Measure to Measure

AuthorAtish Rex Ghosh
Positionan Assistant Director in the IMF’s Research Department.

When the delegates of 44 nations gathered 70 years ago for the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, their purpose was to design a new international monetary system that would bring order to the interwar economic chaos—the hyperinflations and painful deflations of the 1920s, the collapse of the gold standard, and the Great Depression in the 1930s.

The challenge confronting these monetary and financial experts was to come up with a system that would let countries adjust their external imbalances without resorting to the self-defeating competitive devaluations and restrictive trade policies of the interwar period. The burden of adjustment between countries in surplus and those in deficit had to be equitable, and sufficient global liquidity was needed to foster growth of world trade and incomes. Building on extensive preparatory work (mainly by John Maynard Keynes of the British Treasury and Harry Dexter White of the U.S. Treasury), the delegates accomplished the extraordinary feat of agreeing on the postwar monetary order in just three weeks. In closing the conference, U.S. Treasury Secretary Henry Morgenthau, Jr., remarked that, while the conference proceedings may seem mysterious to the general public, the new order lay at the heart of “bread and butter realities of daily life.” What was achieved at Bretton Woods, he said, was “the initial step through which the nations of the world will be able to help one another in economic development to their mutual advantage and for the enrichment of all.”

The linchpin of the new order—dubbed the Bretton Woods system—was a configuration of fixed but adjustable parities for currencies against the U.S. dollar, whose value would be fixed in terms of gold. The IMF was founded to help manage the system. Its Articles of Agreement, negotiated at the conference (where many countries provided valuable input), inevitably reflected the relative bargaining powers of the main protagonists. The United States, which expected to be the main surplus nation for the foreseeable future, opposed Keynes’s call for an “international clearing union.” This union would have penalized large-surplus and large-deficit countries symmetrically and, since it was based on an artificial unit of account called the “bancor,” could have been used to regulate global liquidity. But the new order at least restrained countries seeking to gain an unfair trade advantage. Devaluation was allowed only in cases of “fundamental disequilibrium,” while countries facing temporary shortfalls in their balance of payments were expected to maintain the...

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