How the Bretton Woods Conference Shaped Modern Finance

The Bretton Woods Conference

Today's monetary and financial system has its roots in the planning of a new economic order during the Bretton Woods Conference of 1944. The goal of the conference was to avoid another Great Depression like that of the 1930s by ensuring a stable international monetary and financial system and by building an open international trade system.

Following this objective, two plans were implemented:

The Keynes Plan (UK)

• Creation of a new international non-metallic currency, to determine the exchange rates between each of the national currencies.
• Creation of an international clearing union for international payments compensation.
• Building an international mechanism to stabilize the system by applying pressure on both surplus and deficit balance of payments of every country.
• Controls on capital movements.

This plan had numerous benefits such as:

1. Prevention of the emergence of a key currency by creating a new and shared currency.
2. Meeting of the real economy liquidity requirements.
3. Reduction of international imbalances.
4. Share of the burden of adjustment between debtor and creditor countries.
5. Reduction of financial speculation.

However, it had several disadvantages as it would provoke inflationary pressures and it would reduce the importance of national policies.

The White Plan (USA)

• Fixed exchange rates system based on a key currency, the dollar.
• Creation of a stabilization fund that would receive the contribution of the states in gold and currencies.
• Financial assistance for those countries who were suffering a balance of payments crisis, with the condition of adopting adjustment policies and liberalizing their economies and their trade.
• Creation of an international bank for reconstruction and development.

Differences with the Keynes Plan:

1. Lack of avoidance of key currency.
2. Alternative exchange rates systems.
3. Countries' shares in the fund and the bank depending on contributions.
4. Adjustment burden on the deficit country.
5. Contractionary policies to correct imbalances.

The chosen plan was the White Plan. This led to the establishment of two of the main international economic organizations: the IMF and the International Bank for Reconstruction and Development, and to the adoption of a fixed exchange rate monetary system based on the dollar-gold standard.

This new monetary system was based on a fixed dollar-gold rate of $35 per ounce of gold.