Fifty years ago this month, representatives of 44 nations gathered in the northern New Hampshire town of Bretton Woods, against the backdrop of the green slopes of Mt. Washington. There, far from the battlefields of World War II, they designed a massive, unprecedented reconstruction of the world’s shattered economy.
Half a century later, the legacy of that conference is an integral part of the global economic landscape. From households in Anaheim to conglomerates in Zurich, the world is still reaping major rewards of Bretton Woods.
From that small town in New Hampshire sprang the World Bank and the International Monetary Fund. Of even more overarching importance, Bretton Woods gave birth to a philosophy of openness in world commerce that remains the holy grail of international economics.
“It spawned a world in which economic liberalism has become the dominant philosophy,” said C. Fred Bergsten, a senior Treasury official in the Carter Administration and now the director of the Institute for International Economics. “Economic prosperity has been unprecedented. Economic stability has been unprecedented. There’s been no major collapse. It has underpinned global peace.”
Yet even as they salute the lasting accomplishments of the coordinating system conceived at Bretton Woods, an elite group of central bankers, corporate executives and financiers from around the world has raised a fundamental question for global leaders to ponder: Is it time to do it all over again?
After a decade of financial market gyrations that recently propelled the U.S. dollar to new post-war lows, there is a move afoot to craft a sweeping reform plan that would revitalize some of the central ideas and institutions of the original Bretton Woods accord. While the proposal elicits a skeptical response from government policy-makers in Washington, Bonn and Tokyo, it has provoked a flurry of debate among global financial experts.
Amid the 50th anniversary hubbub surrounding D-Day and other events, the anniversary of Bretton Woods has drawn little notice outside the tightly knit world of international economists. Yet in its own way, it is just as important.
As Bretton Woods participants gathered in July, 1944, allied troops were pressing through northern France toward Paris. In the South Pacific, U.S forces were routing the Japanese from their island strongholds.
Those battles, and the economic precursors to the war, were the backdrop for the deliberations at the Mt. Washington Hotel. The site was chosen because, unlike some New England resorts, it would provide a room to U.S. Treasury Secretary Henry Morgenthau Jr., who was Jewish.
Woven throughout the conference were the lessons learned from World War I and the troubled years between the two global conflicts. It was an era of political weakness, protectionism, hyperinflation and depression.
If the post-war world was to prosper, the participants recognized, it would have to learn from the economic failures that fueled the war that was still raging. Put simply, it would have to conduct its future business--from broad monetary policy to country-by-country trade--in a much more open, but orderly, fashion.
The philosophical descendants of the Bretton Woods economists--the participants included John Maynard Keynes--say the openness has been the conference’s enduring legacy.
Yet the anniversary observation has also led to a critical examination of the structures set up at Bretton Woods, the coordinating system it put into place, and their lasting impact on world affairs.
Increasingly sharp criticism has been aimed at the International Monetary Fund and the World Bank for what some observers regard as extravagant spending on staff travel and perquisites.
At the same time, the twin institutions have been accused of having little to show for their efforts to underwrite development projects in Africa and Latin America despite 50 years of staggering economic growth in Europe, the United States and, more recently, Asia.
Another primary objective of the original Bretton Woods accord has been abandoned altogether. Strict control of currency exchange rates was abandoned in 1971, replaced by a system of floating exchange rates.
Although the shift provided the United States and other leading nations more flexibility to pursue domestic economic priorities, it introduced the volatility that has periodically shaken the international monetary community.
Two major changes in the world financial structure were recently recommended by the independent Bretton Woods Commission, chaired by former Federal Reserve Chairman Paul Volcker and made up of corporate officials, former government officials, academics and bankers from the United States, Germany, Japan and 15 other nations.
In a report, the panel recommended that major industrial nations strengthen their fiscal and monetary policies to achieve greater harmony, and do a better job of coordinating their activities in order to avoid exchange rate volatility.
A failure to deal with the problems caused by skewed or wildly fluctuating exchange rates can create uncertainty that chokes off the international investments, the report warned. That, in turn, could lead to “protectionist pressures from vulnerable industries in one major country after another as their international competitiveness waxes and wanes” with changing currency values.
Whether the study will have any lasting impact is debatable.
Treasury Secretary Lloyd Bentsen, speaking to a group of conference participants who were considering the recommendations, was nonplussed, saying that quiet cooperation and consultation between governments are preferable to a radical restructuring. Among other global economic leaders, most notably those from Japan and Germany, there was no evident enthusiasm for the Volcker proposals.
Other criticisms have come from a group called Fifty Years is Enough. The coalition of 82 environmental, religious and labor groups, among others, wants to pressure the World Bank to give greater weight to the social and environmental impact of its lending policies.
Under the accepted rules of the World Bank and International Monetary Fund, new borrowers must attempt to bring down trade barriers, develop sophisticated markets, reduce labor costs and remove subsidies that offer domestic industries unfair trade advantages.
“We’re polarizing these countries’ economies and politics, and that is going to come back to hurt the international community,” said Doug Hellinger, managing director of the Development Group for Alternative Policies, one of the founding members of the “Fifty Years is Enough” campaign.
In its broadest sense, Bretton Woods spawned a largely free-flowing system of global trade and investment. What was in 1944 a relative trickle of cross-border commerce--less than $1 billion a day--has become a financial torrent estimated at more than $1 trillion.
“If we didn’t have an open trading system, Americans would have gotten VCRs 10 years later, and they wouldn’t now be getting to rent videos,” said Lawrence H. Summers, undersecretary of the treasury for international affairs. “If we didn’t have an open trading system we’d still be driving gas-guzzling cars. If we didn’t have an open trading system, we’d still be producing steel in large-firing plants where people went deaf. If we didn’t have an open trading system, clothing would cost twice as much as it does.”
According to Summers, the spirit of Bretton Woods produced a more dynamic world economy. “It spurred a good deal of the innovation that took place in this country, and it gave us access to a whole set of things at lower cost than we otherwise would have had access to,” he said. “And all of that translated into higher real income” for most Americans.
The economic system put in place by Bretton Woods may have also played a key role in preventing a third global conflict.
“The most important thing that happened after World War II is there wasn’t a World War III. The reason there wasn’t a World War III is in no small part because a network of economic interconnections was created, and capitalism succeeded,” Summers said. “We won the Cold War because we in the West prospered together, and we prospered together because we integrated our economies.”
In addition, “economic thinking was homogenized in the way that McDonald’s has homogenized our taste,” said Antoine van Agtmael, president of Emerging Markets Management, a firm that invests in developing countries. “It is overlooked, but it is incredibly important.”