When delegates from 44 Allied countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, in July 1944, the war was still being fought and the money question was already urgent. They talked from July 1 to July 22 and signed the agreement on the last day.
They had a bad memory to work against. The classic gold standard was abandoned after World War I. In the interwar years governments devalued their currencies against one another and put up restrictive trade policies, and the Federal Reserve’s own history of the period says those measures made the Great Depression worse.
Keynes against White
The two main designers disagreed sharply. John Maynard Keynes, adviser to the British Treasury, wanted a global central bank called the Clearing Union. It would issue a new international currency, the “bancor,” and settle imbalances between countries. He proposed funding it with $26 million. Keynes assumed the United States would fall into another depression and push other countries into deficits.
Harry Dexter White, the Treasury Department’s chief international economist, wanted something smaller. His Stabilization Fund would hold a limited pool of national currencies and gold worth $5 million and issue no currency of its own. White worried that most of Keynes’s resources would end up buying American goods, leaving the United States holding most of the bancor.
The final plan looked mostly like White’s. Keynes won some concessions. A clause let the fund ration a currency that became scarce because a country ran a surplus, and the fund’s total resources went from $5 million to $8.5 million.
Gold, the dollar and two institutions
The United States controlled two-thirds of the world’s gold, and it insisted that the system rest on both gold and the dollar. Countries had to guarantee that their currencies could be converted into dollars, and the dollar stayed convertible to gold for foreign governments and central banks. The accords created the International Monetary Fund and the International Bank for Reconstruction and Development, now part of the World Bank Group. Both became operational in 1945, once enough countries had ratified.
Soviet representatives came to the conference but later refused to ratify. They charged that the new institutions were “branches of Wall Street.”
Economist Barry Eichengreen attributes the system’s success to three things, among them tight financial regulation and the dominant position of the United States and the dollar.
How it ended
On August 15, 1971, the United States ended the dollar’s convertibility to gold. That effectively finished the Bretton Woods system and turned the dollar into a fiat currency. Many fixed currencies, the pound sterling among them, soon began to float. The Jamaica Accords formally ratified the end in 1976.
Critics argue that leaning on the dollar let the United States operate with fewer constraints than other countries. They say fixed exchange rates limited the major European economies and Japan when they tried to adjust monetary policy against rising inflation. They also point out that the IMF and World Bank often attached policy conditions that strained developing countries.
