Bretton Woods

Managing the Postwar Global Economy

The Bretton Woods Agreement was designed to reinvigorate the global capitalist economy by establishing international financial stability, and by avoiding any return to the economic chaos and depression of the interwar period. The debate surrounding the nature of postwar economic management centered around the conflicting aims of Britain and the United States. Representing the British view, the economist John Maynard Keynes argued that the main aim of the postwar system should be to promote economic growth. International imbalances would be resolved with an adjustment by both surplus and deficit nations, and an international central bank would be established to provide global liquidity to help finance this process. The arrangements that were subsequently adopted, however, reflected the postwar dominance of the United States and were based on plans devised by Harry Dexter White, the chief international economist at the U.S. Treasury. These prioritized the avoidance of inflation and the maintenance of price stability and argued that the burden of adjustment for rectifying economic imbalances should fall solely on deficit nations.

The central feature of the postwar arrangements established in the Bretton Woods Agreement was an international system of fixed exchange rates. Participating nations agreed to ensure the free convertibility of their currencies and to maintain their value within one percent on either side of a centrally defined ratio to the price of gold. Because four-fifths of the world's gold was now held in the United States, and because the price of gold was denominated in U.S. dollars, this effectively established a series of bilateral parities between participating currencies and the dollar. The stability of the system itself was underpinned by a credible commitment by the American government to allow the convertibility of the dollar into gold at $35 per ounce.

The Bretton Woods Agreement also established two new institutions. The first of these was the International Monetary Fund (IMF). This was designed to ensure orderly currency arrangements and cooperation between participating states. Countries wanting to adjust their exchange rate with the dollar could do so only with the permission of the IMF, and only in exceptional circumstances, defined loosely as conditions of fundamental disequilibrium. This aimed to ensure that countries pursuing unsound and inflationary economic policies could not simply devalue their way out of trouble. The IMF also provided liquidity to participating states in the form of loans, backed by surveillance measures, to help finance any temporary balance of payments difficulties. Accompanying the IMF was the creation of the International Bank for Reconstruction and Development. Better known as the World Bank, this was set up to promote international trade and to help finance the postwar reconstruction of Western Europe.

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