Bretton Woods system
The Bretton Woods system of international economic management established the rules for commercial and financial relations among the major industrial states. The Bretton Woods system was the first example of a fully negotiated monetary order in world history intended to govern monetary relations among independent nation-states.Preparing to rebuild global capitalism as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel, situated in the New Hampshire resort town of Bretton Woods, for the United Nations Monetary and Financial Conference. The delegates deliberated upon and finally signed the Bretton Woods Agreement during the first three weeks of July 1944.
Setting up a system of rules, institutions, and procedures to regulate the international political economy, the planners at Bretton Woods established the International Bank for Reconstruction and Development (later divided into the World Bank and Bank for International Settlements) and the International Monetary Fund. These organizations became operational in 1946 after a sufficient number of countries had ratified the agreement.
The chief features of the Bretton Woods system were, first, an obligation for each country to maintain the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold; and, secondly, the provision by the IMF of finance to bride temporary payments imbalances. In face of increasing strain, the system eventually collapsed in 1971, following the United States' suspension of convertibility from dollars to gold.
Until the early-1970s, the Bretton Woods system was effective in controlling conflict and in achieving the common goals of the leading states that had created it, especially the United States.
The political bases for the Bretton Woods system are to be found in the confluence of several key conditions: the shared experiences of the Great Depression, the concentration of power in a small number of states, and the presence of a dominant power willing and able to assume a leadership role.
A high level of agreement among the powerful on the goals and means of international economic management facilitated the decisions reached by the Bretton Woods Conference. The foundation of that agreement was a shared belief in capitalism. Although the developed countries differed somewhat in the type of capitalism they preferred for their national economies (France, for example, preferred greater planning and state intervention, whereas the United States favored relatively limited state intervention); all nevertheless relied primarily on market mechanisms and on private ownership.
Yet, it is their similarities rather than their differences that appear most striking. All the participating governments at Bretton Woods agreed that the monetary chaos of the interwar period had yielded several valuable lessons.
The experience of the Great Depression, when proliferation of exchange controls and trade barriers led to economic disaster, was fresh on the minds of public officials. The planners at Bretton Woods hoped to avoid a repeat of the debacle of the 1930s, when exchange controls undermined the international payments system that was the basis for world trade. The "beggar thy neighbor" policies of 1930s governments—using currency devaluations to increase the competitiveness of a country's export products in order to reduce balance of payments deficits—worsened national deflationary spirals, which resulted in plummeting national incomes, shrinking demand, mass unemployment, and a overall decline in world trade. Trade in the 1930s became largely restricted to currency blocs (groups of nations that use an equivalent currency, such as the "Pound Sterling Bloc" of the British Empire). These blocs retarded the international flow of capital and foreign investment opportunities. Although this strategy tended to increase government revenues in the short-run, it dramatically worsened the situation in the medium and longer-run.
Thus, for the international economy, planners at Bretton Woods all favored a liberal system, one that relied primarily on the market with the minimum of barriers to the flow of private trade and capital. Although they disagreed on the specific implementation of this liberal system, all agreed on an open system.
Also based on experience of interwar years, U.S. planners developed a concept of economic security—that a liberal international economic system would enhance the possibilities of postwar peace. One of those who saw such a security link was Cordell Hull, the U.S. secretary of state from 1933 to 1944.1 Hull believed that the fundamental causes of the two world wars lay in economic discrimination and trade warfare. Specifically, he had in mind the trade and exchange controls (bilateral arrangements) of Nazi Germany and the imperial preference system practiced by Britain (by which members or former members of the British Empire were accorded special trade status). Hull argued that
The developed countries also agreed that the liberal international economic system required governmental intervention. In the aftermath of the Great Depression, public management of the economy had emerged as a primary activity of governments in the developed states. Employment, stability, and growth were now important subjects of public policy. In turn, the role of government in the national economy had become associated with the assumption by the state of the responsibility for assuring of its citizens a degree of economic well-being. The welfare state grew out of the Great Depression, which created a popular demand for governmental intervention in the economy, and out of the theoretical contributions of the Keynesian school of economics, which asserted the need for governmental intervention to maintain adequate levels of employment.
At the international level, these ideas also evolved from the experience of the 1930s. The priority of national goals, independent national action in the interwar period, and the failure to perceive that those national goals could not be realized without some form of international collaboration resulted in "beggar-thy-neighbor" policies such as high tariffs and competitive devaluations contributed to economic breakdown, domestic political instability, and international war. The lesson learned was that, as New Dealer Harry Dexter White, the principal architect of the Bretton Woods system, put it:
Thus, the developed market economies agreed to the U.S. vision of postwar international economic management, which was to be designed to create and maintain an effective international monetary system and foster the reduction of barriers to trade and capital flows.
International economic management relied on the dominant power to lead the system. The concentration of power facilitated management by confining the number of actors whose agreement was necessary to establish rules, institutions, and procedures and to carry out management within the agreed system. That leader was, of course, the United States. As the world's foremost economic and political power, the United States was clearly in a position to assume the responsibility of leadership.
The United States had emerged from the Second World War as the strongest economy in the world, experiencing rapid industrial growth and capital accumulation. The U.S. had remained untouched by the ravages of World War II and had built a thriving manufacturing industry and grown wealthy selling weapons and lending money to the other combatants; in fact, U.S. industrial production in 1945 was more than double that of annual production between the prewar years of 1935 and 1939. In contrast, Europe and Japan were militarily and economically shattered.
As the Bretton Woods Conference convened, the relative advantages of the U.S. economy were undeniable and overwhelming. The U.S. held a majority of world investment capital, manufacturing production and exports. In 1945, the U.S. produced half the world's coal, two-thirds of the oil, and more than half of the electricity. The U.S. was able to produce great quantities of ships, airplanes, land vehicles, armaments, machine tools, chemical products, and so on. Reinforcing the initial advantage—and assuring the U.S. unmistakable leadership in the capitalist world—the U.S. held 80 percent of the world's gold reserves and had not only a powerful army but also the atomic bomb.
As the world's greatest industrial power, and one of the few nations unravaged by the war, the U.S. stood to gain more than any other country from the opening of the entire world to unfettered trade. The United States would have a global market for its exports, and it would have unrestricted access to vital raw materials.
The United States was not only able, it was also willing, to assume this leadership role. Although the U.S. had more gold, more manufacturing capacity and more military power than the rest of the world put together, U.S. capitalism could not survive without markets and allies. William Clayton, the assistant secretary of state for economic affairs, was among myriad U.S. policymakers who summed up this point: "We need markets—big markets—around the world in which to buy and sell."
There had been many predictions that peace would bring a return of depression and unemployment, as war production ceased and returning soldiers flooded the labor market. Compounding the economic difficulties was a sharp rise in labor unrest. Determined to avoid another economic catastrophe like that of the 1930s, U.S. President Franklin D. Roosevelt saw the creation of the postwar order as a way to ensure continuing U.S. prosperity.
Throughout the war, the United States envisaged a postwar economic order in which the U.S. could penetrate markets that had been previously closed to other currency trading blocs, as well as to open up opportunities for foreign investments for U.S. corporations by removing restrictions on the international flow of capital.
The Atlantic Charter, drafted during President Roosevelt's August 1941 meeting with British Prime Minister Winston Churchill on a ship in the North Atlantic was the most notable precursor to the Bretton Woods Conference. Like Woodrow Wilson before him, whose "Fourteen Points" had outlined U.S. aims in the aftermath of the First World War, Roosevelt set forth a range of ambitious goals for the postwar world even before the U.S. had entered the Second World War. The Atlantic Charter affirmed the right of all nations to equal access to trade and raw materials. Moreover, the charter called for freedom of the seas (a principal U.S. foreign policy aim since France and Britain had first threatened U.S. shipping in the 1790s), the disarmament of aggressors, and the "establishment of a wider and permanent system of general security."
As the war drew to a close, the Bretton Woods Conference was the culmination of some two and a half years of planning for postwar reconstruction by the Treasuries of the U.S. and the UK. U.S. representatives studied with their British counterparts the reconstitution of what had been lacking between the two world wars: a system of international payments that would allow trade to be conducted without fear of sudden currency depreciation or wild fluctuations in exchange rates—ailments that had nearly paralyzed world capitalism during the Great Depression.
Without a strong European market for U.S. goods and services, most policymakers believed, the U.S. economy would be unable to sustain the prosperity it had achieved during the war. In addition, U.S. unions had only grudgingly accepted government-imposed restraints on their demand during the war, but they were willing to wait no longer, particularly as inflation cut into the existing wage scales with painful force. (By the end of 1945, there had already been major strikes in the automobile, electrical, and steel industries.)
Financier and self-appointed adviser to presidents and congressmen, Bernard Baruch, summed up the spirit of Bretton Wood in early 1945: if we can "stop subsidization of labor and sweated competition in the export markets," as well as prevent rebuilding of war machines, "oh boy, oh boy, want long term prosperity we will have."4 Thus, the United States would use its predominant position to restore an open world economy, unified under U.S. control, which gave the U.S. unhindered access to markets and raw materials.
Furthermore, U.S. allies—economically exhausted by the war—accepted this leadership. They needed U.S. assistance to rebuild their domestic production and to finance their international trade; indeed, they needed it to survive.
Before the war, the French and the British were realizing that they could no longer compete with U.S. industry in an open marketplace. During the 1930s, the British had created their own economic bloc to shut out U.S. goods. Churchill did not believe that he could surrender that protection after the war, so he watered down the Atlantic Charter's "free access" clause before agreeing to it.
Yet, U.S. officials were determined to break open the empire. Combined, British and U.S. trade accounted for well over half the world's exchange of goods. If the British bloc could be split apart, the U.S. would be well on its way to opening the entire global marketplace. But as the nineteenth century had been economically dominated by Britain, the second half of the twentieth was to be one of U.S. hegemony.
A devastated Britain had little choice. Two world wars had destroyed the country's principal industries that paid for the importation of half the nation's food and nearly all its raw materials except coal. The British had no choice but to ask for aid. In 1945, the U.S. agreed to a loan of 3.8 billion. In return, weary British officials promised to negotiate the agreement.
For nearly two centuries, French and U.S. interests had clashed in both the Old World and the New World. During the war, French mistrust of the United States was embodied by General Charles de Gaulle, president of the French provisional government. De Gaulle bitterly fought U.S. officials as he tried to maintain his country's colonies and diplomatic freedom of action. In turn, U.S. officials saw de Gaulle as a political extremist.
But in 1945 de Gaulle—the leading voice of French nationalism—was forced to grudgingly ask the U.S. for a billion dollar loan. Most of the request was granted; in return France promised to curtail government subsidies and currency manipulation that had given its exporters advantages in the world market.
On a far more profound level, as the Bretton Woods conference was convening, the greater part of the Third World remained politically and economically subordinate. Linked to the developed countries of the West economically and politically—formally and informally—these states had little choice but to acquiesce to the international economic system established for them. In the East, Soviet hegemony in Eastern Europe provided the foundation for a separate and stable international economic system.
In short, the confluence of these three favorable political conditions—the concentration of power, the cluster of shared interests and ideas, and the hegemony of the United States—provided the political capability to equal the tasks of managing the international economy.
Free trade relied on the free convertibility of currencies. Negotiators at the Bretton Woods Conference, fresh from what they perceived as a disastrous experience with floating rates in the 1930s, concluded that major monetary fluctuations could stall the free flow of trade.
The liberal economic system required an accepted vehicle for investment, trade, and payments. Unlike national economies, however, the international economy lacks a central government that can issue currency and manage its use. In the past this problem had been solved through the use of gold and through the use of national currencies.
In the nineteenth and twentieth centuries gold played a key role in international monetary transactions. The gold standard was used to back currencies; the international value of currency was determined by its fixed relationship to gold; gold was used to settle international accounts. The gold standard maintained fixed exchange rates were seen as desirable because they reduced the risk of trading with other countries.
Imbalances in international trade were theoretically rectified automatically by the gold standard. A country with a deficit would have depleted gold reserves and would thus have to reduce its money supply. The resulting fall in demand would reduce imports and the lowering of prices would boost exports; thus the deficit would be rectified. Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend. This decrease in the amount of money would act to reduce the inflationary pressure. Supplementing the use of gold in this period was the British pound. Based on the dominant British economy, the pound became a reserve, transaction, and intervention currency. But the pound was not up to the challenge of serving as the primary world currency, given the weakness of the British economy after the Second World War.
The architects of Bretton Woods had conceived of a system wherein exchange rate stability was a prime goal. Yet, in an era of more activist economic policy, governments did not seriously consider permanently fixed rates on the model of the classical gold standard of the nineteenth century. Gold production was not even sufficient to meet the demands of growing international trade and investment. And a sizable share of the world's known gold reserves were located in the Soviet Union, which would later emerge as a Cold War rival of the United States and Western Europe.
The only currency strong enough to meet the rising demands for international liquidity was the dollar. The strength of the U.S. economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold.
Exchange rate stability The Bretton Woods system sought to secure the advantages of the gold standard without its disadvantages. Thus, a compromise was sought between the polar alternatives of either freely floating or irrevocably fixed rates—an arrangement that might gain the advantages of both without suffering the disadvantages of either while retaining the right to revise currency values on occasion as circumstances warranted.
The rules of Bretton Woods, set forth in the articles of agreement, provided for a system of fixed exchange rates. The rules further sought to encourage an open system by committing members to the convertibility of their respective currencies into other currencies and to free trade.
The "pegged rate" or "par value" currency regime" What emerged was the "pegged rate" currency regime. Members were obligated to establish a parity of their national currencies in terms of gold (a "peg") and to maintain exchange rates within 1 percent, plus or minus, of parity (a "band") by intervening in their foreign exchange markets (that is, buying or selling foreign money).
The "reserve currency" In practice, however, since the principal "reserve currency" would be the U.S. dollar, this meant that other countries would peg their currencies to the U.S. dollar, and—once convertibility was restored—would buy and sell U.S. dollars to keep market exchange rates within 1 percent, plus or minus, of parity. Thus, the U.S. dollar took over the role that gold had played under the gold standard in the international financial system.
Meanwhile, in order to bolster faith in the dollar, the U.S. agreed separately to link the dollar to gold at the rate of $35 per ounce of gold. At this rate, foreign governments and central banks were able to exchange dollars for gold. Bretton Woods established a system of payments based on the dollar, in which all currencies were defined in relation to the dollar, itself convertible into gold, and above all, "as good as gold." The U.S. currency was now effectively the world currency, the standard to which every other currency was pegged. As the world's key currency, most international transactions were denominated in dollars.
The U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Additionally, all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States, a fact that contributed to the supremacy of the United States. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system.
A member countries could only change its par value only with IMF approval, which was contingent on IMF determination that its balance of payments was in a "fundamental disequilibrium."
The Bretton Woods Conference led to the establishment of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (now known as the World Bank), which still remain powerful forces in the world economy.
As mentioned, a major point of common ground at the Conference was the goal to avoid a recurrence of the closed markets and economic warfare that had characterized the 1930s. Thus, negotiators at Bretton Woods also agreed that there was a need for an institutional forum for international cooperation on monetary matters. Already in 1944 the British economist John Maynard Keynes emphasized "the importance of rule-based regimes to stabilize business expectations"—something he accepted in the Bretton Woods system of fixed exchanged rates. Currency troubles in the interwar years, it was felt, had been greatly exacerbated by the absence of any established procedure or machinery for inter-governmental consultation.
As a result of the establishment of agreed upon structures and rules of international economic interaction, conflict over economic issues was minimized, and the significancy of the economic aspect of international relations seemed to recede.
Officially established on December 27, 1945, when the 29 participating countries at the conference of Bretton Woods signed its Articles of Agreement, the IMF was to be the keeper of the rules and the main instrument of public international management. The Fund commenced its financial operations on March 1, 1947. IMF approval was necessary for any change in exchange rates. It advised countries on policies affecting the monetary system.
Designing the IMF The big question at the Bretton Woods Conference with respect to the institution that would emerge as the IMF was the issue of future access to international liquidity and whether that source should be akin to a world central bank able to create new reserves at will or a more limited borrowing mechanism.
Although attended by 44 nations, discussions at the conference were dominated by two rival plans developed by the U.S. and Britain. As the chief international economist at the U.S. Treasury in 1942-44, Harry Dexter White drafted the U.S. blueprint for international access to liquidity, which competed with the plan drafted for the British Treasury by the eminent British economist John Maynard Keynes. Overall, White's scheme tended to favor incentives designed to create price stability within the world's economies, while Keynes' wanted a system that encouraged economic growth.
At the time, gaps between the White and Keynes plans seemed enormous. Outlining the difficulty of creating a system that every nation could accept in his speech at the closing plenary session of the Bretton Woods Conference on July 22, 1944, Keynes stated:
In case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. As outlined by Keynes, countries with payment surpluses should increase their imports from the deficit countries and thereby create a foreign trade equilibrium. Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary.
But the U.S., as a likely creditor nation, and eager to take on the role of the world's economic powerhouse, balked at Keynes' plan and did not pay serious attention to it. The U.S. contingent was too concerned about inflationary pressures in the postwar economy, and White saw an imbalance as a problem only of the deficit country.
Although compromise was reached on some points, because of the overwhelming economic and military power of the U.S., the participants at Bretton Woods largely agreed on White's plan. As a result, the IMF was born with an economic approach and political ideology that stressed controlling inflation and introducing austerity plans over fighting poverty. This left the IMF severely detached from the realities of Third World countries struggling with underdevelopment from the onset.
Subscriptions and quotas What emerged largely reflected U.S. preferences: a system of subscriptions and quotas embedded in the IMF, which itself was to be no more than a fixed pool of national currencies and gold subscribed by each country as opposed to a world central bank capable of creating money. The Fund was charged with managing various nations' trade deficits so that they would not produce currency devaluations that would trigger a decline in imports.
The IMF was provided with a fund, composed of contributions of member countries in gold and their own currencies. The original quotas planned were to total $8.8 billion. When joining the IMF, members were assigned "quotas" reflecting their relative economic power, and, as a sort of credit deposit, were obliged to pay a "subscription" of an amount commensurate to the quota. The subscription was to be paid 25 percent in gold or currency convertible into gold (effectively the dollar, which was the only currency then still directly gold convertible for central banks) and 75 percent in the member's own money.
Quota subscriptions were to form the largest source of money at the IMF's disposal. The IMF set out to use this money to grant loans to member countries with financial difficulties. Each member was then entitled to be able to immediately withdraw 25 percent of its quota in case of payment problems. If this sum was insufficient, each nation that had the system was also able to request loans for foreign currency.
Financing trade deficits In the event of a deficit in the current account, Fund members, when short of reserves, would be able to borrow needed foreign currency from this fund in amounts determined by the size of its quota. In other words, the higher the country's contribution was, the higher the sum of money it could borrow from the IMF.
Members were obliged to pay back debts within a period of eighteen months to five years. In turn, the IMF embarked on setting up rules and procedures to keep a country from going too deeply into debt, year after year. The Fund would exercise "surveillance" over other economies for the U.S. Treasury, in return for its loans to prop up national currencies.
IMF loans were not comparable to loans issued by a conventional credit institution. Instead, it was effectively a chance to purchase a foreign currency with gold or the member's national currency.
The U.S.-backed IMF plan sought to end restrictions on the transfer of goods and services from one country to another, eliminate currency blocs and lift currency exchange controls.
The IMF was designed to advance credits to countries with balance of payments deficits. Short-run balance of payment difficulties would be overcome by IMF loans, which would facilitate stable currency exchange rates. This flexibility meant that member states would not have to induce a depression automatically in order to cut its national income down to such a low level that its imports will finally fall within its means. Thus, countries were to be spared the need to resort to the classical medicine of deflating themselves into drastic unemployment when faced with chronic balance of payments deficits. Before the Second World War, European nations often resorted to this, particularly Britain.
Moreover, the planners at Bretton Woods hoped that this would curb the incentives for nations short of cash to import controls. In effect, the IMF extended Keynesian measures—government intervention to prop up demand and avoid recession—to protect the U.S. and the stronger economies from disruptions of international trade and growth.
Changing the par value The IMF sought to provide for occasional discontinuous exchange-rate adjustments (changing a member's par value) by international agreement with the IMF. Member nations were permitted first to depreciate (or appreciate in opposite situations) their currencies by 10 percent. This tends to restore equilibrium in its trade by expanding its exports and contracting imports. This would be allowed only if there was what was called a "fundamental disequilibrium." A decrease in the value of the country's money was called a "devaluation" while an increase in the value of the country's money was called a "revaluation."
It was envisioned that these changes in exchange rates would be quite rare. Regrettably the notion of fundamental disequilibrium, though key to the operation of the par value system, was never spelled out in any detail—an omission that would eventually come back to haunt the regime in later years.
IMF operations Never before had international monetary cooperation been attempted on a permanent institutional basis. Even more groundbreaking was the decision to allocate voting rights among governments not on a one-state, one-vote basis but rather in proportion to quotas. Since the U.S. was contributing the most, U.S. leadership was the key implication. Under the system of weighted voting the U.S. was able to exert a preponderant influence on the IMF. With one-third of all IMF quotas at the outset, enough to veto all changes to the IMF Charter on its own.
In addition, the IMF was based in Washington, D.C., and staffed mainly by its economists. It regularly exchanged personnel with the U.S. Treasury. When the IMF began operations in 1946, President Harry S. Truman named White as its first U.S. Executive Director. Since no Deputy Managing Director post had yet been created, White served occasionally as Acting Managing Director and generally played a highly influential role during the IMF's first year.
No provision was made for international creation of reserves. New gold production was assumed sufficient. In the event of structural disequilibria, it was expected that there would be national solutions—a change in the value of the currency or an improvement by other means of a country's competitive position. Few means were given to the IMF, however, to encourage such national solutions.
It had been recognized in 1944 that the new system could come into being only after a return to normalcy following the disruption of World War II. It was expected that after a brief transition period—expect to be no more than five years—the international economy would recover and the system would enter into operation.
To promote the growth of world trade and to finance the postwar reconstruction of Europe, the planners at Bretton Woods created another institution, the International Bank for Reconstruction and Development (IBRD)—now known as the World Bank. The IBRD had an authorized capitalization of $10 billion and was expected to make loans of its own funds to underwrite private loans and to issue securities to raise new funds to make possible a speedy postwar recovery. The IBRD (now known as the World Bank) was to be a specialized agency of the United Nations charged with making loans for economic development purposes.
The Bretton Wood arrangements were largely adhered to and ratified by the participating governments. It was expected that that national monetary reserves, supplemented with necessary IMF credits, would finance any temporary balance of payments disequilibria. But this did not however prove sufficient to get Europe out of the doldrums.
Postwar world capitalism suffered from a huge dollar shortage. The United States was running huge balance of trade surpluses, and the U.S. reserves were immense and growing. It was necessary to reverse this flow. Dollars had to leave the United States and become available for international use. In other words, the United States would have to reverse the natural economic processes and run a balance of payments deficit.
The modest credit facilities of the IMF were clearly insufficient to deal with Western Europe's huge balance of payments deficits. The problem was further aggravated by the reaffirmation IMF Board of Governors in the provision in the Bretton Woods Articles of Agreement that the IMF could make loans only for current account deficits and not for capital and reconstruction purposes. Only the United States contribution of $570 million was actually available for IBRD lending. In addition, because the only available market for IBRD bonds was the conservative Wall Street banking market, the IBRD was forced to adopt a conservative lending policy, granting loans only when repayment was assured. Given these problems, by 1947 the IMF and the IBRD themselves were admitting that they could not deal with the international monetary system's economic problems. By 1947 the IMF and the IBRD themselves were admitting that they could not deal with Western system's economic problems.6
Thus, the much looser Marshall Plan—the European Recovery Program—was set up to provide U.S. finance to rebuild Europe largely through grants rather than loans. The Marshall Plan was the program of massive economic aid given by the United States to favored countries in Western Europe for the rebuilding of capitalism. In a speech to Congress on June 5, 1946, U.S. Secretary of State George Marshall stated:
To encourage long-term adjustment, the United States promoted European and Japanese trade competitiveness. Policies for economic controls on the defeated former Axis countries were scrapped. Aid to Europe and Japan was designed to rebuild productive and export capacity. In the long run it was expected that such European and Japanese recovery would benefit the United States by widening markets for U.S. exports.
However, the emerging nations of the Third World did not fare so well; from the very beginning any loan was accompanied by pressure to keep their economies completely 'open' to foreign goods and capital. In the late 1950s the World Bank was pressured into setting up the International Development Association (IDA)– this would provide "soft loans" and so head off attempts by the new countries of the Third World to set up an independent funding agency under the tutelage of the United Nations.
In 1945, Roosevelt and Churchill prepared the postwar era by negotiating with Joseph Stalin at Yalta about respective zones of influence; this same year U.S. and Soviet troops joined together in Germany and confronted one another in Korea.
Harry Dexter White succeeded in getting the Soviet Union to participate in the Bretton Woods conference in 1944, but his goal was frustrated when the Soviet Union would not join the IMF. In the past, the reasons why the Soviet Union chose not to subscribe to the articles by December 1945 have been the subject of speculation. But since of the release of relevant Soviet archives, it is now clear that the Soviet calculation was based on the behavior of the parties that had actually expressed their assent to the Bretton Woods Agreements. The extended debates about ratification that had taken place both in the UK and the U.S. were read in Moscow as evidence of the quick disintegration of the wartime alliance.
Facing the Soviet Union, whose power had also strengthened and whose territorial influence had expanded, the United States assumed the role of leader of the capitalist camp. The rise of the postwar United States as the world's leading industrial, monetary, and military power was rooted in the impact of the U.S. military victory, in the instability of the national states in postwar Europe, and the wartime devastation of the Soviet economy.
Thus, U.S. power had to be used to rebuild capitalism, especially in Europe, and prevent socialist revolution from spreading across the war-torn countries of Europe and the colonies whose European imperialist masters were no longer able to hold them in bondage.
The price paid for this position—especially in the Cold War climate—was the militarization of the U.S. economy and the related notion that the U.S. should assume a protective role in the "free world." Looking back at the origins of the Cold War, in a paper that Harry Dexter White was writing at the time of his death, he lamented the "tensions between certain of the major powers" that had brought "almost catastrophic" consequences, including an "acute lack of confidence in continued political stability and the crippling fear of war on a scale unprecedented and almost unimaginable in its destructive potentialities." [1]
Despite the economic effort imposed by such a policy, control of the international market rewarded the U.S. Treasury with profit. Because of the surplus in the balance of trade, it was possible to keep armies abroad and to invest outside the United States. The dollar continued to function as a compass to guide the health of the world economy.
It was under such circumstances that U.S. corporations increased their activities in the Third World as well as in the Western European countries, by means of increased investments and expansion of their control over local economies. To this end, they invested funds and used their domestic savings primarily to purchase assets belonging to nationals. Later, the profits created by the "foreign sector" of the U.S. economy forced it to expand continually abroad. If we add to all this the reconstruction policy carried out in Europe, we shall have an idea of the power of the U.S. economy. In short, the U.S. assumed the role of bankers and stockholders in industrial and service companies, and of world policeman. In return, it offered the Western world leverage against the Soviets.
1For discussions of how liberal ideas motivated U.S. foreign economic policy after World War II, see, e.g., Kenneth Waltz, Man, the State and War (New York: Columbia University Press, 1969) and David P. Calleo and Benjamin M. Rowland, American and World Political Economy (Bloomington, Indiana: University of Indiana Press, 1973).The origins of the Bretton Woods system
The experiences of the Great Depression
"Economic security"
Governmental intervention
To ensure economic stability and political peace, states agreed to cooperate to regulate the international economic system. The pillar of the U.S. vision of the postwar world was free trade. Free trade involved lowering tariffs and among other things a balance of trade favorable to the capitalist system.U.S. hegemony
The Atlantic Charter
U.S. hegemony and Europe
The design of the Bretton Woods system
Informal regimes
Formal regimes
The International Monetary Fund
Keynes' proposals would have established a world reserve currency administered by a central bank (which he thought might be called "bancor") vested with the possibility of creating money and with the authority to take actions on a much larger scale (understandable considering deflationary problems in Britain at the time).The International Bank for Reconstruction and Development
Readjusting the Bretton Woods system
The dollar shortage and the Marshall Plan
From 1947 until 1958, the United States deliberately encouraged an outflow of dollars, and, from 1950 on, the United States ran a balance of payments deficit that provided liquidity for the international economy. Dollars flowed out through various U.S. aid programs: the Truman Doctrine entailing aid to the pro-U.S. Greek and Turkish regimes, which were struggling to suppress socialist revolution, aid to various pro-U.S. regimes in the Third World, and most important, the Marshall Plan. From 1948 to 1954 the United States gave sixteen Western European countries $17 billion in outright grants. Bretton Woods and the Cold War
Collapse of the Bretton Woods system
(to be inserted upon completion)Dollar glut
Dollar overhang
Dwindling of U.S. gold stocks
The Nixon Shock of 1971 and the end of Bretton Woods
The post-Bretton Woods International economic order
(to be inserted upon completion)Footnotes
2Cordell Hull, The Memoirs of Cordell Hull, vol. 1 (New York: Macmillan, 1948), p. 81.
3Quoted in Robert A. Pollard, Economic Security and the Origins of the Cold War, 1945-1950 (New York: Columbia University Press, 1985), p.8.
4Baruch to E. Coblentz, March 23, 1945, Papers of Bernard Baruch, Princeton University Library, Princeton, N.J quoted in Walter LaFeber, Russia, America, and the Cold War (New York, 2002), p.12.
5Comments by John Maynard Keynes in his speech at the closing plenary session of the Bretton Woods Conference on July 22, 1944 in Donald Moggeridge (ed.), The Collected Writings of John Maynard Keynes (London: Cambridge University Press, 1980), vol. 26, p. 101. This comment also can be found quoted online at [1]
6Edward S. Mason and Robert E. Asher, The World Bank Since Bretton Woods (Washington, D.C.: The Brookings Institution, 1973), pp. 105-107, 124-135.
7Comments by U.S. Secretary of State George Marshall in his June 1947 speech "Against Hunger, Poverty, Desperation and Chaos" at a Harvard University commencement ceremony. A full transcript of his speech can be read online at [1]