Bretton Woods Conference

• 1. Introduction

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  In the summer of 1944, with the outcome of World War II still uncertain, 730 delegates from 44 allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire. Their task was nothing less than designing the financial architecture of a world that did not yet exist. They had three weeks, a ticking clock, and the memory of every economic catastrophe from the previous quarter-century pressing down on them.

  What brought so many nations to a resort hotel in the White Mountains? The answer lay in the wreckage of the interwar years. Countries had abandoned the gold standard, ignited trade wars, and watched the Great Depression spread from one economy to the next like a contagion. And there was Germany. After the First World War, reparations demanded by the Versailles treaty had pushed the German economy into a hyperinflation so severe that prices rose 41 percent per day. By the autumn of 1923, one dollar was worth roughly four trillion marks. People had resorted to barter. From that economic collapse came political catastrophe, and from that catastrophe, another world war. The delegates at Bretton Woods were determined it would not happen again.

  The conference, which ran from the 1st to the 22nd of July 1944, produced two institutions that still govern global finance today: the International Monetary Fund and the International Bank for Reconstruction and Development. But it also buried at least one idea that might have changed the balance of power between rich nations and poor ones. This is the story of those twenty-two days.

• 2. The Two Architects

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  John Maynard Keynes and Harry Dexter White had both been thinking about the postwar financial order since early in the war, working independently on either side of the Atlantic. Keynes served as economic adviser to the British Chancellor of the Exchequer. White was Assistant to the Secretary of the U.S. Treasury. By 1944, their proposals had been hammered into a joint statement, published simultaneously across multiple allied countries on the 21st of April that year.

  At the conference itself, each man chaired one of the three central commissions. White ran Commission I, which dealt with the IMF. Keynes chaired Commission II, which handled the IBRD. The third commission, covering other means of international financial cooperation, was led by Eduardo Suárez, Mexico's Minister of Finance.

  Keynes had first put forward his most ambitious idea in 1941: an International Clearing Union, a supranational bank with its own currency he called the bancor. The bancor would be exchangeable with national currencies at fixed rates and would serve as the unit of account between nations. Under his scheme, countries running trade deficits could draw on overdraft facilities, but countries running surpluses would not escape discipline either. Any surplus exceeding half the permitted overdraft size would be charged interest at 10 percent, pressing surplus nations to expand imports and export more capital. If a country's credit exceeded even that ceiling at year's end, the excess would be confiscated entirely.

  Lionel Robbins, who witnessed the reception, wrote that it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government, and that nothing so imaginative and so ambitious had ever been discussed. But White, representing the world's largest creditor nation, was unmoved. His reported position was absolute: we have been perfectly adamant on that point, we have taken the position of absolutely no.

• 3. White's Vision Prevails

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  White's counter-proposal was the International Stabilization Fund, and it placed the burden of correcting trade imbalances squarely on deficit nations rather than sharing it with surplus ones. Rich countries would face no ceiling on how much they could accumulate. The IMF that emerged at Bretton Woods was far closer to White's design than to Keynes's.

  The system the delegates agreed to was built on a set of interlocking mechanisms. Exchange rates would be pegged to gold. Governments could adjust their rates by up to 10 percent from the initially agreed par value without requiring IMF approval, but changes beyond that threshold needed the fund's concurrence. The IMF could not force a member to reverse a change, but it could cut off that country's access to the fund's resources. The goal was stability with just enough flexibility to correct what the agreement called a fundamental disequilibrium.

  Convertibility was another pillar. Member countries pledged to make their currencies convertible for trade-related and current account transactions. That goal, however, took years to become real. The currencies of the IMF's Western European members and their colonies did not actually become convertible until December 1958. Capital flows were a separate matter: the agreement explicitly allowed countries to regulate them, a deliberate carve-out that reflected how much the interwar capital panics had cost.

  Voting in both the IMF and IBRD was weighted by financial contribution. Countries that subscribed more capital, called quotas, carried more votes. Membership in the IBRD was conditioned on being a member of the IMF. Because the United States was both the world's largest economy and the main prospective source of funds, the U.S. delegation shaped the agreements more than any other.

• 4. The BIS Controversy

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  Not everything at Bretton Woods was about building new institutions. One item on the agenda concerned destroying an existing one. The Norwegian delegation presented evidence that the Bank for International Settlements, the BIS, had helped Germany transfer assets from occupied countries during the war.

  The BIS had been formed in 1930, originally to help settle the financial obligations arising from the peace treaties after the First World War. By 1944 it appeared both compromised and redundant, given that the IMF was about to take on functions the BIS had served. Commission III, chaired by Suárez, considered Norway's proposal for liquidation of the Bank for International Settlements at the earliest possible moment. The proposal passed Commission III without objection and was folded into the Final Act.

  But the liquidation never happened. U.S. President Franklin Roosevelt died in April 1945, and the momentum he had lent to the proposal died with him. Under his successor, Harry S. Truman, the U.S. officials most critical of the BIS left office. By 1948, the liquidation had been quietly set aside, and the BIS survived.

• 5. What the Conference Could Not Finish

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  The Bretton Woods Conference recommended that governments work to reduce barriers to international trade, a goal its participants hoped to institutionalize in a proposed International Trade Organization. The ITO's charter was eventually agreed at the U.N. Conference on Trade and Employment, held in Havana, Cuba, in March 1948. The U.S. Senate never ratified it, and the ITO never came into existence.

  In its place, countries adopted the General Agreement on Tariffs and Trade, a less ambitious instrument. GATT held that role for decades until 1995, when the Uruguay Round of negotiations established the World Trade Organization as its replacement. The WTO absorbed GATT's principles and was charged with administering and extending them.

  Beyond the failed ITO, extending the conference itself proved necessary. The original closing date was the 19th of July 1944, but reaching agreement on the IBRD required running three more days to the 22nd. Even then, the agreements signed at Bretton Woods did not take legal force immediately. The Articles of Agreement for both the IMF and IBRD required ratification by countries representing at least 80 percent of the capital subscriptions. That threshold was not reached until the 27th of December 1945.

• 6. Ratification and Aftermath

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  The institutions created at Bretton Woods were formally organized at an inaugural meeting in Savannah, Georgia, from the 8th to the 18th of March 1946. One notable absence from Savannah was the Soviet Union, which had signed the Bretton Woods Final Act but then chose not to ratify it. Soviet officials objected to the dollar's place alongside gold and described the new institutions as branches of Wall Street. The USSR never joined the IMF or IBRD. Its successor, the Russian Federation, joined both in 1992.

  Australia and New Zealand were also absent from formal participation at Savannah, though Australia sent observers, and both countries joined the IMF and IBRD later.

  At the conference itself, gross domestic product was adopted as the primary measure of a country's economy. That choice, which would shape how economists and policymakers assessed national performance for the rest of the twentieth century, received far less attention at the time than the monetary agreements.

  The Bretton Woods system of pegged exchange rates held together into the early 1970s before collapsing. Since then, the phrase New Bretton Woods has recurred whenever economists and governments look for a model of large-scale international monetary cooperation. U.S. Treasury Secretary Henry Morgenthau, who served as president of the conference, declared in his closing remarks that the establishment of the IMF and IBRD marked the end of economic nationalism. Whether that verdict proved accurate, the institutions he helped create at that New Hampshire hotel in July 1944 outlasted the system they were designed to manage.