SYSTEM OF BRETTONWOODS:

1. Introduction
In times of globalisation the economic environment changes rapidly. Capital
movements become larger and at the same time less controllable. Therefore,
the need for a stabilising system becomes more and more apparent. In the
past such a system has been established at the conference of Bretton
Woods. Already in 1944 the British economist John Maynard Keynes
emphasised the importance of rule-based regimes to stabilise business
expectations- something he accepted in the Bretton Woods system of fixed
exchanged rates.1 Recently leading industrial nations have been calling for a
renewal of the purpose and the spirit of this system in order to cope with the
growing size of international trade and capital flows. This essay gives a short
overview of the systems development from 1944 until today and stresses
especially problems and obstacles. It identifies mistakes that have been
made and points out aspects that have to be taken into account when
implementing a new system of Bretton Woods.
2. Development of the system
The international economic situation After World War I most countries wanted
to return to the old financial security and stable situation of pre-war times as
soon as possible. Discussions about a return to the gold standard began and
by 1926 all leading economies had re-established the system, according to
which every nations circulating money had to be backed by reserves of gold
and foreign currencies to a certain extent. But several mistakes in
implementing the gold standard (mainly that a weakened Great Britain had
to take the leading part and that a number of main currencies where over- or
undervalued) led to a collapse of the economic and financial relations,
peaking in the Great Depression in 1929. Every single country tried to
increase the competitiveness of its export products in order to reduce its
payment balance deficit by deflating its currency. This strategy only led to
success as long as a country was deflating faster and more strongly than all
other nations. This fact resulted in an international deflation competition that
caused mass unemployment, bankruptcy of enterprises, the failing of credit
institutions, as well as hyper inflations in the countries concerned. In the
1930s several conferences dealing with the world monetary problems caused
by the Great Depression had ended in failure. But after World War II the need
for a stabilising system that avoided the mistakes, which had been made
earlier, became evident. Plans were made for an innovative monetary
system and a supervising institution to monitor all actions. First negotiations
took place under wartime conditions.

2.2. The conference of Bretton Woods

In 1944 an international conference took place in Bretton Woods, New

Hampshire (USA). 44 countries attended this conference in order to
restructure international finance and currency relationships. The participants
of this conference created the International Monetary Fund (IMF) and the
International Bank for Reconstruction and Development (IBRD/World Bank).
Additionally, they agreed on implementing a system of fixed exchange rates
with the U.S. dollar as the key currency.
The plans for the system of Bretton Woods were developed by two important
economists of these days, the American minister of state in the U.S. treasury,
Harry Dexter White, and the British economist John Maynard Keynes who
stated: We, the delegates of this Conference, Mr President, have been
trying to accomplish something very difficult to accomplish.[...] It has been
our task to find a common measure, a common standard, a common rule
acceptable to each and not irksome to any. 2 This statement outlines the
difficulty of creating a system that every nation could accept. The ideas of
John Maynard Keynes and Harry Dexter White have been described as very
different from each other on several occasions but in fact there are
extraordinary similarities. According to the White plan, a Bank for
Reconstruction (today the World Bank) and an International Stabilisation
Fund should be established. The Keynes plan called for the same. The only
difference was that Keynes wanted to vest the IMF with possibilities to create
money (a fact that can easily be understood in the background of Great
Britains suffering from the deflation policies in the Inter-War period) and with
the authority to take actions on a much larger scale. In case of balance of
payments imbalances John Maynard Keynes recommended that both sides,
debtors and creditors, should change their policies. Countries with payment
surpluses should increase their imports from the deficit countries and
thereby create a foreign trade equilibrium. Harry Dexter White, on the other
hand, saw an imbalance as a problem only of the deficit country. Economists
today agree that White was mistaken and Keynes was more farsighted.3
However, Keynes plan was never discussed seriously at Bretton Woods
and the participants agreed on the White plan. The United States defined the
value of its dollar in terms of gold, so that one ounce of gold wasequal to $
35. All other members had to define the value of their money according to
what was called the par value system in terms of U.S. dollars or gold.

2.3The dominant role of the USA

The USA has been and still is the dominating power of the Bretton Woods
system. After World War II the United States was the country with the biggest
economic potential. The U.S. dollar was the currency with the most
purchasing power and it was the only currency that was backed by gold.
Additionally, all European nations that had been involved in World War II
were highly in debt and transferred large amounts of gold into the United
States, a fact that contributed to the supremacy of the USA. Thus, the U.S.
dollar was strongly appreciated in the rest of the world and therefore became

the key currency of the Bretton Woods system. The headquarters of the two
main institutions (the IMF and the World Bank) are situated in Washington
D.C. The dominant role of the USA already became apparent when the
American ideas of the Bretton Woods system gained more acceptance than
those of Great Britain. The plans of the British economist John Maynard
Keynes were rejected and the model of the American economist White was
favoured. Despite Keyness part in constructing the Bretton Woods system,
[...] his vain struggle, over five wartime missions to Washington, to preserve
Britains financial independence from the United States 4 the Bretton
Woods system is dominated by the USA.