Journal Issue

Echoes of Bretton Woods

International Monetary Fund. External Relations Dept.
Published Date:
June 1969
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B. K. Madan

THIS YEAR marks the completion of a quarter century of Bretton Woods in the international monetary annals. Recently, nostalgia for that epochal meet seemed to have curiously welled up, in the form of demands for a new Bretton Woods, only to be drowned in a chorus of dissent. The dissent sprang from the still fresh memories alike of the earlier background of that historic event and of what went just before it, for which the present situation holds no parallel. It befits the occasion, however, both to reminisce a little on the highlights of that great Conference and to lean back and reflect on some of the international financial and economic trends as they have shaped during the period that has elapsed since.

The Setting

Trite as it may sound to repeat it at this distance of time, the Bretton Woods Conference yet remains one of the most outstandingly successful international meetings that was ever summoned for defined and specific ends. The setting of the Conference, which took place from July 1 to July 22, 1944, was in several ways ideally suited for the conduct of intense, intimate, and productive discussions and intellectual interchange. About 1,000 delegates and other members of 44 country delegations, including the U.S.S.R., were packed in the Mount Washington Hotel and its appendages, set in the idyllic surroundings of the lush countryside of New Hampshire not far from the foot of Mount Washington, a famed but—in wartime—quiet summer resort. The financiers, bankers, economists, administrators, journalists, and political experts and leaders descending there from the four corners of the globe were provided with unique facilities for uninterrupted deliberation; withal, they had all the amenities for relaxation and recreation except the leisure to use them! For the duration of the Conference, work went on all days in the week, with but the formality of an occasional Sunday break for the main Commissions and Committees, while the subcommittees and drafting committees and one-man drafters functioned on around the clock. Altogether, the Conference was one crowded moment of history, heralding the end of an era and the beginning of another.

The Scene: A Papal Election

The total setting had at least something of the air of a papal election. The delegates worked toward the final outcome, the signing of the draft Articles of Agreement for the Fund—what had been the International Stabilization Fund but was named at the eleventh hour as the International Monetary Fund—goaded by a certain sense of compulsion in events that did not seem to brook failure; it was only half way through the Conference that the birth of the Bank became an additional possibility.

The driving impulse of the meeting, its vital and propelling force, was an overriding sense of purpose and, indeed, of mission which seemed to have seized the delegates. This was to rescue the world economy, racked by chronic monetary instability and currency disorders and bedeviled by excessive trade barriers, and exchange restrictions, multiple currency practices, and barter deals during the interwar years, and set it on the road toward the beckoning goals of broad-based prosperity, of full employment, and of rising living standards; this in turn spurred an intense striving and search for a new way of international economic life based on growing international trade and transactions and capital flows in a multilateral, competitive framework geared to efficient pursuit of these goals. However, it was not without some alarms and moments of dark despair that the meetings reached the final accords. It is of some interest in this regard, particularly for those engaged in weaving the international monetary web, to recall that toward the end of the Conference its fate seemed to hang in the balance owing to the threat of reservations which several delegations wished to attach to their signatures—the longest list of reservations being that of the French Delegation. The memorable speech on the night of July 20, 1944, during the after-dinner executive plenary session, by Fred M. Vinson, Vice-Chairman of the U.S. Delegation, was the smoke signal that the hopes of an accord had been finally salvaged. He said: “Gentlemen here assembled, today we approach a new milestone in the path of history. Oftentimes when we are near, close to history in the making, we fail to recognize the significance of our meeting.” And then, after skimming over some relevant ground he came to the point: “Tell me that the people of my country can ever forget the France that was, the France that is and the France that will be. We have been taught in our schools; we learned it at our mothers’ knees that France came to us when we were in need…. Tell me that my people will ever forget the debt we owe France; that we will forget France’s suffering, France’s misery…” and so on. He continued: “A poet said that yesterday is but a dream and tomorrow is only a vision but today well lived makes every yesterday a dream of happiness and every tomorrow a vision of hope. We are here today. Today will be the day in which unity or non-unity may be seen. Oftentimes men fail because of the fear of the unknown. I trust that doubts that may arise in your heart will be resolved….” The highest tribute of “profound appreciation” for the “splendid work” of Mr. Vinson, his “sense of diplomacy” and “patient and smiling tenacity” came from the French Delegation.

In this context, Lord Keynes’ exposition of the character and status of commitment by the assembled delegations toward the conclusion of the Conference, in relation to the reservations which various delegations wished to record, perhaps tilted the scales, so that the delegations were content to have the reservations reflected in the minutes and proceedings of the Conference rather than appended to the final text. Said Lord Keynes at the start of the executive plenary session on July 20, 1944: “… So far as the U.K. Delegation is concerned we, in common with all other delegations, reserve the opinion of our Government on the document as a whole and on every part of it. The whole of our proceedings is ad referendum to our governments who are at the present stage in no way committed to anything. We have been gathered here to put our heads together to produce the most generally acceptable document we could frame. We do not even recommend our governments to adopt the result. We merely submit it for what it is worth….” The manner in which agreement thus finally emerged, by a process of consensus, without a single reservation by any delegation to any part of the final text of the draft agreements, has not perhaps been without its influence on the mode of operation of the institutions set up at Bretton Woods.

Some Highlights

Among the highlights of the Conference, the closing plenary session has stood out in the memory of many participants as recording the indelible impress that Lord Keynes made on the meeting. His brief concluding address summed up the achievement of the Conference as seen at the time: “such a bulk of lucid, solid construction” in terms of its task, viz., “to find a common measure, a common standard, a common rule applicable to all and not irksome to any,” accomplished by the participants who, in the words of Keynes, “operating in a field of great intellectual and technical difficulty … had to perform at one and the same time the tasks appropriate to the economist, to the financier, to the politician, to the journalist, to the propagandist, to the lawyer, to the stateman—even, I think to the prophet and to the soothsayer.”

Of these categories of roles, several of which corresponded to the actual specialization of the galaxy of delegates assembled, he selected the lawyers for perhaps the most eloquent tribute. “When I first visited Mr. [Henry] Morgenthau in Washington some three years ago accompanied only by my secretary, the boys in your Treasury curiously inquired—where is your lawyer? When it was explained that I had none, the rejoinder was: “Who then does your thinking for you?” That is not my idea of a lawyer. I want him to tell me how to do what / think sensible, and, above all, to devise means by which it will be lawful for me to go on being sensible in unforeseen conditions some years hence. Too often lawyers busy themselves to make common sense illegal. Too often lawyers are men who turn poetry into prose and prose into jargon. Not so our lawyers here in Bretton Woods. On the contrary, they have turned our jargon into prose and our prose into poetry. And only too often they have had to do our thinking for us.” And he went on to conclude his testimonial by what has perhaps been the most quoted part of that oft-quoted address: “I have only one complaint against them. 1 wish they had not covered so large a part of our birth certificate with such very detailed provisions for our obsequies, hymns and lessons and all.”

Others, of course, acknowledged the services of the economists, especially the “magnificent work” of Dr. Harry White, Chairman of the Fund Commission, whose “indomitable will and energy, always governed by good temper and humor” were lauded by Keynes. “Admiration and gratitude” were expressed for the most illustrious of the economists present at Bretton Woods, Keynes of course, with his mind a “unique mixture of deepness of thought and quickness of action.” It is impossible to appraise adequately the contribution of numerous delegates, advisors, and technical experts to the work of the Conference and it is not the purpose of this article to attempt this invidious task. But no reference to individual participants in the meeting can omit to record the resonant voice of the Executive Secretary of the U.S. Delegation, Mr. E. M. Bernstein, which rang through the halls of the committee meetings.

It might not be generally remembered that Lord Keynes, though one of the originators of both the Fund and the Bank plans, made his most signal contribution to the work of the Conference as Chairman of the Bank Commission in the evolution of the Bank Articles. It is widely acknowledged that the spectacular speed of the work of the Bank Commission, which started with the considerable handicap of having had nothing like the scrutiny of international research that the Fund proposals had received, was due in very large measure to the brilliant stewardship of the Commission’s work by Keynes who “kept the proceedings at a brisk pace which the delegates sportingly emulated.” At one point, early in the proceedings, a score of delegates were simultaneously on their feet to plead with the Chairman to accept a pace for the proceedings which might be more in keeping with the ability of the average delegate!

With the entire novelty of the concept of the Bank and the rapidity of its unfolding, the Bank emerged as the major find of the Conference itself. As was remarked at the executive plenary session on July 21, 1944: “So novel was it that no adequate name could be found for it … the type of shareholders, the nature of subscriptions, the exclusion of all deposits and of short-term loans, the non-profit basis, are quite foreign to the accepted nature of a bank. However it was accidentally born with the name Bank, and the Bank it remains, mainly because no satisfactory name could be found in the dictionary for this unprecedented institution.” Essentially, of course, as has often been remarked, the Fund is like a bank, making short-term credits available to members, while the Bank is like a fund, giving long-term loans to members.

The thought and feeling uppermost in the minds and hearts of delegates departing from the Conference was that for the first time a monetary system had been set up based upon international accord and dependent for its continued success on international cooperation during peace as it had been established during war. In the words of Secretary Morgenthau, “This monetary agreement is but one step in the broad program of international action … the Conference at Bretton Woods has erected a signpost—a signpost pointing down a highway broad enough for all men to walk in step and side by side.”


Apart from the highlights of the meeting, there are some sidelights and cross-sectional views of the Fund proceedings which in retrospect also seem interesting. Of these I pick up for notice a very few, not because they are more significant than many others, but because of my own involvement or better familiarity with them. One of the ticklish issues before the Fund Commission was a proposal (sponsored by the Indian Delegation) for the internationalization of the new and still mounting sterling debts, which in the eyes of perhaps the largest holder of sterling balances then seemed to pose a threat to the pound sterling and thereby to the value of the balances. The proposal was stoutly resisted and unequivocally rejected, principally by the two largest “currency debtors”—the United Kingdom and the United States! Some recent proposals initiated by academics of these same countries for the pooling in one form or another of short-term liabilities of the reserve currency countries, at least as an element of a reorganized international monetary system of the future, sound in this light as muffled echoes of Bretton Woods, changed as the context is.

The postwar transitional period, the bridge to the future international trading and monetary millenium conceived at Bretton Woods, was at one time expected to be a reasonably short one. There were no illusions, however, among many of those who framed or approved the final agreement, that a range of three to five years set a minimum time dimension for some of the harshest elements of the transitional period, and it was widely believed that it might last a good deal longer. Even the pessimists among the participants, however, did not give it the lease on life it has in fact had, having worked out for itself almost a place of its own under the sun! During a meeting which the Delegation of India had with Lord Keynes, this writer put a specific query to him regarding his view of the duration of the transitional period. “Not less than five years,” was his instant reply.

In many a context, some nexus between the operations and purposes of the Fund and the economic development of less developed countries—about the most challenging task before the world economy in the twentieth century—has been sought to be established, without any conspicuous success. The outcome in this regard has been conditioned by the basic concept of the Fund. The Fund has, however, latterly reflected growing awareness of the importance of this problem and of its relevance to some aspects of its operations. It is of interest to recall in this connection that this debate was joined at Bretton Woods itself in the Committee on Purposes of Commission I. It happened that the onus of seeking some widening in the purposes of the Fund beyond financing the balanced growth of international trade to encompass the development of the productive resources of member countries devolved on the Delegation of India. The result is appropriately reflected in the speech of the Chairman of the Delegation of Colombia on July 18, 1944, before Commission I: “The formula proposed by the special committee … harmonizes the technical orientation of the Fund, the resources of which are to be used solely to provide foreign exchange for current transactions, with the desire of the Delegation from India to include among the ultimate purposes of the new facilities for the growth of international trade the development of the means of production of the member countries….”


From reminiscence to reflection is an easy transition. It should be of interest to look back at the panorama of world monetary and economic developments since Bretton Woods and to view the system as it has developed and worked, the challenges it has faced as well as its accomplishments and failures, and to consider the directions in which it may be reoriented to fulfill more adequately the purposes of the institutional framework. This is, however, too large a task and beyond the purpose of this article. Here we may only reflect a little on the course of things since Bretton Woods as compared to what had gone before and what the founding fathers might have looked forward to. It may also be of interest, in conclusion, to pause a while and scan new initatives and perspectives in the emerging context which may have relevance for the period ahead.

In the last two decades the world economy has experienced a rapid rate of growth and unprecedented prosperity. This has been assisted, no doubt, by the buoyant expansion of international trade which has thrived in a generally stable international monetary framework along with steadily growing operations of the international financial institutions of the Fund-Bank family. How much of the world economic expansion has been attributable to the successful functioning of the Bretton Woods institutions is difficult to tell. Finance is said to be only the handmaid of economics.

But a good handmaid” can unobtrusively improve the outlook, while a poor one can fray economic tempers to the point of collapse. The contrast between the faltering course of the world economy during the interwar period, driven by trade and exchange rivalry and riddled by international financial uncertainty, and its general advance during the postwar phase is, however, too marked to miss the major contribution to the latter which is likely to have been made by Bretton Woods and its progeny.

During the last decade in particular the Fund has widened and deepened its participation in the international financial and monetary scene and in the external aspects of the economies of member countries. The Bank has bloomed into a multipronged instrument for the development and welfare of the member countries, fanning out on the one hand to stimulate activity in the private sector and on the other to reinforce the infrastructure of development through its own operations as well as those of its associate institutions. There is every indication that the Bretton Woods twins will maintain their dynamic initiative and remain the spearheads of the movement for internationalization as well as institutionalization of the framework for stability and growth of the world economy. The size, resources, and operations of the Fund and the Bank have greatly expanded since they started working and are probably at the point of another bound forward. Much of this could have been foreseen, though perhaps not clearly discerned in its detail, at Bretton Woods.

It is interesting to scan the sea change in the general environment for the operations of the Bretton Woods institutions. This perhaps also explains certain elements of the international financial scene and some of the current response patterns among member countries.

A pervasive change in the international economic outlook, reflecting primarily the situation in many developed countries, relates to the general atmosphere of the world economy from that of recession or subdued economic activity, often marked by lagging demand, during the interwar period, to that of creeping inflation and boom fed by excessive aggregate demand with continued high levels of consumption, investment, and employment. In the main, this is, of course, the reflex and counterpart of burgeoning prosperity and high and rising levels of national income in many countries, with virtual elimination of the traditional trade cycle around which much economic writing had sprouted in the pre-Bretton Woods days. With this basic change in the general economic environment there have been other associated, and coterminous, policy shifts in international exchange and economic fields, which raise interesting speculative queries for an exercise in hindsight from the vantage point of Bretton Woods.

Did we at Bretton Woods visualize, against the background of competitive exchange depreciations during an era of recessions that this specter had, perhaps, in the main, already passed? Since the immediate postwar depression also turned out to be a mirage rather than the real possibility it seemed earlier, could it be that the general economic climate had already undergone a transformation? Would the founding fathers at Bretton Woods have thought that the monetary technicians of today would be tickled by talk of flexible exchange rates, wider “bands,” “crawling pegs” and the like, and that some “desperate tactics of the past,” described as such at Bretton Woods, such as multiple currency practices, border taxes, and export subsidies, might be regarded by some as not an unwelcome accession to the armory of weapons to further the ends of the adjustment process? That exchange restrictions of a sort would again creep into vogue among the prestigious membership of Article VIII1 countries? And, that there might arise stirrings of doubt in certain quarters about the system itself? Did even the deities of Bretton Woods envisage the phase of dollar glut, corresponding to the heavy deficit stage in the U.S. balance of payments that followed the period of acute dollar shortage associated with the succession of earlier surpluses, and its implications for the international monetary system?

The essence of the system set up at Bretton Woods was reasonably stable exchange rates within a multilateral credit mechanism. The system has been supported by a series of supplementary bilateral and other credit arrangements. At Bretton Woods more radical credit proposals of the type of the Clearing Union proposed by Keynes were not accepted. The participants could not perhaps then have foreseen the phase in which, if the Proposed Amendment on Special Drawing Rights is adopted, a new supplement to reserve assets will be created in lieu of the recurrent accretions to reserves of member countries in gold or other reserve currencies in the past. In effect, perhaps a new era of “world money,” to be created under international supervision and with due regard to the growth of members’ ordinary reserves, the needs of international trade and transactions, the temperature of the national as well as international economies and other relevant factors, will have been launched. This is perhaps the most far-reaching change in the mechanism of international money since the discovery of bank money two centuries ago. It is possible yet that the silver jubilee year of Bretton Woods may witness this consummation.

We may turn at this point to note other developments in the international economy and in the balance of national economies in the world since Bretton Woods, which have not come up to the expectations entertained at that time. Bretton Woods was not only the symbol of a new stability in international financial and exchange arrangements; it was also a beacon of hope for a new approach to the problem of development of the underdeveloped countries.

Though many new initiatives have since been taken in support of development in the international sphere, the setting up of the International Bank at Bretton Woods was the first active international step in this direction. While the efforts of the Bank and its associated agencies in this field have shown commendable advance, and a further spurt in them may be in the offing, the problem of development retains some stubborn aspects. The developing countries have only of late shown an improved performance in terms of their over-all rate of growth. In the last decade or so this has compared favorably with the growth of developed countries as a whole. The per capita increase in gross national product of the developing countries has, however, still lagged far behind owing to the faster increase of their population. Also, of particular significance from the point of view of long-term capability for growth is the continuing sharp decline, partly owing to worsening terms of trade, in their share of world exports; this came down from one quarter in 1955-56 to less than one fifth in 1965-66. On the whole, with all the vaunted and valiant efforts on the international plane to bridge the gap, the hiatus between the developed and developing countries still continues to grow.

It is an irony of the international efforts for development, epitomized in the flow of foreign capital and aid, that these have tended to be slashed when they are near-ing their point of maximum effectiveness and when, with the upsurge in levels of gross national product in the developed countries, their capacity to sustain a transfer of resources is significantly improved. However, by coincidence, the development of aid in its usual forms has also reached a turning point, with its large and growing debt-servicing burden. Accordingly, aid policies need to reflect a shift in pattern, in its forms and terms, in consonance with the new situation. It is in this context that the imaginative initiative of the Bank, reflected in the International Development Association, assumes its high relevance. It is in this context again that developed as well as developing countries are out to seize some new initiatives to “revamp and reorient the aid policies so as to make them more effective and purposive. The change in outlook stems from the disenchantment of developed countries with aid in the old ruts, which is matched by a similar disillusionment among the recipient developing countries regarding the adequacy of existing forms of aid. It seems opportune to build on this new mood to achieve a greater degree of consistency and coordination between trade and aid policies of the developed countries. Priority of place could well be accorded to policies for free access to the exports—of manufacturers as well as primary products—of developing countries so as to replace aid which is in lieu of trade. Again, aid might be harnessed to provide an impetus to trade of the developing countries through a variety of new ways.

Two such ways deserve specific mention. These are: the encouragement of more rapid growth of trade among developing countries through commitment of (foreign exchange) resources to cushion such growth and the provision of institutional facilities which can provide medium-term credit to such developing countries as have developed their manufacturing sector sufficiently to export some capital and intermediate goods. These and other programs of aid for trade would seem to fit the stage of evolution of aid attitudes, responses, and policies at this juncture, besides changes in the basis and terms of aid.

We may conclude with a word on the relationship of international liquidity to aid. The issue has, for the present, been sealed in the Proposed Amendment of the Articles of Agreement of the Fund relating to the New Facility based on Special Drawing Rights. The Amendment, however, leaves open the possibility of countries receiving special drawing rights and transferring them to certain specialized regional institutions and organizations for a limited type of transaction. The present disposition of the issue apart, the matter is important enough to deserve some further thought for the longer term, as part of the answer to the quiz: “Whither Bretton Woods?”

A little reflection suggests that considered in perspective, a nexus between liquidity and aid is, for the long term, both natural and logical, even if for the short term there is need for caution in this respect. The Fund has, over time, reviewed the role of capital flows in the equilibrating mechanism, in consonance with the needs of the growing world economy. Though the Fund Agreement places main stress on freedom from restrictions on current transactions and permits controls of capital transfers, the Fund has recognized the function of capital movements in the adjustment process as well as their direct relevance for growth and development of the productive resources of member countries, and the corresponding need for freedom from restrictions of capital transactions, particularly long-term. Recognition of the role of aid and its relationship to the Fund’s purposes is only another step: since private foreign investment has to be supplemented in the conditions of a majority of developing economies, and in particular for development of their economic infrastructures, with capital aid through the public sector, aid, like trade, becomes a normal component and constituent element of the balance of payments (of donor as well as recipient countries). It has a bearing on levels of reserves and on the criteria for assessing adequacy of reserve growth. Nor need it be gainsaid that aid, like capital, should primarily be financed by a current surplus in payments. It may be recognized too that international liquidity has a special relevance to the adjustment process as between developed-surplus and developed-deficit countries—the categories, of course, changing in their country composition. But the manner in which the flow of capital and aid generally, and from developed-deficit countries in particular, tends to be hemmed in with restrictions, thereby impairing the goals of multilateral trade, suggests that international liquidity and reserve levels have a function in improving the fluidity, and possibly widening the span, of the stream of aid and capital from developed to developing countries, and thereby facilitating the adjustment process in the developing as well as developed countries.

Bretton Woods was the culmination of a long process of international research and discussion bearing on the evolution of a consensus on new horizons in the international monetary arrangements for the postwar world. With the lapse of a quarter century there is a natural interest in reviewing the performance of the system. Appropriately this task proceeds in different contexts and varied forums, and for the Bretton Woods institutions themselves it is a continuous one. However, if there is one thing above all others for which we can hark back to Bretton Woods, which we may hope to recapture for ourselves at this hour, when some of the problems which the founding fathers were up against are pressing again to the fore for somewhat more than the ordinary meed of attention, it is the spirit of international cooperation which made it possible for the Conference to be crowned with success. We need now a full measure of that spirit, in whatever way the technical issues of monetary arrangements are to be resolved.

B.K. Madan, the Executive Director of the Fund for India since 1967, was Economic Adviser to Government, Punjab, Lahore, 1940-41; Director of Research, Reserve Bank of India, 1941-46; Alternate Executive Director of the Fund and the World Bank in the period 1946-48; and Executive Director of the Fund, 1948-50. He was a member of the Finance Commission and Taxation Commission in the Government of India, 1951-54. Between 1950-67 he was Economic Adviser, Executive Director, and Deputy Governor of the Reserve Bank of India. Mr. Madan was educated at the University of Punjab, Lahore.

Article VIII countries are those that have accepted the obligations of convertibility expressed in Article VIII of the Fund’s Articles of Agreement. Members accepting these obligations undertake to avoid imposing restrictions on payments for current international transactions or engaging in multiple exchange rates or discriminatory currency practices, without obtaining prior approval of the Fund.

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