Posted by 
In July 1944, with war still raging in Europe and the Pacific, 730 delegates from 44 countries gathered at the Mount Washington, a grand hotel built at the turn of the century in New Hampshire. They were on the edge of a little town called Carroll, surrounded by a national forest not far from the Canadian border. But the name that would become famous was that of the area in which they were staying: Bretton Woods.
The conference had been facilitated by the US to agree new rules for the post-war international monetary system. Described as the most important international gathering since the Paris peace conference of 1919, it would “look beyond the carnage of war to establish a new world order founded on commerce and cooperation”. To the indignity of the British, it became the moment when the hosts conclusively replaced them as the world’s dominant power.
Some 80 years later, the international system looks very different to what was agreed during that three-week process, much of it having failed or mutated along the way. All the same, American dominance has continued, with the basic tenets that underpinned the agreement still broadly in place. As we shall see, however, they are now under threat like never before.
The two key protagonists at Bretton Woods were the British economist and lead negotiator, John Maynard Keynes, and the chief international economist at the US Treasury Department, Harry Dexter White. Keynes was a veteran of the Paris conference, which had culminated in the treaty of Versailles.
He had resigned disillusioned from the negotiations and published a vivid and devastating memoir, The Economic Consequences of the Peace in 1919 to explain why “the treaty’s economic terms were deeply misguided and dangerous”.
The onerous conditions the treaty placed on Germany arguably enabled the rise of the Nazis. Their power then grew after the Wall Street crash of 1929 gave way to the great depression, which was made worse by a collapse in world trade.
This was the result of many countries turning to protectionism, devaluing their currencies, and introducing capital controls to restrict how much money could flow across their borders.
White and Keynes both wanted the avoid repeating the mistakes of Versailles, and believed that a system of stable exchange rates and free trade were essential to promote both prosperity and peace. Yet there were some sharp differences between the two men about how the new system should be set up.
Essentially this boiled down to a geopolitical battle, with the war-torn British trying to salvage their global importance while the Americans were determined to sideline them.
Keynes proposed, among other things, that the international monetary system be underpinned by a global reserve currency called the bancor and a global central bank called the International Clearing Union. Unfortunately for him, the Americans held most of the cards.
They had become the world’s leading exporter, including supplying the bulk of military equipment for the two wars and lending large amounts so that the warring nations could afford to fight. Much of this was paid for in gold, and by 1944 the US owned most of the world’s reserves.
As a result, White’s vision of a more America-centric system prevailed (and Keynes would die from heart problems less than two years later). Two new US-dominated institutions were set up, the International Monetary Fund (IMF) and International Bank for Reconstruction and Development (IBRD).
The IMF was tasked with managing an international system of fixed exchange rates, pegged against the US dollar. The dollar had a fixed value in gold – US$35 (£28) per ounce – replacing the previous system in which many countries’ currencies were pegged directly to gold and could be converted into the precious metal.
The IBRD, nowadays part of the World Bank, was established to provide financial assistance to rebuild Europe and Japan after the war – ensuring the US had prosperous allies who could buy from them. To facilitate free trade, the system was then enhanced in 1947 by the general agreement on tariffs and trade (GATT), which grew into the World Trade Organization (WTO).
How it played out
The system only lasted until 1970, as US military spending during the Vietnam war meant the US dollar was unable to retain its peg to gold. Whereas Bretton Woods had restricted the quantity of currencies in circulation, now central banks could expand their money supplies to try and stimulate their economies.
This enabled the vast money creation used to prop up the global economy after the economic crises of 2008 and 2020, which has arguably been a major cause of inflation.
Meanwhile, the IMF and World Bank have become preoccupied with lending to poor countries in crisis. Both get heavily criticised for forcing governments to slash public spending and sell off assets to foreign companies. As for the WTO, it may have done much to help reduce tariffs and other trade barriers, but it has all but ceased functioning in recent years.
Then there is the US dollar. The US government’s decision to weaponise the international financial system in the wake of the Ukraine war by cutting off Russia’s access to its dollar-denominated assets has made other countries fear they could suffer the same fate. China and others have been reducing their exposure to the dollar by doing trade deals priced in other currencies such as the yuan.
Yet none of this is to say that the Bretton Woods system has truly failed. Between 1950 and 2017 the volume of world trade increased 39-fold. The share of the world’s population living on less than US$2 a day after adjusting for inflation declined from 75% in 1950 to just 10% by 2015, albeit it has barely fallen since then.
Europe paid the US the compliment of trying to replicate the Bretton Woods system when it created the eurozone, while the UN secretary-general, António Guterres, felt enough goodwill towards the 1944 agreement to call for a “new Bretton Woods moment” in 2023 to ensure that developing countries have a greater voice in global financial institutions.
Equally, some of the other problems with the current system can be overstated. Arguably, the discipline demanded by the IMF and World Bank are ultimately well intentioned. Greece may have endured brutal austerity on the back of its 2010s bailouts, for instance, but the loans probably still saved the nation from even worse outcomes like being forced to leave the euro and going into hyperinflation.
Similarly, “dedollarisation” has had a limited effect: the greenback’s place at the apex of the international financial system is not in serious trouble.
But new challenges have emerged. China is now a real threat to US economic dominance. America’s subsidy-heavy Inflation Reduction Act 2022 represents a significant move away from the free-trade doctrine underpinning the international system since the 1940s, as are the tariffs recently imposed by Washington and potentially Brussels on Chinese electric vehicles.
The nationalist successes in the recent European parliamentary elections and the potential reelection of Donald Trump are further threats to the international system, not to mention the worst east-west tensions in decades.
In this context, Bretton Woods looks increasingly like a high watermark in international cooperation. It can take much credit for enabling a 1944 Europe ravaged by the unimaginable brutality of two world wars and a global depression to live in relative peace for 80 years. Whether it can survive is difficult to say, but we would do well to reflect on its achievements in these troubled times.
Conor O'Kane does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
