How the Bretton Woods System Changed the World
How the Bretton Woods System Changed the World
By Matthew Johnston Updated 1-26-22 Reviewed By Charles Potters Fact Checked By Suzanne Kvilhaug
The roughly three decades that coincided with the monetary arrangements of the Bretton Woods system is often thought of as a time of relative stability, order, and discipline. Yet considering that it took nearly 15 years following the 1944 conference at Bretton Woods before the system was fully operational and that there were signs of instability throughout the era, perhaps not enough has been made of the relative difficulty in trying to maintain the system.1
Rather than seeing Bretton Woods as a period characterized by stability, it's more accurate to consider it as being a transitional stage that ushered in a new international monetary order that we're still living with today.
Divergent Interests at Bretton Woods
In July 1944, delegates from 44 Allied nations gathered at a mountain resort in Bretton Woods, NH, to discuss a new international monetary order.1 The hope was to create a system to facilitate international trade while protecting the autonomous policy goals of individual nations. It was meant to be a superior alternative to the interwar monetary order that arguably led to both the Great Depression and World War II.
Discussions were largely dominated by the interests of the two great economic superpowers of the time, the United States and Britain. But these two countries were far from united in their interests, with Britain emerging from the war as a major debtor nation and the U.S. poised to take on the role of the world’s great creditor.
Wanting to open the world market to its exports, the U.S. position, represented by Harry Dexter White, prioritized the facilitation of freer trade through the stability of fixed exchange rates. Britain, represented by John Maynard Keynes and wanting the freedom to pursue autonomous policy goals, pushed for greater exchange rate flexibility in order to ameliorate balance of payments issues.
Rules of the New System
A compromise of fixed-but-adjustable rates was finally settled upon. Member nations would peg their currencies to the U.S. dollar, and to ensure the rest of the world that its currency was dependable, the U.S. would peg the dollar to gold, at a price of $35 an ounce. Member nations would buy or sell dollars in order to keep within a 1% band of the fixed-rate and could adjust this rate only in the case of a “fundamental disequilibrium” in the balance of payments.2
In order to ensure compliance with the new rules, two international institutions were created: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD; later known as the World Bank). The new rules were officially outlined in the IMF Articles of Agreement.3 Further provisions of the Articles stipulated that current account restrictions would be lifted while capital controls were allowed, in order to avoid destabilizing capital flows.4
What the Articles failed to provide, however, were effective sanctions on chronic balance-of-payments surplus countries, a concise definition of “fundamental disequilibrium,” and a new international currency (a Keynes proposal) to augment the supply of gold as an extra source of liquidity.
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