Bretton Woods System: Post-War Monetary Order

Post-War Monetary System Talks

The initial talks on reconstructing a postwar international monetary system started between the United States and United Kingdom as early as 1941. The lead negotiators were Harry Dexter White for the USA and John Maynard Keynes for the British. Given the US economic and political dominance at the end of the war, it is not surprising that the eventual system reflected more the US proposals. The system that emerged was ratified at an international monetary conference held at Bretton Woods, New Hampshire, attended by some 44 countries, although some commentators dubbed the conference as a meeting of 1.5 nations (the USA and the UK!).

Bretton Woods Institutions

The Bretton Woods Agreement created three institutions:

• The World Bank dealt with structural and long-term development issues.
• The International Monetary Fund (IMF) focused on monetary, balance of payments, and short-term stabilization issues.
• The General Agreement on Tariffs and Trade (GATT) was exclusively concerned with trade.

Goals of Bretton Woods

The Bretton Woods system was about creating the conditions for sustained growth of output and job creation, post-war reconstruction, and post-colonial development, as the official name of the World Bank implied. The stakes were high, and the reforms were seen as absolutely necessary to avoid the kinds of social and political developments that led to the outbreak of the Second World War.

Pre-Bretton Woods Challenges

The 1930s were marked by the Great Depression and major trade imbalances, which in turn led to the adoption of widespread protectionism, deflationary policies, competitive devaluations, and the abandonment of the gold standard. In an influential report for the League of Nations, Ragnar Nurkse (1944) argued that experience with floating exchange rates had shown that they discouraged international trade, caused a misallocation of resources, and were generally characterized by bouts of destabilizing speculation.

Speculation and Controls

There was not much room for speculation. Obviously, there was no need for any currency futures market because the exchange rate in six months' time was known, barring, of course, the occasional catastrophic devaluation. Besides, governments were able to apply controls on capital movements. One consequence was that financial crises were rare under the system. The powers of financial capital, though important, were circumscribed and reasonably transparent. However, during this period, the world began sowing the seeds of our future downfall. The Eurodollar market was created in London, a financial system out of control of any government, and tax havens began to spread.

General Agreement on Tariffs and Trade (GATT)

In 1947, the General Agreement on Tariffs and Trade (GATT) was set up to achieve greater liberalization of world trade. Countries agreed to reduce tariffs and other barriers to free trade. However, GATT had important exceptions for rich countries (agriculture and textiles), and countries were not easily punished if they did not follow GATT and raised tariffs. The GATT operated by consensus, and the agreement of the country to be punished was necessary for that same country to be punished.