The US and the Bretton Woods System

The Bretton Woods meeting was the first conference to establish a permanent international institutional and a legal framework for ensuring cooperation between states, requiring commitments by states to limit their sovereignty for the sake of cooperation and to observe specified rules in economic intercourse.²³⁹ It is firmly believed that only after the end of World War II when an all-out mobilization of resources had been called for that the countries around the world, after having suffered from an unprecedented disaster, came to hold a common belief in overall economic objectives, which contributed to the realization of a supranational cooperation. By the same token, more than any other postwar international organizations, the International Monetary Fund was viewed by successive American administrations as a linchpin of the international economic order.²⁴⁰ While we go beyond the fundamental consensus of this international project and explore more deeply the essence of the Bretton Woods system, it is almost undoubted that instead of simply serving a legitimating function, it was mainly the creation of America, and represents the American institutional interest on the World economic arena. Therefore, the rise and fall of the Bretton Woods System (BWS) has spontaneously been reckoned as the symbol of the ups and downs of the American hegemony.

At the very beginning of the establishment of the Bretton Woods System, the core of it was composed of two international institutions. The first institution was the international monetary system based on fixed, but adjustable, exchange rates, an officially maintained gold price of $35 an ounce, for which the International Monetary Fund (IMF) was, in reality, given formal responsibility.

The United States used its economic resources and political influence to assure the early success of that monetary system. The second one is the Dollar-Standard international monetary system established at the Bretton Woods Conference in 1944. The IMF actually was employed by the United States to govern this system. The Dollar-Standard institution brought tremendous income to the

239 Harold James, International Monetary Cooperation Since Bretton Woods, Washington, D.C. International Monetary Fund and Oxford University Press, 1996, p. 57.

240 Miles Kahler, “The United States and the International Monetary Fund: Declining Influence or Declining Interest?” 1990.

United States, and thus benefited hegemonic maintenance, e.g., during the Vietnam War, the inflationary burden was transferred to other states and the U.S. could enlarge the circulation of dollars without worrying about its domestic economic situation.

Although the Bretton Woods System originally depended on the concepts of universality, equality, and progressive liberalization,²⁴¹ it sometimes turned out to be the opposite because of the United States’ hegemony. More specifically, the USSR did not become a member of IMF until 1992 when it had actually been replaced by Russia, which greatly reduced the universal character of the IMF and handed the United States almost uncontrollable power. Moreover, as is well known, although the Bretton Woods System had been based on the principle of the equality of currencies, in practice some currencies came to be much more important in the international system than others.

With regard to liberalization, vested interests in many of the participating countries, particularly those of United States, soon came into being to deal with specific issues. The United States adopted a more and more dollar-centered view of the world that was more compatible with a different intellectual tradition than that which had led to Bretton Woods.²⁴² With its enormous economic power, which accounted for almost half of the world’s industrial production in 1945, it ensured that its point of view influenced the operation of the whole system. The United Kingdom desperately clung to its belief that the pound sterling should serve as an international reserve currency and, as a consequence, became an obstacle to international liberalization. In addition, concerning the situation of France, which felt unhappy with the increasingly American-dominated postwar developments, it was declared ineligible to use the resources of the IMF because it was operating multiple exchange rates in contravention of the Articles of Agreement.²⁴³

One of the striking features of the postwar world was a rediscovery of national interest that resulted a decreased willingness to tolerate a system of externally imposed rules. To some extent, it was such special conditions that allowed a state, which has both the willingness and the power, to extend its influence to the widest range. Just like Armand Van Dormael stated, the consensus at Bretton Woods was overshadowed, already at the conference itself, by an aggressive and assertive

241 Harold James, International Monetary Cooperation Since Bretton Woods, Washington, D.C. International Monetary Fund and Oxford University Press, 1996, p. 58.

242 Harold James, International Monetary Cooperation Since Bretton Woods, p. 60.

243 Ibid.

manipulation of the proceedings in the direction of the US national interest.²⁴⁴ Moreover, evidence existed in the report of the conversation between the two principal U.S. figures concerning the location of the Fund headquarters. Morgenthau told White, “now the advantage is ours here, and I personally think we should take it.” White replied, “if the advantage was theirs, they would take it.”²⁴⁵ During the conference, the incessant struggle for checking the assertion of national interest was witnessed as well while idealism didn’t result in realistic behavior. In the rules versus discretion balance, the weight had already shifted significantly to discretion, and consequently greater scope for the realities of power politics.

Because of the trade deficits with Europe and Japan, and mainly the direct involvement in the Vietnam War beginning in 1965, the US economy and national power became relatively feeble in the maintenance of the BWS. In early 1968, the longstanding arrangement in which gold was bought and sold in one market for all transactions (private as well as official) collapsed. Two separate markets were established for gold transactions, one for official transactions at $35 an ounce and one for private transactions at a price to be determined in the free markets. Subsequently, there was a gradual rise in the free market price that was many times the official price. The shortage in its gold reserve led to the abandonment of the fixed rate system by the United States during the Nixon Administration in the early 1970s because the system no longer suited American interests. The United States itself had balance of payments deficits that were exceedingly large in relation to the size of its official gold holdings. Two pillars of the Articles of Agreement—the fixed exchanging rates system and the gold convertibility of the dollar—crumbled. Consequently, in August 1971, the classical Bretton Woods system came to an end. The par value system was killed by mutual disagreements and recriminations about who should adjust—in other words, because of the absence of a truly effective mechanism for multilateral surveillance.²⁴⁶ As Harold James put it, there are mainly three reasons for the collapse: first, on the most general level, because of insufficient flexibility in the system. Exchange rates had hardened, a discussion of alteration had become impossible outside of the dramatic circumstances of a major crisis, and other sorts of adjustments (for instance, in fiscal policy) were too politically contentious. Second, the immediate disturbance

244 Armand Van Dormael, “The Bretton Woods Conference: Birth of a Monetary System,” in Armand Van Dormael, Bretton Woods: Birth of a Monetary System, Hoover Institution, Public Policy Inquiry, 1978.

245 Ibid.

246 Harold James, International Monetary Cooperation Since Bretton Woods, p. 205.

that destroyed the system had a particular cause, the monetary expansion of the United States in the late 1960s associated with the Viet Nam War, and a very loose approach to monetary policy in the face of an exchange crisis in 1971. Third, the trigger that demonstrated the incompatibility of different national policy stances within the system was provided by the larger flows of capital.²⁴⁷

Generally speaking, an international system requires compromise from the states, sometimes even a transfer of their sovereignty, to stabilize the international cooperation environment. As noted above, after the end of World War II, when most of the countries reached a consensus that “revival”

and “development” were the critical tasks, naturally, negotiations went smoothly as expected. With the passage of time, during the 1970s, when the exterior environment gradually tended to be peaceful and stable, states became increasingly committed to domestic growth with less tolerance for concessions. On the other hand, the technological forces that were driving economic growth in the developed countries, for instance the United States, required internationalization of the goods markets as well as the capital market. Therefore, the crisis of the Bretton Woods system can be reckoned as a particular and very dramatic instance of the clash of national economic regulation with the logic of internationalism. Under the circumstances that existed in 1971, the disruption of the system followed very obviously and directly from the policies of the United States.

The course of events followed a predictable logic. Once the United States decided to use the system for the sake of power politics, other members would legitimately object, the markets would realize the unsustainability of the divergent national positions, and begin to prepare for a collapse of the parity structure. It would then only be a matter of time before the country that had tried to manipulate the rules realized that it could not continue that operation forever; and once that happened, it would be prepared to act more broadly to attack the system as a whole, as no longer suiting or serving its interests.²⁴⁸

In sum, the original vision of Bretton Woods had included a substantial and long-term control of capital movements across national frontiers. By the end of the 1960s, such regulation was unthinkable to the major of the players in international finance. Critics pointed out how the operation of the international monetary system in the 1950s and the 1960s had allowed the United States to pile up assets throughout the world. In a discussion of the repercussions of the Nixon shock, one

247 Harold James, International Monetary Cooperation Since Bretton Woods, p. 205.

248 Harold James, International Monetary Cooperation Since Bretton Woods, p. 207.

Executive Director of the IMF referred to the $166 billion in US assets throughout the world as

“greater than the total amount of the Marshall Plan and US foreign aid combined.”²⁴⁹ Capital movements had become not only one of the features of the international market, but also came to be widely regarded as one of the tools of power politics.²⁵⁰

As a matter of fact, the IMF has been the core component of the Bretton Woods System, and after 1971 it inherited the legacy of this institution. The collapse of the BWS reflected the relative decline of American hegemony, and accordingly, the purpose and function of the IMF varied in some respects. The United States and the dollar could not command a predominant role as before in the IMF and the world economy. Nevertheless, the United States and the dollar respectively have continued to be the main actor and basic element of the floating monetary system. Therefore, the American role has changed from being the greatest impact to being a great one. After twenty years of relative decline, the American economy revived and renewed its greatest impact on the IMF through other means without rebuilding this system.