The Bretton Woods legacy: its continuing relevance - Bretton Woods Agreement of 1944 - transcript

US Department of State Bulletin, Sept, 1984

I am here today to acknowledge the debt of people of my generation to the work done here 40 years ago. My generation has never known soup kitchens or bread lines or depression of the type experienced in the 1930s. This is due in no small part to the outstanding work that was done here in setting up an international monetary system toward the end of the Second World War.

Forty years ago, a group of distinguished and farsighted men erected what has become a living historical landmark of international economic cooperation. The structure they erected enabled the world economy to achieve an unprecedented four decades of reconstruction, growth, and change. Today, the Bretton Woods institutions, having proven both resilient and flexible, are in the forefront of our efforts to resolve current international economic problems.

Some of those who helped to build this structure 40 years ago are here tonight. We pay tribute to them and their fellow architects and salute the men and women who, over the subsequent 40 years, worked within and built upon the foundation laid down here.

The wisdom and farsightedness of the architects of Bretton Woods are the more remarkable when we consider the background against which they labored. It is sometimes noted that their conference took place soon after the landing of the Allied forces in Normandy. But, as you know, the gestation period of the Bretton Woods structure began earlier, when the alliance was struggling for its very survival. Remarkably, despite preoccupation with the course of the war, these men were able to look to the future and to see that a totally new cooperative international monetary and financial structure was needed to rebuild the world economy and secure a lasting peace.

Developing a Stable

Monetary Order

What did the Bretton Woods founders believe they had accomplished? How successful were they? What elements of their design are most relevant to our concerns today? Let me begin with the quote from U.S. Treasury Secretary Morgenthau reproduced in our program: ?What we have done here in Bretton Woods," Morgenthau said, "is to devise machinery by which men and women everywhere can freely exchange, on a fair and stable basis, the goods which they produce with their labor." A commonplace observation? Perhaps it seems so today. But compare the ideal to the then-existing reality.

The interwar period had left international economic intercourse in virtual anarchy, with countries attempting to defend themselves against external shocks (and, indeed, to export their unemployment to others) through all kinds of devices--exchange rate manipulation, multiple raes and exchange controls of various kinds, import barriers, and restrictive bilateral agreements. In this context, Morgenthau's simple claim must have seemed visionary indeed.

The first order of business, then, was to bring countries together in a structure that would substitute stability, cooperation, and open markets for the existing chaos. At the same time the founders wanted to leave individual countries scope to pursue their legitimate individual economic objectives. Balancing these two goals--discipline and cooperation versus freedom of action--was one of the most fundamental and difficult problems facing the negotiators 40 years ago.

The Bretton Woods founders believed that these goals could best be reconciled within a system of fixed but adjustable exchange rates. They had very much in mind the experience of the interwar period with its turbulent spells of flexible exchange rates and "beggarthy-neighbor" devaluations. Therefore, in their system, countries were committed to the maintenance of exchange rates within narrow margins around agreed parities, and the International Monetary Fund (IMF) was to exercise discipline over changes in these parities.

Did Bretton Woods Fail?

Although this exchange rate structure provided the foundation for the world's monetary system for almost 30 years, it is now generally believed to have had fatal defects which caused it to be abandoned by the major countries a little more than a decade ago--in practice, in 1973; in law, with the second amendment to the IMF articles in 1976.

Many learned writers have written countless pages on the reasons why this happened. The consensus, as I understand it, is that the system proved in practice to be too rigid in the face of changing conditions. Currency convertibility, fixed exchange rates, and independent national macroeconomic policies become increasingly inconsistent with growing economic interdependence. The Bretton Woods escape hatch--adjustment through major exchange rate realignments only after fundamental disequilibrium had clearly emerged--proved unworkable in a world economy where vast amounts of capital can move relatively freely across the exchange markets to hedge or speculate on an anticipated realignment.

Of course, the Bretton Woods founders did not foresee--they could not reasonably have foreseen--the vast increase in funds free to cross and recross national borders over the postwar decades. And it is clear at least some of them gave far less weight to the benefits of free capital movement than to those of free trade. To their credit, the founders viewed their arrangements as experimental, not immutable. If anything, those who followed ought probably to have modified the system at an earlier stage, before it collapsed.