United Nations Monetary and Financial Conference

The United Nations Monetary and Financial Conference, commonly known as the Bretton Woods conference, was a gathering of 730 delegates from all 44 Allied nations

Allies of World War II

The Allies of World War II were the countries that opposed the Axis powers during the Second World War . Former Axis states contributing to the Allied victory are not considered Allied states...

at the Mount Washington Hotel

Mount Washington Hotel

The Mount Washington Hotel opened in 1902 near Mount Washington, in the town of Carroll, New Hampshire. The area is better known as Bretton Woods, and includes the Bretton Woods ski resort nearby. It is located at the northern end of Crawford Notch, east of the village of Twin Mountain, New...

, situated in Bretton Woods

Bretton Woods, New Hampshire

Bretton Woods is an area within the town of Carroll, New Hampshire, USA, whose principal points of interest are three leisure and recreation facilities...

, New Hampshire

New Hampshire

New Hampshire is a state in the New England region of the northeastern United States of America. The state was named after the southern English county of Hampshire. It is bordered by Massachusetts to the south, Vermont to the west, Maine and the Atlantic Ocean to the east, and the Canadian...

, to regulate the international monetary and financial order after the conclusion of World War II

World War II

World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

.

The conference was held from 1-22 July 1944, when the agreements were signed to set up the International Bank for Reconstruction and Development

International Bank for Reconstruction and Development

The International Bank for Reconstruction and Development is one of five institutions that compose the World Bank Group. The IBRD is an international organization whose original mission was to finance the reconstruction of nations devastated by World War II. Now, its mission has expanded to fight...

(IBRD), the General Agreement on Tariffs and Trade

General Agreement on Tariffs and Trade

The General Agreement on Tariffs and Trade was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization . GATT was signed in 1947 and lasted until 1993, when it was replaced by the World...

(GATT), and the International Monetary Fund

International Monetary Fund

The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

(IMF).

As a result of the conference, the Bretton Woods system

Bretton Woods system

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...

of exchange rate

Exchange rate

In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...

management was set up, which remained in place until the early 1970s.

Purposes and goals

The Bretton Woods Conference took place in July 1944, but did not become operative until late December 1958, when all the Europe

Europe

Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...

an currencies became convertible

Convertibility

Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value. Convertibility is an important factor in international trade, where instruments valued in different currencies must be exchanged....

. Under this system, the IMF and the IBRD were established. The IMF was developed as a permanent international body. The summary of agreements states, "The nations should consult and agree on international monetary changes which affect each other. They should outlaw practices which are agreed to be harmful to world prosperity, and they should assist each other to overcome short-term exchange difficulties." The IBRD was created to speed up post-war reconstruction

Marshall Plan

The Marshall Plan was the large-scale American program to aid Europe where the United States gave monetary support to help rebuild European economies after the end of World War II in order to combat the spread of Soviet communism. The plan was in operation for four years beginning in April 1948...

, to aid political stability, and to foster peace. This was to be fulfilled through the establishment of programs for reconstruction and development.

The main terms of this agreement were:

Formation of the IMF and the IBRD (presently part of the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

).
Adjustably pegged foreign exchange market
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...

rate system: The exchange rates were fixed, with the provision of changing them if necessary.
Currencies were required to be convertible
Convertibility
Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value. Convertibility is an important factor in international trade, where instruments valued in different currencies must be exchanged....

for trade related and other current account transactions. The governments, however, had the power to regulate ostentatious capital flows.
As it was possible that exchange rates thus established might not be favourable to a country's balance of payments
Balance of payments
Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers...

position, the governments had the power to revise them by up to 10%.
All member countries were required to subscribe to the IMF's capital.

Encouraging open markets

The seminal idea behind the Bretton Woods Conference was the notion of open markets

Capitalism

Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...

. In Henry Morgenthau

Henry Morgenthau, Jr.

Henry Morgenthau, Jr. was the U.S. Secretary of the Treasury during the administration of Franklin D. Roosevelt. He played a major role in designing and financing the New Deal...

's farewell remarks at the conference, he stated that the establishment of the IMF and the World Bank marked the end of economic nationalism

Economic nationalism

Economic nationalism is a term used to describe policies which emphasize domestic control of the economy, labor and capital formation, even if this requires the imposition of tariffs and other restrictions on the movement of labor, goods and capital. It opposes globalization in many cases, or at...

. This meant countries would maintain their national interest, but trade blocks and economic spheres of influence would no longer be their means. The second idea behind the Bretton Woods Conference was joint management of the Western political-economic order, meaning that the foremost industrial democratic nations must lower barriers to trade

Protectionism

Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...

and the movement of capital

International finance

International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, global financial system, and how these affect international trade. It also studies international projects, international investments and capital flows, and trade deficits. It includes...

, in addition to their responsibility to govern the system.

The Bank for International Settlements controversy

In the last stages of the Second World War, in 1944 at the Bretton Woods Conference, the Bank for International Settlements

Bank for International Settlements

The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...

became the crux of a fight that broke out when the Norwegian delegation put forth evidence that the BIS

Bank for International Settlements

was guilty of war crimes and put forth a motion to dissolve the bank; the Americans, specifically President Franklin Delano Roosevelt and Henry Morgenthau, supported this motion. This resulted in a fight between, on one side, several European nations, the American and the Norwegian delegation, led by Henry Morgenthau and Harry Dexter White

Harry Dexter White

Harry Dexter White was an American economist, and senior U.S. Treasury department official, participating in the Bretton Woods conference...

; and on the other side, the British delegation, headed by John Maynard Keynes

John Maynard Keynes

John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...

and Chase Bank representative Dean Acheson

Dean Acheson

Dean Gooderham Acheson was an American statesman and lawyer. As United States Secretary of State in the administration of President Harry S. Truman from 1949 to 1953, he played a central role in defining American foreign policy during the Cold War...

, who tried to veto the dissolution of the bank.

The problem was that the BIS

Bank for International Settlements

, formed in 1930, had as the main proponents of its establishment the then Governor of the Bank of England

Bank of England

The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...

, Montagu Norman

Montagu Norman

Montagu Collet Norman, 1st Baron Norman DSO PC was an English banker, best known for his role as the Governor of the Bank of England from 1920 to 1944...

, and his colleague Hjalmar Schacht

Hjalmar Schacht

Dr. Hjalmar Horace Greeley Schacht was a German economist, banker, liberal politician, and co-founder of the German Democratic Party. He served as the Currency Commissioner and President of the Reichsbank under the Weimar Republic...

, later Adolf Hitler's finance minister. The Bank was as far as known, originally primarily intended to facilitate money transfers arising from settling an obligation from the peace treaty after WWI. After World War I

World War I

World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...

, the need for the bank was suggested in 1929 by the Young Committee

Young Plan

The Young Plan was a program for settlement of German reparations debts after World War I written in 1929 and formally adopted in 1930. It was presented by the committee headed by American Owen D. Young. After the Dawes Plan was put into operation , it became apparent that Germany could not meet...

, as a means of transfer for German reparations payments ('see: Treaty of Versailles

Treaty of Versailles

The Treaty of Versailles was one of the peace treaties at the end of World War I. It ended the state of war between Germany and the Allied Powers. It was signed on 28 June 1919, exactly five years after the assassination of Archduke Franz Ferdinand. The other Central Powers on the German side of...

'). The plan was agreed in August of that year at a conference at the Hague, and a charter for the bank was drafted at the International Bankers Conference at Baden Baden in November. The charter was adopted at a second Hague Conference on January 20, 1930. The Original board of directors of the BIS included two appointees of Hitler, Walter Funk and Emil Puhl

Emil Puhl

Dr. Emil Puhl was a Nazi economist and banking official during World War II. He was director and vice-president of Germany's Reichsbank during World War II and also served as a director for the Bank for International Settlements at Basel . He was instrumental in moving Nazi gold during the war...

, as well as Herman Schmitz

Herman Schmitz

Herman Schmitz co-wrote the song Patrick mon chéri , along with Peter Koelewijn and Will Hoebee. This song was performed by the duo of which he was part, Kiki and Pearly. The song was covered by French singer Sheila, who had a French number-one hit with it in 1976.Herman started his music career as...

the director of IG Farben

IG Farben

I.G. Farbenindustrie AG was a German chemical industry conglomerate. Its name is taken from Interessen-Gemeinschaft Farbenindustrie AG . The company was formed in 1925 from a number of major companies that had been working together closely since World War I...

and Baron von Schroeder the owner of the J.H. Stein Bank, the bank that held the deposits of the Gestapo.

As a result of allegations that the BIS

Bank for International Settlements

had helped the Germans loot assets from occupied countries during World War II, the United Nations Monetary and Financial Conference recommended the "liquidation of the Bank for International Settlements at the earliest possible moment." This dissolution, which was originally proposed by Norway and supported by other European delegates, as well as the United States and Morgenthau

Henry Morgenthau, Jr.

Henry Morgenthau, Jr. was the U.S. Secretary of the Treasury during the administration of Franklin D. Roosevelt. He played a major role in designing and financing the New Deal...

and Harry Dexter White

Harry Dexter White

Harry Dexter White was an American economist, and senior U.S. Treasury department official, participating in the Bretton Woods conference...

, was never accomplished.

In July 1944, Dean Acheson

Dean Acheson

interrupted Keynes in a meeting, fearing that the BIS would be dissolved by President Franklin Delano Roosevelt. Keynes went to Henry Morgenthau to prevent or postpone the dissolution of the BIS, but the next day the dissolution of the BIS was approved. The British delegation did not give up, however, and the dissolution of the bank was still not accomplished when Roosevelt died. In April 1945, the new president Harry S. Truman

Harry S. Truman

Harry S. Truman was the 33rd President of the United States . As President Franklin D. Roosevelt's third vice president and the 34th Vice President of the United States , he succeeded to the presidency on April 12, 1945, when President Roosevelt died less than three months after beginning his...

and the British suspended the dissolution and the decision to liquidate the BIS was officially reversed in 1948.

Monetary order in a post-war world

The need for postwar Western economic order was resolved with the agreements made on monetary order

Monetarism

Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...

and open system of trade

Free trade

Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

at the 1944 Bretton Woods Conference. These allowed for the synthesis of Britain's desire for full employment

Full employment

In macroeconomics, full employment is a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so....

and economic stability and the United States' desire for free trade

Free trade

International Trade Organization

The Conference also proposed the creation of an International Trade Organization

International Trade Organization

The Bretton Woods Conference of 1944 recognized the need for a comparable international institution for trade to complement the International Monetary Fund and the World Bank...

(ITO) to establish rules and regulations for international trade

International trade

International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...

. The ITO would have complemented the other two Bretton Woods proposed international bodies: the IMF and the World Bank. The ITO charter was agreed on at the U.N. Conference on Trade and Employment (held in Havana

Havana

Havana is the capital city, province, major port, and leading commercial centre of Cuba. The city proper has a population of 2.1 million inhabitants, and it spans a total of — making it the largest city in the Caribbean region, and the most populous...

, Cuba

Cuba

The Republic of Cuba is an island nation in the Caribbean. The nation of Cuba consists of the main island of Cuba, the Isla de la Juventud, and several archipelagos. Havana is the largest city in Cuba and the country's capital. Santiago de Cuba is the second largest city...

, in March 1948), but the charter was not ratified by the U.S. Senate

United States Senate

The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...

. As a result, the ITO never came into existence. However, in 1995, during the Uruguay Round

Uruguay Round

The Uruguay Round was the 8th round of Multilateral trade negotiations conducted within the framework of the General Agreement on Tariffs and Trade , spanning from 1986-1994 and embracing 123 countries as “contracting parties”. The Round transformed the GATT into the World Trade Organization...

of GATT negotiations established the World Trade Organization

World Trade Organization

The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...

(WTO) as the replacement body for GATT. The GATT principles and agreements were adopted by the WTO, which was charged with administering and extending them.

International Clearing Union

John Maynard Keynes

proposed the ICU as a way to regulate the balance of trade. His concern was that countries with a trade deficit would be unable to climb out of it, paying ever more interest to service their ever greater debt, and therefore stifling global growth. The ICU would effectively be a bank with its own currency (the "bancor

Bancor

The Bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher conceptualised in the years 1940-42 and which the United Kingdom proposed to introduce after the Second World War...

"), exchangeable with national currencies at a fixed rate. Nations would be the unit for accounting between nations, so their trade deficits or surpluses could be measured by it.

On top of that, each country would have an overdraft facility in its "bancor" account with the ICU. Keynes proposed having a maximum overdraft of half the average trade size over five years. If a country went over that, it would be charged interest, obliging a country to reduce its currency value and prevent capital exports. But countries with trade surpluses would also be charged interest at 10% if their surplus was more than half the size of their permitted overdraft, obliging them to increase their currency values and export more capital. If, at the year's end, their credit exceeded the maximum (half the size of the overdraft in surplus), the surplus would be confiscated.

Lionel Robbins

Lionel Robbins

Lionel Charles Robbins, Baron Robbins, FBA was a British economist and head of the economics department at the London School of Economics...

reported that "it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government ... nothing so imaginative and so ambitious had ever been discussed". However, Harry Dexter White

Harry Dexter White

Harry Dexter White was an American economist, and senior U.S. Treasury department official, participating in the Bretton Woods conference...

, representing America which was the world's biggest creditor said "We have been perfectly adamant on that point. We have taken the position of absolutely no."

Instead he proposed an International Stabilisation Fund (now the IMF), which would place the burden of maintaining the balance of trade on the deficit nations, and imposing no limit on the surplus that rich countries could accumulate. White also proposed creation of the IBRD (now part of the World Bank) which would provide capital for economic reconstruction after the war.

Negotiators

The USA was represented at the conference by Harry Dexter White
Harry Dexter White
Harry Dexter White was an American economist, and senior U.S. Treasury department official, participating in the Bretton Woods conference...
The UK was represented at the conference by Lord Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
Australia was represented at the conference by Leslie Melville
Leslie Melville
Sir Leslie Galfreid Melville KBE was a renowned Australian economist, academic and public servant. He helped form Australia's central banking system and gave her a voice in international economic forums in the years following World War II...
India was represented by Sir Chintāman Dwārakānāth Deshmukh
C. D. Deshmukh
Sir Chintāman Dwārakānāth Deshmukh, CIE , better known as C. D. Deshmukh, was the first Indian to be appointed as the Governor of the Reserve Bank of India in 1943 by the British Raj authorities...
Mexico's delegation included Víctor Urquidi
Víctor Urquidi
Víctor Luis Urquidi Bingham was a Mexican civil servant, economist, and academic.- Biography:...

.
China was represented by Dr. H.H. Kung.

Quotes

"The economic health of every country is a proper matter of concern to all its neighbors, near and far."

— U.S. President Franklin D. Roosevelt

Franklin D. Roosevelt

Franklin Delano Roosevelt , also known by his initials, FDR, was the 32nd President of the United States and a central figure in world events during the mid-20th century, leading the United States during a time of worldwide economic crisis and world war...

at the opening of Bretton Woods

Purposes and goals

Encouraging open markets

The Bank for International Settlements controversy

Monetary order in a post-war world

International Trade Organization

International Clearing Union

Negotiators

Quotes

See also