr ency. Another  met hod is to p eg the value of the money to one of the main curr encies. After this r eform t he syst em of Br etton Woods was mor e about ³information exchange and consultation, conditional policy understandings, t han about rule based guarant ees.´10 In the years of floating exchange rates the level of coop eration vari ed with the economic and political developments.

5. Relevance Today6

For decades, t he dollar  has been the world's most widely us ed curr ency. Many governments hold a large portion of t heir r es er ve ves in dollars. Crud e oil and many 6

http://www.sc http: //www.scribd.com/d ribd.com/doc/14849174/Brettonoc/14849174/Bretton-Woods-Conference Woods-Conference

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commodities ar e priced in dollars. Busin ess deals around t he world ar e done in dollars. But t he financial crisis has highlighted how America's economic probl ems can wr eak havoc on nations around t he world. `

The world financial crisis, largely a r esult of  excessive risk -taking and faulty risk management practices in t he financial mark ets, has highlighted the immediate need for compr ehe ehensive r eforms to t he existing global economic and financial structur  structur e.

`

The sub-loan crisis in the United States led to t he collaps e of t he world economy and has brought an immeasurable loss to t he entir e world.

Restructuring the anachronistic Br etton Woods syst em needs thes e activities: `

r e-ex e-examining r eser ve ve curr encies,

`

dealing with growing public de  bt and the symbiotic r elationship of t he state with financ e capital,

`

r egulating stock mark ets, hedge funds, and banks to a void futur e disasters, and

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Dealing with the World Trade Organization. Xiaochuan, governor of C hina's c entral bank, has propos ed cr eating as  part of r eform in t he international monetary syst em. Zhou

³Cr eate a curr ency made up of a bask et of global curr encies and controlled by the International Monetary Fund. Call for a global currency to r e place the dominant dollar´