Bretton Woods
A New Hampshire resort where 1944 a forty-four-country agreement was signed to establish a post-war international monetary and payments system. Hence ‘Bretton Woods system’ refers to the institutions and their workings thus established. This process had begun as Anglo-American wartime collaboration.
Mindful of the economic disasters of the 1930s and the failure of the inter-war international monetary system known as the Gold Standard, the delegates recognized that a successful replacement had to be compatible with the domestic policy priorities and objectives of participating countries. A stable monetary and payments system was seen as the necessary underpinning of a liberal international trade regime (see World Trade Organization). The outcome of the negotiations would have important distributional consequences for national economies and would provide the framework for the international financial system and capital flows. As the Cold War emerged in 1946-7, the agreement in practice became limited to countries of the Western alliance and the developing world. The Bretton Woods institutions entrenched the interests of the most developed market economies among this group.
The delegates devised a payments system and exchange rate mechanism based on fixed but adjustable exchange rates pegged to the American dollar, dollar-gold convertibility at a fixed price ($35.00/ounce), international cooperation in the control of short-term capital flows, and two crucial public international institutions, the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD or World Bank). Members of these organizations with payments difficulties and related exchange-rate problems would be able to borrow from the IMF in the short term and the IBRD would provide long-term financing for economic reconstruction and development. The authors of the agreement intended that public multilateral cooperative institutions would underpin the exchange rate and payments system, as opposed to private market processes or unilateral nationalist policies of the most powerful states, as during the inter-war disaster.
In the event, the resources provided for the two institutions were grossly inadequate for the task in the immediate post-war years, and the attempt to establish what came to be known as the Bretton Woods system collapsed in 1947. The inadequate level of resources largely reflected the concerns of the US Congress: as the only country in the immediate post-war period with a sustainable payments surplus, a still isolationist Congress was unwilling unilaterally to finance recovery in Europe and the Far East. From 1947 the plan was put on hold until currencies other than the US dollar could sustain convertibility, for most from 1959 onwards. Meanwhile, through the Marshall Plan and other programmes of aid to allies in the early Cold War, unilateral United States aid effectively replaced the IMF and World Bank as providers of international liquidity and the American dollar became the principal reserve currency in the system. The World Bank's activities became limited to the problems of the Less Developed Countries in the global economy, a role which continues to this day.
The Bretton Woods ‘system’ which emerged post-convertibility differed in important respects from the original plan. The US dollar functioned as a ‘key currency’ in the system, with dollar outflows eclipsing the meagre resources of the IMF in financing international trade and payments. The US Treasury and Federal Reserve were thus primarily responsible and dominant in the system through their discretionary manipulation of the dollar, thus side-stepping the prescribed role of the IMF. As the dollar became overvalued through a failure on the part of the United States to adjust to intensified trade competition and to keep inflation in check, confidence in the exchange rate parities declined. In addition, growing off-shore capital markets began to exert pressure on the exchange rate mechanism and international payments equilibrium. The commitment of the US government to convert dollars to gold at a fixed rate was challenged by speculators, and the United States unilaterally abrogated the system in August 1971. There were attempts at reform of the system, but differences among the big market economies prevented re-establishment with new parities and rules. The era known as Bretton Woods officially came to an end with the ‘Jamaica’ amendments to the IMF Articles of Agreement 1976 instituting a ‘non-system’ of floating exchange rates.
— Geoffrey R. D. Underhill
