United Nations Monetary and Financial Conference

Mount Washington Hotel

The United Nations Monetary and Financial Conference, commonly known as the Bretton Woods conference, was a gathering of 730 delegates from all 44 Allied nations at the Mount Washington Hotel, situated in Bretton Woods, New Hampshire, to regulate the international monetary and financial order after the conclusion of World War II.^[1]

The conference was held from 1-22 July 1944, when the agreements were signed to set up the International Bank for Reconstruction and Development (IBRD), the General Agreement on Tariffs and Trade (GATT), and the International Monetary Fund (IMF).

As a result of the conference, the Bretton Woods system of exchange rate management was set up, which remained in place until the early 1970s.

Purposes and goals

The Bretton Woods Conference took place in July 1944, but did not become operative until late December 1958, when all the European currencies became convertible. Under this system, the IMF and the IBRD were established. The IMF was developed as a permanent international body. The summary of agreements states, "The nations should consult and agree on international monetary changes which affect each other. They should outlaw practices which are agreed to be harmful to world prosperity, and they should assist each other to overcome short-term exchange difficulties." The IBRD was created to speed up post-war reconstruction, to aid political stability, and to foster peace. This was to be fulfilled through the establishment of programs for reconstruction and development.

The main terms of this agreement were:

1. Formation of the IMF and the IBRD (presently part of the World Bank).
2. Adjustably pegged foreign exchange market rate system: The exchange rates were fixed, with the provision of changing them if necessary.
3. Currencies were required to be convertible for trade related and other current account transactions. The governments, however, had the power to regulate ostentatious capital flows.
4. As it was possible that exchange rates thus established might not be favourable to a country's balance of payments position, the governments had the power to revise them by up to 10%.
5. All member countries were required to subscribe to the IMF's capital.

Encouraging open markets

The seminal idea behind the Bretton Woods Conference was the notion of open markets. In Henry Morgenthau's farewell remarks at the conference, he stated that the establishment of the IMF and the World Bank marked the end of economic nationalism. This meant countries would maintain their national interest, but trade blocks and economic spheres of influence would no longer be their means. The second idea behind the Bretton Woods Conference was joint management of the Western political-economic order, meaning that the foremost industrial democratic nations must lower barriers to trade and the movement of capital, in addition to their responsibility to govern the system.

The Bank for International Settlements controversy

In the last stages of the Second World War, in 1944 at the Bretton Woods Conference, the Bank for International Settlements became the crux of a fight that broke out when the Norwegian delegation put forth evidence that the BIS was guilty of war crimes and put forth a motion to dissolve the bank; the Americans, specifically President Franklin Delano Roosevelt and Henry Morgenthau, supported this motion. This resulted in a fight between, on one side, several European nations, the American and the Norwegian delegation, led by Henry Morgenthau and Harry Dexter White; and on the other side, the British delegation, headed by John Maynard Keynes and Chase Bank representative Dean Acheson, who tried to veto the dissolution of the bank.

The problem was that the BIS, formed in 1930, had as the main proponents of its establishment the then Governor of the Bank of England, Montagu Norman, and his colleague Hjalmar Schacht, later Adolf Hitler's finance minister. The Bank was as far as known, originally primarily intended to facilitate money transfers arising from settling an obligation from the peace treaty after WWI. After World War I, the need for the bank was suggested in 1929 by the Young Committee, as a means of transfer for German reparations payments ('see: Treaty of Versailles'). The plan was agreed in August of that year at a conference at the Hague, and a charter for the bank was drafted at the International Bankers Conference at Baden Baden in November. The charter was adopted at a second Hague Conference on January 20, 1930. The Original board of directors of the BIS included two appointees of Hitler, Walter Funk and Emil Puhl, as well as Herman Schmitz the director of IG Farben and Baron von Schroeder the owner of the J.H. Stein Bank, the bank that held the deposits of the Gestapo.

As a result of allegations that the BIS had helped the Germans loot assets from occupied countries during World War II, the United Nations Monetary and Financial Conference recommended the "liquidation of the Bank for International Settlements at the earliest possible moment." ^[2] This dissolution, which was originally proposed by Norway and supported by other European delegates, as well as the United States and Morgenthau and Harry Dexter White, was never accomplished. ^[3]

In July 1944, Dean Acheson interrupted Keynes in a meeting, fearing that the BIS would be dissolved by President Franklin Delano Roosevelt. Keynes went to Henry Morgenthau to prevent or postpone the dissolution of the BIS, but the next day the dissolution of the BIS was approved. The British delegation did not give up, however, and the dissolution of the bank was still not accomplished when Roosevelt died. In April 1945, the new president Harry S. Truman and the British suspended the dissolution and the decision to liquidate the BIS was officially reversed in 1948.^[4]

Monetary order in a post-war world

The need for postwar Western economic order was resolved with the agreements made on monetary order and open system of trade at the 1944 Bretton Woods Conference. These allowed for the synthesis of Britain's desire for full employment and economic stability and the United States' desire for free trade.

Failed proposals

International Trade Organization

The Conference also proposed the creation of an International Trade Organization (ITO) to establish rules and regulations for international trade. The ITO would have complemented the other two Bretton Woods proposed international bodies: the IMF and the World Bank. The ITO charter was agreed on at the U.N. Conference on Trade and Employment (held in Havana, Cuba, in March 1948), but the charter was not ratified by the U.S. Senate. As a result, the ITO never came into existence. However, in 1995, during the Uruguay Round of GATT negotiations established the World Trade Organization (WTO) as the replacement body for GATT. The GATT principles and agreements were adopted by the WTO, which was charged with administering and extending them.

International Clearing Union

Main article: International Clearing Union

John Maynard Keynes (right) represented the UK at the conference, and Harry Dexter White represented the US.

John Maynard Keynes proposed the ICU as a way to regulate the balance of trade. His concern was that countries with a trade deficit would be unable to climb out of it, paying ever more interest to service their ever greater debt, and therefore stifling global growth. The ICU would effectively be a bank with its own currency (the "bancor"), exchangeable with national currencies at a fixed rate. Nations would be the unit for accounting between nations, so their trade deficits or surpluses could be measured by it.

On top of that, each country would have an overdraft facility in its "bancor" account with the ICU. Keynes proposed having a maximum overdraft of half the average trade size over five years. If a country went over that, it would be charged interest, obliging a country to reduce its currency value and prevent capital exports. But countries with trade surpluses would also be charged interest at 10% if their surplus was more than half the size of their permitted overdraft, obliging them to increase their currency values and export more capital. If, at the year's end, their credit exceeded the maximum (half the size of the overdraft in surplus), the surplus would be confiscated.

Lionel Robbins reported that "it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government ... nothing so imaginative and so ambitious had ever been discussed". However, Harry Dexter White, representing America which was the world's biggest creditor said "We have been perfectly adamant on that point. We have taken the position of absolutely no."

Instead he proposed an International Stabilisation Fund (now the IMF), which would place the burden of maintaining the balance of trade on the deficit nations, and imposing no limit on the surplus that rich countries could accumulate. White also proposed creation of the IBRD (now part of the World Bank) which would provide capital for economic reconstruction after the war.

Negotiators

• The USA was represented at the conference by Harry Dexter White
• The UK was represented at the conference by Lord Keynes
• Australia was represented at the conference by Leslie Melville
• India was represented by Sir Chintāman Dwārakānāth Deshmukh
• Mexico's delegation included Víctor Urquidi.
• China was represented by Dr. H.H. Kung.

Quotes

• "The economic health of every country is a proper matter of concern to all its neighbors, near and far."

— U.S. President Franklin D. Roosevelt at the opening of Bretton Woods

See also

• Bretton Woods system
• Nixon Shock
• World War II
• Marshall Plan
• Franklin D. Roosevelt
• Gold standard
• Exchange rates
• Protectionism
• International Trade Organization (Proposed by this Conference; failed to be ratified by the U.S. Senate; later revived in the WTO).
• International Clearing Union (Proposed by Keynes at this conference)
• Atlantic Charter
• Fixed exchange rate

References

1. ^ Donald Markwell, John Maynard Keynes and International Relations: Economic Paths to War and Peace, Oxford University Press, 2006
2. ^ United Nations Monetary and Financial Conference, Final Act (London et al., 1944), Article IV.
3. ^ R.F. Mikesell, The Bretton Woods Debates: A Memoir, Essays in International Finance 192 (Princeton: International Finance Section, Dept. of Economics, Princeton University, 1994), p. 42 . ISBN 0881650994. 
4. ^ brief history of the BIS