What do You Know about Bretton Woods?

| November 12, 2018
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During World War Two it became apparent to the Allied nations that global economics had been one of many precipitating factors for the war. During the interwar years, there was a wave of economic nationalism. This manifested itself in the form of competitive currency devaluations, with each nation overly focused on its balance of payments. It also resulted in a spate of trade tariffs. These things, and others, hampered the global economy. The international consensus was that without international guidance, countries would return to the same monetary policies that proved so damning. It was also evident that many countries would require international support to rebuild after the war.

Bretton Woods was the largest and most significant international gathering since the Paris Peace Conference of 1919 that ended World War I. It was held in Bretton Woods, New Hampshire at the Mount Washington Hotel. Representatives from all 44 Allied nations attended. The reason the conference was held in the near wilderness in New England was because President Roosevelt was attempting to curry favor with then N.H. Senator Charles Tobey, whose support would be needed to pass whatever was decided on at Bretton Woods. Roosevelt did not want a repeat of what happened to Woodrow Wilson with the League of Nations, wherein the primary sponsor of the program (the United States) would not ratify the treaty.

The conference sought to develop an international exchange system that would smooth international transactions and facilitate trade. Particularly driving the process was the United States and Great Brittan. Prior to the war, London had been the center of international finance, and yet now, it found itself a debtor nation, and virtually bankrupt. The U.S. on the other hand was ascendant and sought to secure itself as the new global economic leader. The lead negotiators from each country; Harry Dexter White and John Maynard Keynes, respectively each sought to position their country advantageously for the post war world.

Harry Dexter White sought a form of gold standard for the global exchange system. The reasoning behind this was to make the dollar the dominant global currency.   In the proposed system the dollar would be permanently convertible to gold at $35 a troy ounce. This would make the dollar the primary global reserve currency.

Additionally, the conference set out to establish international organizations to oversee this new system of exchange. The result was the International Monetary Fund (IMF) and the World Bank. The IMF would be responsible for preventing massive currency and economic failures at the country level. This would frequently be accomplished through country level loans, however, the IMF also seeks to modify governance in countries to which it loans to improve their operating conditions. All of this was in the name of creating a more stable global system for the post war world.

In sum, the Bretton Woods system did not impact international exchange in the way it was intended. Countries were expected to fix their currencies to the dollar, and by the 1960s only 9 countries had done so. Soon after that, during the Nixon administration, the U.S. left the gold standard. The international institutions have proved to work more frequently as intended. The IMF has successful aided countries such as South Korea, and the Dominican Republic when they suffered economic and currency collapse.

For further reading about this interesting and influential moment in world economic history check out The Battle of Bretton Woods by Benn Steil.

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