Bretton Woods Institutions

The Bretton Woods Institutions—consisting of the International Monetary Fund (IMF) and the World Bank (the Bank)—were created in 1944 to help promote the economic health of the world economy. The Bretton Woods Conference, officially called the United Nations Monetary and Financial Conference, was held in Bretton Woods, New Hampshire, at the Mount Washington Hotel on July 1–22, 1944, as World War II was coming to a close.

Delegations from 45 governments agreed on a framework for economic cooperation designed to avoid a repetition of the disastrous economic policies that [Page 201]contributed to the Great Depression of the 1930s. During the 1930s, as economic activity in the major industrial countries weakened, these countries attempted to support their own economies by increasing restrictions on imports. Unfortunately, increased restrictions led to a downward spiral in world trade, limited economic output, increased unemployment, and worsening living standards in many countries.

At the close of World War II, various plans to restore order to international monetary and financial relations led to the creation of the Bretton Woods Conference and the Bretton Woods Institutions. The British economist John Maynard Keynes and the U.S. Treasury international economist Harry Dexter White were the intellectual founding fathers of the Bretton Woods Institutions. Keynes and White shared a belief that powerful, multilateral institutions could prevent future depressions while helping build a strong, global economy. John Maynard Keynes, the father of Keynesian economics, in particular, actively advocated for a strong government role in developing interventionist policies to mitigate economic recessions, depressions, and booms. As the father of macroeconomic theory, Keynes argued for an interventionist role of governments in alleviating unemployment, stirring investment, and increasing savings rates by focusing on aggregate consumption and investment.

Initially, the IMF and the Bank were designed to help rebuild Europe after the war. The IMF was charged with promoting global economic growth through international trade and financial stability, with stable currency exchange rates initially tied to gold reserves. The Bank made its first loan of $250 million to France in 1947 for postwar reconstruction. Over the intervening decades, with the increased international integration of markets, the IMF and the Bank have increased their responsibilities to coordinate, assess, and promote international cooperation for continued monetary stability. Expanding memberships and a strategic focus on poverty and debt reduction have led to new initiatives by the Bretton Woods Institutions.

Headquartered in Washington, D.C., the IMF and the Bank are governed by their member countries. As specialized agencies of the United Nations, the IMF and the Bank are related but have different purposes.

The IMF promotes balanced expansion of world trade, stability of exchange rates, avoidance of competitive currency devaluations, and orderly correction of balance of payment issues. Balance of payment issues occur when a country starts running short of money and credit by buying more goods and services abroad than it can sell or as a result of investors taking their capital abroad. The IMF provides temporary financing to ease the balance of payments crisis provided the country agrees to implement policies addressing the cause of the problem and ensuring that the IMF is repaid. Member countries provide money (called quota subscriptions) to the IMF. The IMF then lends to members in financial difficulties. Quotas, based predominantly on the country's economic size, determine the voting power and the amount of funds a country can borrow. A 24-member executive board provides oversight to the managing director, his or her deputies, and an international staff that carries out the IMF's work. The finance minister and other high officials of all member countries comprise the board of governors, the overall authority for the IMF.

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