80 Years Since the Bretton Woods Conference

During 1-22 July 1944 over 700 representatives from 44 countries met in Bretton Woods, New Hampshire for the United Nations Monetary and Financial Conference.

This conference (also known as the Bretton Woods Conference) set up international monetary and financial architecture post-World War II, by launching the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD).

The President of the conference was Henry Morgenthau, US Secretary of Treasury. The US was the organising country and the largest economy in the world, contributing around 35% to the global GDP in 1944.

The debates were organised in three Commissions, following talks between the representatives of the US and UK in Atlantic City in June 1944:

1. Commission I of the Fund, with Harry White (chief international economist of the US Treasury) as President;

1. Commission II of the Bank, having as President the famous British economist J.M. Keynes;

1. Commission III on Other Means of International Financial Cooperation, headed by Eduardo Suarez from Mexico.

The White Plan was focused on the creation of the IMF, an institution to play the role of a central bank. It would control capital flows and use the US dollar as the reference currency of the international system.

The Keynes Plan mentioned the creation of a new international currency (BANCOR) to support foreign exchange transactions within the IMF. In a system characterised by the creation of the International Clearing Union (ICU), the quota of the participating countries was dependent on their weight in international trade. According to this plan, the countries confronting imbalances in terms of balance of payments were debited/credited in order to avoid competitive depreciations.

The spirit of the Bretton Woods Conference in 1944 consisted of promoting economic cooperation as a fundamental principle for peace and prosperity.

The representatives to the Bretton Woods Conference supported the creation of the international financial institutions, with the IMF playing the central of promoting economic growth through trade and financial stability, in line with the White Plan.

The quotas of the participating countries were established based on the formula of the United States (belonging to Professor Raymond Mikesell, from the Treasury), taking into account several macroeconomic variables, including national income, international reserves, and dynamics of the international trade flows (exports, and imports).

The first five countries (USA, UK, USSR, China, and France) had a cumulative weight of over 70% in the initial structure of quotas. (Figure 1).

Figure 1. The quotas at the creation of the International Monetary Fund

Source: representation of the author taking into account the International Monetary Fund data (1996)

Initially the currencies of the participating countries were convertible to US dollars (at a fixed parity), while the US dollar was the only one convertible to gold for foreign governments and central banks (at the price of USD 35/ounce).

The Bretton Woods model was sustainable during the first decades following WW II, as emphasized by Professor Eichengreen, given the control of international capital flows, the high degree of financial regulation, and the dominant position of US economy and US dollar.

However, the Bretton Woods System as launched in 1944 turned unsustainable in the 1960s, due to the challenges the US economy was confronted with: focus on domestic full employment and the persistence of a balance of payments deficit.

In fact, the challenges the system was confronted with in the 1960s contributed to the development of international literature on optimum currency areas, starting with the seminal paper of the Nobel Prize Economist R. Mundell.

In this context, at the IMF Annual Meetings in 1967 (Rio de Janeiro) there was an agreement on Special Drawing Rights (SDR) (paper-gold), while in August 1971 US President Nixon suspended the convertibility of the US dollar to gold.

Furthermore, in December 1971 the Smithsonian Agreement marked the end of the international monetary system of Bretton Woods, with free-floating exchange rates regime in function from the Spring of 1973.

80 years since the Bretton Woods Conference the world economy is confronted with unprecedented challenges for the period following World War II, among which I mention:

1. economic confrontation between US and China (the largest economies of the world, contributing more than 40% to global GDP);

1. the arms race - world military spending per capita hit record levels in 2023;

1. the race of subsidies and trade barriers among the largest economies of the world;

1. the decline of the weight of the European economies in global GDP;

1. the significant increase of the weight of the Global South countries in the world economy;

1. the intensification of international cooperation among emerging and developing economies;

1. the severe impact of climate change;

1. unprecedented geo-political tensions;

1. the increase of inequality.

Furthermore, there is an accumulation of signals and upside risks for the outbreak of a new global economic crisis, given the challenges of public finance (including the alarming increase of the public debt in US, where the snowball effect is imminent), persisting geo-political tensions, overvaluation of stock markets, and cyber risks.

In fact, the strong upward trend of the price of gold in recent months (close to the record level of USD 2500/ounce) confirms the increasing probability of the outbreak of a new global economic crisis.

Therefore, nowadays the need for a new Bretton Woods is higher than ever.

As it stands, Bretton Woods Institutions are very prepared to counter the current challenges the world economy is confronting, including the multiple crises, as reflected by the report of the Bretton Woods Committee in April 2024.

All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.

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