Bretton Woods Agreement
BRETTON WOODS AGREEMENT.NEED FOR AGREEMENT
CHANGING THE RULES
PROBLEMS AND FAILURES OF THE SYSTEM
BRETTON WOODS IN RETROSPECT
The New Hampshire spa of Bretton Woods gave its name to the international economic agreements negotiated there between the United States and the United Kingdom in 1944, subsequently signed by forty-two other countries. The agreements covered a wide range of commercial and monetary purposes, but the name is used to signify the international trade and payments machinery that replaced the gold standard of the interwar period. The regime did not become fully operative until 1958 and underwent many changes before its collapse in 1971. It makes better historical sense to think of Bretton Woods as a broad agreement on the manner in which world trade and payments were to be managed between the capitalist states and on a readiness to make adjustments for that common purpose.
The need for agreement was imperative both for the United Kingdom, deeply in debt to the United States by summer 1944, and for the United States, whose postwar policy was to return to unrestricted international trade based on automatic currency convertibility. Nevertheless, agreement was hard to reach. In London financial reasoning suggested that Britain would need a substantial transition period before its overall balance of payments would be strong enough to accept the automatic dollar convertibility of the pound sterling. The terms of the final settlement of all mutual Anglo-American war debts dominated the Bretton Woods meeting, because they determined what seemed possible.
The experience of the failure of the gold standard in the interwar period helped in reaching agreement. Both countries now wished to control capital movements, confining the purpose of convertibility to the settlement of trade and current accounts. The United Kingdom conceded that currency exchange rates should be fixed against the gold value of the U.S. dollar. The United States withdrew its demand that countries would not have the right to alter their exchange rate, although it insisted on setting too high a rate for the pound against the dollar ($4.03 = £1.00). Tariff preferences for British Commonwealth goods exported to the United Kingdom were regarded by the United States as discrimination against American exports of similar agricultural products, but the issue was compromised by both sides accepting a rule that there should be no new preferences in the Bretton Woods trading system, thus leaving the intended process of reduction of tariffs to reduce the degree of advantage given by the existing preferential tariffs. Such movements toward agreement were testimony to the common impact of the war on economic policy and theory in the United States and the United Kingdom, not least in concentrating both policy and theory on the advantages of reflation.
A common standpoint also emerged about the need for international collaborative institutions to make the management of a world trade and payments mechanism possible. The International Monetary Fund (IMF) was created to supervise the exchange rates, and its permission was decreed necessary before any rate could be changed. The ability to create international supervisory institutions that have lasted is the most telling indication of the underlying common purpose of the two countries and of the subsequent signatories. In practice, as well as in its origins, Bretton Woods was to show that consistent intentions were more durable than rules.
The history of the rules is full of change. The United Kingdom was unable to win any longer transition period than two years before automatic currency convertibility in trade settlements had to apply. In the first two years of peace Western European economies experienced a vigorous boom with high levels of investment and a high rate of import growth, particularly of capital goods and food, of which in both cases the United States was at first the only available supplier. By summer 1947 not only Britain, as it had feared, but also other Western European countries were running out of dollars. None, however, except Italy, cut back on imports and tightened its monetary policy. All were faced with imperative public demand for goods, jobs, and public welfare provision. Return to interwar conditions seemed politically impossible. This was against the background of relentless competition with the communist political regimes of Eastern and central Europe.
Faced with the emerging threat of the Cold War and of a political division through the center of Europe and of Germany and no prospect of a peace treaty being signed, the United States had to support Western European domestic policies or face isolation. The outcome was the Marshall Plan, officially styled the European Recovery Program. It opened a new stream of dollars to Western Europe for economic reconstruction and additional international agencies to implement Bretton Woods. The European Payments Union (EPU) added to its task of regulating the trade settlements that of directing trade between the European recipients of Marshall Aid toward greater multilateralism. In retrospect the need for the Marshall Plan justified Europe's fears about the inadequacy of Bretton Woods as a viable regime so soon after the war. It was only at the end of December 1958 that automatic convertibility between all Western European currencies and the dollar was achieved.
To mark even more clearly that the Bretton Woods system was not the monolith envisaged in 1944, Canada maintained its decision in 1950 to float its currency, France used multiple exchange rates for much of 1948, and the pound sterling was devalued in 1949 from $4.00 to $2.80, a decision about which the IMF was informed, without prior discussion, only one day in advance.
Bretton Woods did not break free from the denomination of international settlements in gold. Convertibility was based on the American dollar being tied to a fixed value in gold, to be maintained by the open-market operations of the American monetary authorities. As under the interwar gold standard, therefore, the exchange rates were at the mercy of variations in the supply and demand for gold, not a commodity whose supply could be quickly increased. Earlier reserve currencies, such as sterling, became less used, from the mid-1960s through deliberate policy actions of the British government. The availability of gold was outpaced by the relentless growth in the value of foreign trade over the long boom from 1945 in the Western world. One characteristic of that trade was the persistent increase of manufactured imports into the United States from Western Europe and Japan. Its counterpart was the remorseless flow throughout the Bretton Woods years of gold from the United States to Europe. Monetary economists often conclude that the dollar price of gold was set too low, but the flow of dollars from the United States reflected the reality of the longest recorded economic boom in Europe and the increasing power of European and Japanese manufacturing.
To exacerbate this problem, there were persistent inflationary trends in the American economy, some of them generated by its long, and in foreign eyes doomed, war in Vietnam. Either the United States would be forced to reduce worldwide liquidity, and thus the expansion of foreign trade, and risk a return to international deflation, or new forms of sustaining liquidity would have to be devised. Experiments in alternatives, chiefly the issue of tradable Special Drawing Rights (SDRs), came too late to be effective. The United States had a balance of payments deficit in its own settlements in every year from 1958 to the close of 1967, although in all except one it had a surplus on current account. The deficit was due to capital exports, of which the largest component was private investment, mainly in Western Europe. The fear was that the dollar value of investments might be converted into gold. The rest of the world's gold stock was already in 1959 estimated to exceed that of the United States. If, alternatively, the United States reduced the size of its dollar deficit, the loss of the liquidity that had been backed by that deficit might well also provoke deflation.
The end came in response to British and French intentions to convert dollars into gold. On 15 August 1971 the United States suspended automatic dollar convertibility into gold, ending its efforts to maintain the fixed value of gold, and imposed a surcharge on imports and wage and price controls within the United States.
In one sense, this only registered the fact that the system had already changed into a dollar, rather than a gold, standard. But that change should have led to a more determined effort by the United States to reduce its own domestic inflation. Bretton Woods will be remembered as ushering in and for a long time safeguarding the longest recorded period of high economic growth in modern history, although for the United States this was much less evident in the 1950s. Its ignominious end demonstrates that all international payments systems are eventually overtaken by the worldwide economic change that their success in stimulating international trade promotes. No single hegemonic power can prevent such an outcome. International settlements agreements facilitate foreign trade. Foreign trade promotes economic growth, notably so in the 1960s, and states must adjust domestic and foreign policies as long as they wish to maintain that advantage.
See alsoMarshall Plan.
Bordo, Michael D., and Barry Eichengreen, eds. A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform. Chicago, 1993.
Gardner, Richard N. Sterling-Dollar Diplomacy: Anglo-American Collaboration in the Reconstruction of Multilateral Trade. Oxford, U.K., 1956.
Milward, Alan S. The Reconstruction of Western Europe, 1945–51. London, 1984.
Pressnell, Leslie. External Economic Policy since the War. Vol. 1: The Post-War Financial Settlement. London, 1986.
Triffin, Robert. Europe and the Money Muddle: From Bilateralism to Near-Convertibility, 1947–1956. New Haven, Conn., 1957.
Alan S. Milward