Bretton Woods Conference

How do countries trade with each other? And how do they decide how much a currency is worth against another?

In this article, we will try to answer these questions by looking into the Bretton Woods Conference of 1944. The Bretton Woods Conference set the ground for today's international financial relationships. So let's look at why it was organised and what were its outcomes and its legacy.

Bretton Woods Conference definition

The official name for the Bretton Wood Conference is the United Nations Monetary and Financial Conference. It was a conference held between 1st and 22nd July 1944 in the Mount Washington Hotel, Bretton Woods, New Hampshire, USA.

It was attended by 730 representatives from 44 nations, including the USSR (now, referred to as the former Soviet Union), with the goal of establishing a new post-World War II international order.

The overall aim of the Bretton Woods Conference was to establish greater political and economic stability, that would prevent the breakout of further world wars and promote peace through global financial cooperation.

Fig. 1 Mount Washington Hotel, Bretton Woods, NH, USA

Bretton Woods Conference summary

As we've established, the Bretton Woods Conference represented a key economic and political event. Therefore, to take a closer look we will explore these three areas below:

1. The historical context of the Conference
2. The key political principles of the Conference
3. The structure of the Bretton Woods Conference

Historical context of the Conference

After World War I (1914-1918), the Treaty of Versailles (1919) required the German state to pay 132 billion gold marks in war reparations. Today, 132 billion gold marks are equivalent to roughly $33 billion!

Consequently, the cost of war reparations and wider economic climate led to the collapse of the German economy during the inter-war period between 1918-1939, which in turn was a key factor in the rise of Nazism and World War II.

This set of events, coupled with the events that characterised the Great Depression, motivated nations, such as the USA and Britain, to attempt to come up with a new system of international economic stability.

Key political principles of the Conference

The key assumption behind the Bretton Woods conference was that free trade promoted international cooperation, peace, and prosperity; and that free trade relies on currency convertibility.

In preparation for the conference, John Maynard Keynes, adviser to the British Treasury, and Harry Dexter White, chief international economist at the American Treasury Department, started drafting plans which included:

• agreements for international financial cooperation and assistance to countries experiencing deficit (including post-war deficit) and,

• an entity that would mediate currency exchanges and prevent competitive devaluation of currency while allowing countries to maintain economic autonomy.

As an international conference focused on global economics, there is a lot of technical terminology to be consider. Take a look at the table below to brush up on some key concepts:

Bretton Woods Conference structure

During the Bretton Woods conference, the representatives were divided into 3 working groups or "commissions":

The three working groups generally reached decisions by consensus via a vote. Each represented nation-state was afforded a single vote on each matter. Let's now take a closer look at the purpose of the IMF and of the IBRD.

Bretton Woods Conference organisations

The two organisations that emerged from the Bretton Woods Conference were the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, which are, still today, powerful economic institutions.

Fig. 2 Plaque in the gold room, mount Washington hotel, where the IMF was established

International Monetary Fund summary

The purpose of the IMF was to promote stability in international currency exchange rates. The IMF would do this by pegging (fixing) exchange rates to the value of the dollar, which in turn was pegged to gold. A level of flexibility to this system was inbuilt, allowing for alteration in exchange rates by individual countries in case of a "fundamental disequilibrium".

By being the currency that all other currencies were pegged against, the US dollar became the new "gold", and therefore, the new international currency.

All members pledged to the convertibility of their currencies to allow for free trade and had to get permission from the IMF should they wish to change the rate of exchange by more than 10%. All member states were required to sign up to the IMF, and the IMF is funded by the subscriptions of its members.

In time, the aim of the IMF shifted toward the support and promotion of international trade and economic development by promoting policies that facilitate free international trade and economic cooperation.

International Bank for Reconstruction and Development

The purpose of the IBRD was to organise foreign aid and provide funds to rebuild infrastructure in post-war European countries. After the reconstruction of Europe, the IBRD's aim shifted to the promotion of economic development and the eradication of poverty. This means the IBRD is today the lending arm of the World Bank Group from which middle-income and "credit-worthy" low-income countries can get loans and receive economic advice.

Countries can only be members of the IBRD if they sign up to the IMF. Influence in both organisations was, and continues to be based on "quotas".

The outcome of the Bretton Woods Conference

The role of the IMF and the IBRD in the management of international financial relationships is known as the Bretton Woods system. The Bretton Woods system took a number of years to stabilise itself and led to a considerable time of financial stability and growth.

However, as this progressed and world economies, as well as population numbers, continued growing, the Bretton Woods system started feeling the pressure of inflation. This means that the pegged system it created wasn’t allowing enough liquidy (availability of cash) to keep funding new businesses and therefore to keep employment rates high.

Fig. 3 Graph representing inflation

Bretton Woods Conference's significance

Even though the gold standard principle is no longer in use, the Bretton Woods Conference was incredibly important because of the international effort it represented and the unity of purpose it signified.

It was the first time, in the post-war era, that economic relations were institutionalised and that all governments involved were given voices, albeit dependent on "quotas".

The USA contributed a third of the quotas, therefore owned a third of the decision-making power, and the power of veto.

Because of this, the quota system is one of the main sources of criticism against the Bretton Woods system. The disproportionate US power is quoted as one of the main reasons the USSR has never joined the IMF or the World Bank.²

In 1992 Russian Federation did join to receive support to re-join international trade and stabilise its economy. In joining, its president, Boris Yeltsin, said that it would not allow the IMF to impose conditions on the pace and kind of Russian reforms³. This was a bold statement but the act of joining further reinforced the key role the IMF plays in the world economy.

Following the 2008 financial crisis and the 2020 economic recession, world leaders are also highlighting the significance of the Bretton Woods system by calling for a “Bretton Woods II”, a second conference “as bold in its own way as Bretton Woods”⁴ to develop a new financial system appropriate for modern times.