Bretton Woods system

Topic: The Making of a Global World · NCERT: Class 10, Ch 3 "The Making of a Global World"

Meaning

The Bretton Woods system was the set of rules for world money agreed in July 1944. Under it, each country's currency was pegged (fixed at a set rate) to the US dollar, and the dollar was fixed to gold at $35 per ounce. It was run with the help of two new institutions, the IMF and the World Bank.

It mattered because it shaped the world economy after the Second World War. It supported a long boom from 1950 to 1970. Its collapse in the early 1970s brought in floating exchange rates (currency values set by the market every day), which we still use today.

Explanation

Background: why a new system was needed

• The war left the world in ruins.
• The Second World War lasted six years. It killed at least 60 million people, about 3% of the world's 1939 population.
• More civilians died than soldiers.

• Large parts of Europe and Asia were destroyed. Rebuilding them needed money and planning.

• Two powers shaped the rebuilding.

• The United States came out as the leader of the Western world. No fighting took place on its land, and its industry was huge.

• The Soviet Union had grown from a backward farming country into a world power, during the same years that capitalist countries were stuck in the Great Depression.

• Lesson 1: mass production needs mass consumption.

• Factories make goods in huge numbers, so huge numbers of people must be able to buy them.
• For that, people need high and stable incomes, and stable incomes need full employment (jobs for everyone, all the time).

• Markets alone cannot promise this, so governments must step in.

• Lesson 2: full employment needs control.

• A government can keep everyone in work only if it can control the movement of goods, capital (money) and labour (people) across its borders.

The conference and the "twins"

• The meeting. The framework was agreed at the United Nations Monetary and Financial Conference, held at the Mount Washington Hotel, Bretton Woods, New Hampshire, USA. Delegates from 44 nations met from 1 July to 22 July 1944 [2][3].
• The leading minds. John Maynard Keynes (adviser to the UK Treasury) and Harry Dexter White (US Assistant Secretary of the Treasury) [2].
• The documents. The conference produced the Articles of Agreement (founding rules) of both the IBRD and the IMF. The IMF Articles were adopted on 22 July 1944 and were first accepted by 29 countries [2][3].
• The Bretton Woods twins:

Institution	Its job
IMF (International Monetary Fund)	Deal with members' external surpluses and deficits, that is, whether a country earns more or less from the outside world than it pays out
IBRD / World Bank (International Bank for Reconstruction and Development)	Lend money for post-war reconstruction of wrecked countries

• Financial operations began in 1947.
• Who held power? The Western industrial powers made the decisions. The US had an effective veto, so nothing important could pass against its wishes.

How the money system worked

• Fixed exchange rates. A currency could not rise and fall freely against other currencies.
• Currencies were pegged to the dollar. For example, the Indian rupee was fixed at a set rate to the US dollar.
• The dollar was pegged to gold at $35 per ounce. A government holding dollars could ask the US to swap them for gold at that price.
• The chain: gold backed the dollar, and the dollar backed every other currency. The whole system rested on US gold reserves.
• Results: the post-war boom, 1950–70.
• World trade grew by over 8% a year.
• Incomes grew by nearly 5% a year.
• Unemployment averaged under 5% in most industrial countries.

• Growth was mostly stable, and technology spread as developing countries imported industrial plant and equipment.

• Limits for new nations.

• The IMF and World Bank were designed for industrial countries, not for poor, newly independent ones in Asia and Africa.
• Only from the late 1950s, after Europe and Japan were rebuilt, did they turn to developing countries.
• This sense of exclusion led to the G-77, formed on 15 June 1964, and its demand for a New International Economic Order (NIEO) [4][5].

Collapse and what followed

• The dollar weakened.
• From the 1960s the US spent heavily abroad. These rising overseas costs weakened its finances.

• Too many dollars were held around the world, and too little gold sat in US vaults. The dollar could no longer hold its value against gold.

• The sequence of the end:

• 15 August 1971. President Richard Nixon suspended the dollar's convertibility into gold, an act called the "closing of the gold window". It was driven by a balance-of-payments crisis linked to spending on the Vietnam War and the Great Society programmes [7].
• 17–18 December 1971. In the Smithsonian Agreement, signed in Washington by the Group of Ten, countries tried to set new fixed rates. It did not last [7][8].

• Early 1973. The major currencies were floating [7][8].

• Results:

• Floating exchange rates replaced fixed rates.
• From the mid-1970s developing countries had to borrow from Western commercial banks instead of getting cheap official loans. This led to debt crises and deeper poverty, especially in Africa and Latin America.
• In industrial countries, unemployment stayed high from the mid-1970s to the early 1990s.
• From the late 1970s MNCs moved production to low-wage Asian countries. This was the start of modern globalisation.

Time, place and evidence

• Period: agreed in 1944. Operations began in 1947. It worked from the late 1940s until it broke down in 1971–73.
• Place: Bretton Woods, New Hampshire, USA, at the Mount Washington Hotel [2][3].
• Key people:
• John Maynard Keynes, for Britain [2].
• Harry Dexter White, for the US [2].

• Richard Nixon, the US President who ended dollar–gold convertibility in 1971 [7].

• Key bodies: the IMF, the IBRD (World Bank), the Group of Ten (Smithsonian Agreement), the G-77 and UNCTAD [4][5][7][8].

• How we know:
• The Articles of Agreement of the IMF, adopted on 22 July 1944, an official founding document [3].
• The World Bank's own archive on the conference and the birth of the Bank [2].
• IMF historical records on the 1971 suspension and the move to floating rates [7].
• NCERT Class 10, Ch 3 "The Making of a Global World".

Don't confuse with

• Bretton Woods twins: these are the two institutions, the IMF and the World Bank. The Bretton Woods system is the wider set of rules: fixed rates, with the dollar pegged to gold.
• Smithsonian Agreement (December 1971): a failed attempt to save fixed rates after Nixon's move, signed by the Group of Ten. It was not part of the original 1944 plan [7][8].
• Gold standard (before 1914): under it, many currencies were tied directly to gold. Under Bretton Woods, only the dollar was tied to gold, and other currencies were tied to the dollar.
• NIEO (1974): a demand by developing countries (the G-77 and Non-Aligned states) for fairer economic rules, adopted as UNGA resolution 3201 (S-VI). It was a reaction against the Bretton Woods order, not part of it [6].

Prelims Hooks

• Bretton Woods Conference: the United Nations Monetary and Financial Conference, 1–22 July 1944, 44 nations, Mount Washington Hotel, New Hampshire, USA [2][3].
• Person–role pairs: Keynes was adviser to the UK Treasury. Harry Dexter White was US Assistant Secretary of the Treasury [2].
• IMF Articles of Agreement: adopted on 22 July 1944 and first accepted by 29 countries. The twins began financial operations in 1947 [2][3].
• Trap: the IMF handles external surpluses and deficits. The IBRD (World Bank) financed post-war reconstruction. Do not swap their roles.
• Peg chain: national currencies (e.g. the rupee) were pegged to the US dollar, and the dollar to gold at $35 an ounce. The US held an effective veto.
• Chronological order: Bretton Woods (1944) → operations begin (1947) → G-77 (15 June 1964) → Nixon closes the gold window (15 August 1971) → Smithsonian Agreement (17–18 December 1971) → floating rates (early 1973) → NIEO resolution (1 May 1974) [4][6][7][8].

Mains Points

• A system built on the lessons of the 1930s. The planners believed that mass production needs mass consumption, that stable incomes need full employment, and that markets cannot give full employment on their own.
• So Bretton Woods was a managed system, with fixed rates, controls on money flows and an IMF to watch over trade balances.

• Its 20-year boom (trade growth over 8% a year, unemployment under 5%) is the strongest evidence for state-managed capitalism. Its collapse after 1971 is the strongest evidence against it.

• An order made by and for the West. The Western powers controlled decisions and the US held a veto. The IMF and World Bank were built for rebuilding industrial nations, not for developing ones.

• Newly free nations in Asia and Africa found that political freedom did not bring economic freedom.

• The G-77 (1964) and the NIEO (1974) were their attempt to complete decolonisation on the economic side [4][6].

• Its collapse changed the world map of wealth.

• US overseas spending weakened the dollar, which then lost its gold anchor, which brought in floating rates [7].
• The end of cheap official loans pushed poor countries to private Western banks, which caused debt crises in Africa and Latin America.
• MNCs moved to low-wage Asia, which led to globalisation and the rise of China, India and Brazil.

Related concepts

• Bretton Woods Conference
• International Monetary Fund
• World Bank
• Fixed exchange rate
• Marshall Plan
• General Agreement on Tariffs and Trade
• Multinational corporation
• Group of 77
• New International Economic Order
• Floating exchange rate

Read more

• Rebuilding the world economy: Bretton Woods to globalisation