Bretton Woods Agreements/System

The Bretton Woods system refers to the rules and norms governing international monetary and financial practice during the roughly quarter century following World War II. Although both the institutions and the practices of the Bretton Woods system focused on obligations between sovereign governments, they are generally credited with creating a congenial environment for the explosive growth of private international trade and investment that took place during subsequent decades; this growth in trade and investment became a central foundation of globalization.

The name refers to the town in New Hampshire where an international conference was convened in 1944 in order to formulate these rules and also to agree on the charters for two institutions intended to play central roles in postwar international economic governance: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (World Bank). The promotion of international trade was a key normative objective of the Bretton Woods system. The system's commitment to stable exchange rates, with “fixed but adjustable” parities, was a second-order consideration, consistent with prevailing beliefs that floating exchange rates were inimical to liberal trade.

This belief about exchange rates was shared by the system's two primary architects, Harry Dexter White of the United States and John Maynard Keynes of the United Kingdom. These two men also agreed, at least for the most part, on the necessity of limiting cross-border capital movements in order to preserve a system of stable exchange rates and, hence, of relatively free trade. Their disagreements focused largely on how to promote economic adjustment among the participants in the resulting network of states, given at least a nominal commitment to exchange-rate fixity. Keynes, representing a country expected to run considerable deficits in its future balance of payments, pushed for international arrangements that would provide temporary financing of those deficits on lenient terms and that would permit changes in exchange-rate parities at the request of national governments. White, representing a country anticipating a continued surplus position, was not anxious to finance other nations’ profligacy and, hence, resisted both of these initiatives. On these questions, the formal arrangements adopted at Bretton Woods tended to reflect the U.S. position, although there were key concessions to the British.

In subsequent years, actual exchange-rate practices varied rather substantially, despite the tendency to refer to the next several decades as “the Bretton Woods system.” For example, in the period immediately after the war, the United States strongly discouraged exchange-rate movements and, consequently, deficit spending by IMF members. With the beginnings of the Cold War, the U.S. position softened considerably: The Marshall Plan provided substantial payments financing to European states, deficit spending was countenanced, and in 1949 the United States gave its assent to a major multilateral exchange-rate realignment. Beginning roughly 10 years later, when the U.S. balance of payments shifted from surplus to deficit, the U.S. government once again became intolerant of exchange-rate movements, fearing that these would undermine confidence in the dollar. These very different postures of the West's economic leader toward the question of exchange-rate flexibility, and the shifts in practice that accompanied these changes in posture, have led some observers to suggest that applying the moniker “Bretton Woods system” to the entire period is misleading.

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