Bretton Woods regime

Bretton Woods is a location, period of history, beginning of an era in the twentieth century, birth of an international organization, but, most of all, an international mon- etary system to regulate trade, peg currencies to one standard, and maintain a regime of fixed exchange-rate parity.

In July 1944 at Bretton Woods, New Hampshire, 44 nations under official British and American leadership set up economic measures for post-war reconstruction. The US dollar - pegged to gold - was approved as the new monetary standard. Two new insti-tutions were also established with specific tasks: the Stabilization Fund (International Monetary Fund, IMF), a "special organization" (Horsefield, 1969, p. 39), to be a watchdog facilitating and promoting trade through monetary stabilization, and the International Bank for Reconstruction and Development (World Bank), with the role of providing member nations with "necessary capital not otherwise available except possibly on too costly terms" (ibid.).

While the role and the purpose of the World Bank, targeting long-run structural changes, were straightforward, those of the IMF, involving the participation of member nations in short- and medium-run monetary coordination, were more challenging. The IMF would expect member nations to adhere and adjust their trade policies to given common goals, implicating and impacting national policies. The IMF would provide "consultation and collaboration on international monetary problems" (Horsefield, 1969,p. 2). Implied was that achievement of high levels of employment and income was in concordance with the IMF's policy of dissuading "foreign exchange restrictions" and promoting "expansion and balanced growth of international trade" (ibid.). To avoid slowdown in the world economy, the IMF's general resources would be made available "to correct maladjustments in their balance of payments" (ibid.). Finally, to "avoid com- petitive exchange depreciation" (ibid.), the IMF would promote exchange-rate stability.

The final consensus on the currency standard and the responsibilities of the agencies was known as the Bretton Woods gold-standard agreement. These international mon- etary arrangements after World War II, which served to guide the world economy for 28 years, came to an end in 1972. Under Nixon's administration, the United States, finding itself unable to fulfil its obligation to guarantee the US dollar's convertibility, decided to end the agreements, under circumstances similar to those of the early 1930s, when the British pound gave way to pressure. The IMF and World Bank have nonetheless contin- ued to function, leaving the supply of the international currency to the whims of the US Federal Reserve.

Unlike the establishment of the US dollar as the international standard or the ex- nihilo creation of the euro, the British pound, without agreements or treaties, became the international currency of the nineteenth century. During that first gold-standard era, the pound was accepted as an international currency through trust, reliability, and market needs and risks. As, however, industrial production in the advanced economies grew sub- stantially and in scale, needs for finance and credit became more intricate. The use and abuse of the instruments of money produced more violent financial fluctuations with devastating consequences, like the 1929 crisis. Proposals for the Bretton Woods agree- ments were conceived, as depression was looming again and war raging. It was during those difficult circumstances that plans for an international monetary agreement were proposed.

The British Keynes and the American White Plans were the main proposals discussed at Bretton Woods. While both called for the setting-up of monetary institutions to aid and promote international trade, the two were fundamentally different. The Keynes Plan presented an ambitious concept with relatively little political interference and structural cumbersomeness: "a central institution, of a purely technical and non-political char- acter" (Horsefield, 1969, p. 21), entailing minimal interference "with internal national policies" (ibid., p. 19) and limited authority for "the Governing Board of the proposed Institution" (ibid.). It called for safeguards for "the rights and privileges of the smaller countries" (ibid., p. 20) and insisted that management be "genuinely international without preponderant power of veto or enforcement to any country or group" (ibid.). Keynes had in mind the contemporary bleak consequences and disarray resulting from "extravagant fluctuations of market conditions" (ibid., p. 19), leading nations to resort to "unilateral action and competitive exchange depreciations" (ibid., p. 20) and thus proposed a monetary arrangement to aid in offsetting or preventing "deflationary and inflationary tendencies in effective world demand" (ibid.).

Keynes's proposal also consisted in the establishment of an International Clearing Union, a bank through whose accounts nations could settle their balance-of-payment dif- ferences. To avoid speculations related to bilateral currency exchanges, Keynes suggested the creation of an "international bank-money" (Horsefield, 1969, p. 21), the bancor. "[F]ixed in terms of gold and accepted as the equivalent of gold" (ibid.), it would serve exclusively to balance the assets and liabilities of member nations. The bancor, strictly for use by central banks, would be capable of self-equilibrating international financial flows, since the deficits of certain countries would simply be the counterpart of the surpluses of others. With an agreed-upon stock of reserves of bancor, "[i]f no credits can be removed outside the clearing system, but only transferred within it, the Union can never be in any difficulty as regards the honouring of cheques drawn upon it" (ibid., p. 22). Keynes argued the need for "an agreed plan for starting off every country after the war with a stock of reserves" (ibid., p. 21), stating that "it is not for the Clearing Union to assume the burden of long term lending" (ibid., p. 20). Keynes felt that "operating through whatever national organ, such as a Treasury or a central bank, is most appropriate, private indi- viduals, businesses and banks other than central banks, [will] each [be] continuing to use their own national currency as heretofore" (ibid.).

The White Plan was the one largely adopted in the final agreement of Bretton Woods. It favoured the dominance of the US dollar over other currencies, tilting the balance of power toward creditor (over debtor) countries. It resulted in a system institutionally intrusive, bureaucratically burdensome, and disproportionate in the weight it gave to the United States in deciding the fate of the organizations. Had the Keynes Plan been adopted, the financial environment of today would undoubtedly be very different.

See also:

Bancor; Dollar hegemony; Federal Reserve System; International Monetary Fund; International settlement institution; Keynes Plan; White, Harry Dexter.