The Bretton Woods System at 75
Seventy five years ago, in July 1944, while World War II was still raging, delegates from all 44 Allied nations gathered in Bretton Woods, New Hampshire, in the United States, for the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference. They met from 1 to 22 July 1944 to discuss the rebuilding of the international economic system after the War and agreeing on measures to prevent a repetition of the beggar-thy-neighbour policies of the 1930s, that caused the great depression and contributed to the outbreak of World War II. The outcome of this meeting was the Bretton Woods Agreement.
The Bretton Woods Conference is remembered as a milestone event in international institutional cooperation. It also bears testimony to the leadership displayed at that time and how sovereign states agreed to legal and institutional arrangements to tackle the crises confronting them. The remedial action required then was beyond their individual capacity; they had to find ways and means for joint action.
The Bretton Woods system has seen important changes and now faces new challenges. On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency. This action, referred to as the Nixon shock, created the situation in which the U.S. dollar became a reserve currency used by many states. At the same time, many fixed currencies (such as the pound sterling) also became free-floating. Members could choose other ways to set the value of their currencies, including letting market forces decide.
This Agreement also created two important institutions in 1945: the International Monetary Fund (IMF) and the World Bank Group. The purpose of the IMF was to monitor exchange rates and lend reserve currency to nations that needed it to support their currencies and settle their debts. The World Bank Group, initially called the International Bank for Reconstruction and Development, was established to provide assistance to countries that had been physically and financially devastated by World War II. These two organisations continue to this day.
The IMF finds itself at a critical juncture. Its major challenges have been identified as its governance structure, an increasing level of politicisation, leadership challenges, performance evaluation difficulties, and dealing with social instability. It has been argued that it should do more to resist politically motivated fiscal austerity as practiced by particular governments.
The United States is the largest shareholder with a de facto veto over major decisions. It wields enormous power over this institution. Its present policies stand in stark contrast to the leadership role performed at Bretton Woods. President Trump’s trade war with China and his accusations that Beijing is manipulating its currency, come at a critical time. His policies are a threat to several multilateral institutions. The IMF and the World Trade Organisation (WTO) are the two most directly targeted global institutions. The American leadership displayed 75 years ago is no longer.
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