International Loan Agreement

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.

Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944.

Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Bank for Reconstruction and Development (IBRD) (now one of five institutions in the World Bank Group) and the International Monetary Fund (IMF). 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 an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing strain, the system 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.

Origins

The political basis for the Bretton Woods system are in the confluence of several key conditions: the shared experiences of the Great Depression, the concentration of power in a small number of states (further enhanced by the exclusion of a number of important nations because of the war), and the presence of a dominant power willing and able to assume a leadership role in global monetary affairs.

The Great Depression

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' governments 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 relied primarily on market mechanisms and on private ownership.

Thus, 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 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 foreign 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 an 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 "Sterling Area" 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.

“Economic security”

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 United States Secretary of State from 1933 to 1944. 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

The rise of governmental intervention

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 an adequate level of employment.

At the international level, these ideas 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 which contributed to economic breakdown, domestic political instability, and international war. The lesson learned was as the principal architect of the Bretton Woods system New Dealer Harry Dexter White put it:

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.

Thus, the more developed market economies agreed with 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.

The Atlantic Charter

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 expand opportunities for foreign investments for U.S. corporations by removing restrictions on the international flow of capital.

The Atlantic Charter, drafted during U.S. 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 prosperi