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CHAPTER 3 The Compromise Unravels

Author(s):
Harold James
Published Date:
June 1996
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Brerton Woods had created an ideal. What would the reality look like? In the light of the almost overwhelming difficulties confronting the new system in its early years, in the face of a world torn apart by the experience of war, with a devastation of much of the European and Asian areas, it may even be surprising that anything of the original vision remained at all. This chapter describes how the utopian element of Bretton Woods faded, how with the outbreak of the Cold War relations between nations became conflictual, and how new initiatives by the United States successfully put at least part of the world on the path to prosperity. At this time, the Bretton Woods institutions played a substantially reduced role, but the period of enforced idleness was by no means fruitless. In this period, and especially in the early 1950s, they developed operational procedures—in particular the device of the (nonauto-matic) IMF stand-by arrangement—that could be used later, in more propitious circumstances.

Bretton Woods depended on the concepts of universality, equality, and progressive liberalization. All three principles soon came to be questioned. Where Bretton Woods had sought to establish a universal system, its participants soon found a world divided by the Cold War. The U.S.S.R. had originally been cast as a crucial member of the new older, with the third largest quota in the new Fund (at $1,200 million only $100 million less than that of the United Kingdom) and a corresponding voting power. It would use its position in the United Nations to exercise its power interests, but opted not to join the Fund or the Bank. Instead, a few years later, it created its own institution for international economic cooperation in the area that it dominated politically, the Council for Mutual Economic Assistance (CMEA, or Comecon).

PATH TO RECOVERY

Where Bretton Woods 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. Commentators often made the analogy with the animals of George Orwell’s farm.

Where Bretton Woods had demanded liberalization, vested interests in many of the participating countries soon deployed their obstructive talents.

The whole edifice came under a substantial political attack. Each of the wartime Big Four soon found the proposed instruments for managing the postwar economic order uncomfortable. The U.S.S.R. withdrew. In the United Kingdom and the United States bitter conflicts were fought out over the ratification of the Bretton Woods agreement. The United States adopted more and more a dollar-centered view of the world, more compatible with a different intellectual tradition than that which had led to Bretton Woods. Over the next two decades, the United States often in practice behaved as if a dollar exchange standard had been created in 1944. The enormous economic power of the United States (it accounted in 1945 for almost half of the world’s industrial production) ensured that such a view influenced the operation of the whole system. The United Kingdom clung desperately to the role of the pound sterling as an international reserve currency and, as a consequence, became an obstacle to international liberalization. France, which felt unhappy with the increasingly American-dominated postwar development, was declared ineligible to use the resources of the IMF, because it was operating multiple exchange rates in contravention of the Articles of Agreement.

By an odd twist of historical irony, it was the states not represented at Bretton Woods, the defeated Axis powers, that in the first decades of the new order did the most to perpetuate a push for liberalization. The explanation is abundantly obvious: Japan and Germany had paid the costs imposed by the irrationalities of planned authoritarian economics. They now benefited greatly from a benevolent U.S. hegemony. Under new political leadership, with vested interests largely destroyed by the political collapse, they saw the advantages that liberalization would bring. In Japan, the efforts at first involved primarily domestic liberalization, with a freeing of the external economy proceeding only gradually and rather after the 1960s. In Germany, however, with a much stronger historical pattern of trade and investment links with its neighbors, the domestic reform measures of 1948 were followed with a delay of only a few years by a sustained drive to liberalize external relations. Later, at the end of the 1950s, Spain too, which previously had also been altogether outside the system, became one of the most effective and successful reformers. States previously isolated felt the imperative to liberalize and internationalize much more compellingly than older and more established members of the international system.

One of the striking features of the postwar world was a rediscovery of national interest and as a result a decreased willingness to tolerate a system of externally imposed rules. Some writers, notably Armand Van Dormael, have seen the consensus at Bretton Woods as overshadowed, already at the conference itself, by an aggressive and assertive manipulation of the proceedings in the direction of U.S. national interest. There is certainly evidence for this in the conversation reported 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.”1 At the conference itself, however, a certain idealism had still held in check the assertion of national interest. But it could not be expected to last for long. In the rules versus discretion balance, the weight had already shifted significantly to discretion, and a consequently greater scope for the realities of power politics. At the end of this chapter, the adaptation of the Bretton Woods institutions to the changed international climate is discussed. These institutions now faced a world much less prepared to commit itself to the impersonal regulation provided by a rule-based system.

The critical moment came in 1952, when the adoption of the stand-by procedures marked a significant step toward a more flexible Fund, that would discuss policy issues with its members and make such consultation a standard part of its financial operations. The new procedures could be used to create considerable incentives for countries to adopt liberalization and were used vigorously to this effect in the late 1950s (see Chapter 4). They played a part as a result in the gradual adoption of the guiding principles of Bretton Woods. Perhaps the establishment of convertibility occurred at a slower pace than had been foreseen by the visionaries in 1944: but it still formed an essential element in the reordering of the world economy on liberal principles. Incentives (the availability of financial resources) as well as rules would now inspire the creation of a more open world economy.

The Past Re-Emerges

Despite all the good will that pervaded the New Hampshire air, the new order inevitably bore the burdens of the past as well as confronting the issues of the present. The two major problems of the immediate postwar world, the so-called dollar gap and sterling balances, were the legacy of previous mechanisms for conducting the international settlement of payments. Sterling balances were what was left of the pre-eminent position of sterling as the world currency of the nineteenth century, as well as a legacy of the sterling area of the 1930s and of British wartime finance. They provided after 1945 an economic mechanism through which Britain hoped to continue to act out its imperial role. Debates about a dollar gap, and diagnoses of a permanent dollar shortage, came from the world of the 1930s: from the war scares and capital flight out of Europe and the consequential accumulation of gold in Fort Knox, where it was assumed to have found a loving permanent home.

The effect of sterling balances was to prompt British objections to any manner of proposal for a reordering of the international monetary system. Any system that involved liberalization would entail an unfreezing of sterling balances and would thus inevitably harm British interests (as perceived by the financial and governmental elite). As a result, Britain resisted not only the American proposals, debated since 1941, for the restoration of convertibility, but also opposed European proposals in the late 1940s for a European payments system. The Bank of England disliked, and did its best to frustrate the operations of, the Fund both before and after it began business. It felt that the Bretton Woods conference had transferred power away from the central banking community and toward finance ministries and treasuries.2 For at least a generation, sterling balances turned Britain into the most persistent troublemaker within the international monetary system. Britain’s concept of its self-interest thus disturbed attempts at creating an international order.

After 1945, the United States also began to change its attitude toward international economic relationships quite substantially. It sought a way of managing the international economy outside the universal framework established at Bretton Woods. There was less sympathy for the New Deal dirigisme that had been reflected in the early vision of the purpose and role of the Fund and the World Bank. In addition, the Cold War involved a reconsideration of American economic diplomacy. By the 1950s, a survey of the economic motivations behind U.S. foreign policy could take it for granted that the “liberal economic internationalism” of Bretton Woods was an absurdity, since “its prescriptions were based on the mistaken ‘universalist’ premise that all countries could participate in this kind of liberal international economy on an equal footing … despite gross differences in economic health, cultural backgrounds, and degrees of political and economic effectiveness.”3

Perhaps it was inevitable that the glowing and idealistic vision of the Bretton Woods founders would be buffeted by political currents. At first, the implementation of an institutional machinery designed to reconcile greater prosperity across frontiers with strongly held conceptions of national sovereignty turned out to be a harsh exercise in disenchantment and disappointment. The high initial expectations needed to be scaled back. Camille Gutt, who had been appointed as the first Managing Director of the IMF, wrote that the Bretton Woods signatories “were faced with these two alternatives: to do something imperfect, questionable in its formulation, but tending nevertheless towards a most essential goal on which they were all agreed, or to do nothing. I thought at the time—and still think—they were right to choose the first alternative.”4

Despite the consultations with governments in exile, the 45 delegations at Bretton Woods, and the concession on quotas and gold subscriptions to the U.S.S.R., Bretton Woods had remained fundamentally a product of the Anglo-American wartime alliance.5 The treaty reflected a compromise between a U.S. desire to impose convertibility on the large trading area within the sterling system and a British attempt to make the United States underwrite perpetual world prosperity and to promote adjustment by obliging creditors to expand rather than debtors to contract. The most obvious form of the reconciliation of interests involved in these negotiations was the balancing of Article VII of the Lend-Lease Agreement (on the obligation to introduce convertibility) with Article VII of the IMF’s Articles of Agreement (on the scarce currency provision). Sterling could become convertible, but only if Britain was to be permitted in some circumstances to introduce discriminatory protection against exports from dollar countries; and it Britain were prepared to rein in its large official (largely military) spending overseas.

Eight days after the end of the war in the Pacific, the United States canceled Lend-Lease. Britain was plunged into an immediate financial catastrophe. As the wartime Chancellor of the Exchequer had put it, “the period of the war would have seen England’s transition from a position of the world’s largest creditor nation to the world’s largest debtor nation.”6 Keynes’s response to the crisis was that Britain had to learn to stop playing “Lady Bountiful” right across the globe and conserve its resources more adequately. “The gay and successful fashion in which we undertake liabilities all over the world and slop money out to the importunate represents an over-playing of our hand, the possibility of which will come to an end quite suddenly and in the near future unless we obtain a new source of assistance.”7

America Rethinks

At the same time as Britain reflected on the likely perils of the postwar world, American fears of the consequences of the Bretton Woods commitments increased. For a while, those who thought they believed in “sound money” mobilized against the proposals. The accusation that the new proposals would be inflationary (which had already been made, bizarrely, in the context of postwar reconstruction against the gold exchange standard in the 1920s) was repeated. Already in June 1944, Randolph Burgess of the Federal Reserve Bank of New York commented that few bankers understood the new proposals and that they followed the debate with suspicion and hostility. “They are distrustful of any program for giving away American gold; they are distrustful of all spending programs, especially when sponsored by Lord Keynes.” Keynes appeared to be advocating in an international context “the philosophy of deficit spending over again—the use of credit as a cure-all,” and “making a big pot of money available … would accentuate … inflationary tendencies.”8 The academic economist Edwin Kemmerer, who had been a major figure in drawing up interwar currency stabilization plans in Latin America, Central Europe, and China, pleaded for a return to the gold standard and called Bretton Woods “a grandiose global scheme for a conglomeration of politically managed paper money standards—a scheme in which debtor nations would call the tune and Uncle Sam would ultimately pay the fiddler.”9 Three associations of American bankers drew up a recommendation, in which they urged acceptance of the World Bank “with minor changes,” but that “the plan for the International Monetary Fund be not adopted, as it embodies lending methods that are unproved and impractical.”10 Securing the passage of the Bretton Woods legislation through the U.S. Congress in the end became possible only because the internationalist wing of the Republican Party ignored the protests of the bankers. But the campaign against Bretton Woods left a permanent mark on the U.S. interpretation of the new agreements.11

The original Keynes proposals had met resistance from American conservatives because they had appeared to involve a country that accumulated balance of payments surpluses (that is, the United States) in a virtually unlimited liability to the extent of the total resources of the Fund. The U.S. answer had been to limit the potential liability to the extent of its Fund quota: in the end therefore to $2.75 billion. In the Fund Articles, Article V, Section 3(a) specified that “A member shall be entitled to buy the currency of another member from the Fund in exchange for its own currency subject to the following conditions: (i) The member desiring to purchase the currency represents that it is presently needed for making in that currency payments which are consistent with the provisions of this Agreement; (ii) The Fund has not given notice under Article VII, Section 3, that its holdings of the currency desired have become scarce,” But supposing members wished to purchase more dollars than the U.S. quota of $2.75 billion? If the Fund Articles went into force in the likely conditions of the postwar world, the new institution would be faced with an instant shortage of dollars. The formulation in Article V, Section 3(a)(i) was designed to avoid this problem by compelling countries to borrow the currencies required for trading. But it made little conceptual sense in that it is not necessary to have a particular currency in order to pay bills due from that country in a world of convertibility and multilateral payments.

The alternative approach to the flawed formulation in Article V emphasized the concept of “key currencies” used in world trading: in other words, the dollar and sterling. This approach was advocated most conspicuously and vigorously by the Harvard economist and Vice-President (and chief economist) of the Federal Reserve Bank of New York, John H. Williams, in a series of articles in Foreign Affairs as well as in his testimony to the U.S. Senate on the Bretton Woods agreements.12 All that was required in practice to deal with postwar payments difficulties, Williams suggested, was a solution to the dual problem of the dollar gap and the sterling overhang.

First, countries engaged in reconstruction needed to be supplied with dollars to import necessary foodstuffs and capital equipment. This might be done much more effectively and straightforwardly by a gift or grant rather than by loans or overdrafts within the context of an international institution. And if it were to be accomplished by loans, then the appropriate Bretton Woods institution was the Bank and not the Fund, since the Bank could provide the appropriate mix of private funds with government guarantees. Second, there needed to be an unblocking of sterling balances. “If we could work out the conditions of multilateral trade and free exchange for this country and England, there would not be much difficulty about extending them to the rest of the world.”13 Bretton Woods, Williams believed, had produced a misleading and overcomplicated institutional structure, which diverted attention away from the fundamental problems of the world economy and which might well break down if it attempted to intervene. “To put the Fund into effect during the transition period,” Williams claimed in 1947, “would involve the risk of wrecking it because of the unusual character of the conditions that it would have to confront.”14 Before the Bretton Woods conference, Harry Dexter White had objected very vigorously to Williams’s approach, which he thought would inevitably “divide the world up into blocs.” “Many countries,” he wrote, “would feel that they were being excluded from the determination of policy of vital importance to them.” And, in addition, such an approach would prevent a general and genuine liberalization, because “many of the most vicious practices would be firmly entrenched in some countries.”15

In the months following the end of the war, the force of Williams’s criticism, however, swayed more and more American policymakers. In the Fund Agreement, Article IV, Section 1(a) required the expression of par values in terms of gold or the dollar. In practice, the relationship with the dollar became the key value, and the world moved to the adoption of a dollar system. Williams’s views on the immediate importance of ensuring an adequate supply of dollars for the nondollar world provided a substantial part of the intellectual underpinning of the two major U.S. economic policy initiatives of the immediate postwar era: the Anglo-American Loan Agreement of 1946 and the Marshall Plan of 1947. As the key currency approach, and the vision that lay behind it of America’s righrful place in the world economy, flourished, so the role of the Bretton Woods institutions receded, and the Fund’s activity became increasingly reduced. It began to appear a redundant bureaucratic encumbrance, Williams suggested in 1947 that the world should “postpone the Fund until more favorable conditions have been developed for its operation.”16 (It was indeed excluded from the operation of the Marshall Plan.) As long as the world operated with key currencies, in practical terms the role of the Fund would be reduced. The evolution of the dollar helped to “displace” the IMF “from the central position it was intended to occupy in monetary affairs,” wrote Harry Johnson, who concluded that, as a result, “the field has been dominated instead by politically motivated and directed relationships between the United States and the major European countries.”17

In particular, the Fund could no longer apply discipline universally. Correspondingly, the new system would function only if the United States chose to follow a course based on stability. The future of the system depended on the self-restraint of the anchor currency, the dollar. By and large, the United States fulfilled the required role with great responsibility until the second half of the 1960s. Only at that time did the increased willingness of the United States to turn a blind eye to international economic conditions contribute to a developing crisis within the mixed Bretton Woods and key currency system.

Britain Collapses

For the United Kingdom, the debate about desirable ways of reordering the world economy soon became secondary to the basic business of national economic survival. The assistance required by the United Kingdom was of a scale that could not possibly be provided even under the most generous interpretation of the Bretton Woods scheme. Keynes set out once more across the Atlantic on a financial bargaining mission, this time as a beggar. The negotiations were concluded in the last months of 1945. Only a small fraction of Lend-Lease was to be repaid by Britain. In addition, Britain obtained a $3.75 billion loan at 2 percent repayable over 50 years from the end of 1951. The price of this uniquely favorable loan was British ratification of the Bretton Woods agreements and the acceptance of its Lend-Lease Article VII responsibility to return to currency convertibility (“no restrictions on payments and transfers from current transactions”) within one year of the provision of the loan (which occurred on July 15, 1946). Britain would have to renounce the protection of the transitional period negotiated as part of the Fund Articles of Agreement.18

The Anglo-American loan appeared as the extension of the liberal trading principles of Cordell Hull. In defending the new agreement to the U.S. public, White said: “Economic warfare has in the past too frequently led to actual warfare. If we want to help keep world peace, we must also prevent the outbreak of international economic warfare, and that is what this proposed Anglo-American Financial Agreement aims to do.” When Britain adopted, as a result of its new obligations, a liberal commercial policy, the rest of the world might be expected to follow.19

Keynes had originally believed that the British government should accept the Bretton Woods agreements, “provided that they were not coupled with dangerous concessions under the heading of commercial policy.”20 He became increasingly isolated. A substantial and growing opposition to Bretton Woods and its principles developed in Britain. After 15 years of working with exchange controls, the Bank of England had come to appreciate the power that it derived from them and to fear that liberalization would mean an end of its influence as a global institution. The Deputy Governor of the Bank, C.F. Cobbold, wanted “to snap our fingers at the Americans and develop the sterling area.” A substantial part of the Conservative opposition was sympathetic to this view of the world, and the idea of Empire, when given an anti-American slant, even convinced a significant element of the Labour Party. An important part of the British financial press depicted the new agreements as requiring “a more rigid form of stabilization of sterling in relation to gold than the one that existed under the old gold standard.”21 Keynes’s ideas about the importance of domestic demand were marshaled in the argument against Keynes’s internationalist creation. The Chancellor of the Exchequer, Stafford Cripps, was intimidated by the hostility and did little to defend and nothing to explain the principles of Bretton Woods.

It appeared for some time that the only committed British internationalist was the distinguished economist who had been instrumental in the making of the new monetary system. Keynes defended in public both Bretton Woods and the loan, with all the strength remaining to him, as the best possible deal that Britain could get in the circumstances. “It is a unique accomplishment, 1 venture to say,” he proclaimed in the House of Lords, “in the field of international discussion to have proceeded so far by common agreement along a newly-trodden path, not yet pioneered, I agree, to a definite final destination, but a newly-trodden path, which points the right way. We are attempting a great step forwards towards the goal of international economic order amidst national diversities of policies.”22 Keynes’s biographer, Roy Harrod, gave a gloss: “We need no longer be content with a nationalist experiment in Keynesian economics, implying some measure of autarky, but could take the better path of an experiment in Keynesian economics on a world scale and not forgo the full benefits which flow from international trade.”23

The Soviet Hesitation

While a major political debate about the ratification of the Bretton Woods agreements occurred in the United States and the United Kingdom, at first few signs emerged of the Soviet attitude toward the new world economic order. To those who had believed in a genuinely universal institutional framework that would lead to world trade, world prosperity, and world peace, Soviet participation was essential.

For Harry Dexter White, one of the appeals of a universal institution was that it cut the sterling-dollar problem—which was at the heart of all the major international policy disputes of the first four postwar years—down to proper size. Did the world not have more serious problems than the power pretensions of Great Britain? “It matters little,” White wrote in 1945, “what our political relationships with England become or what happens in the Balkans or the Far East if the problems between the United States and Russia can he solved.”24 White’s desire to make Bretton Woods work in a truly global sense may well have led him to attempt too intensively and too intimately to cooperate with the U.S.S.R. Already in early 1944, he had proposed a “large credit to the U.S.S.R. in exchange for needed strategic raw materials” as “a sound basis for continued collaboration between the two governments in the post-war period.”25 At the beginning of 1945, he proposed a $10 billion reconstruction credit (equivalent to the total amount of the capital of the World Bank) for the U.S.S.R. at an interest rate of 2 percent.26 Stories of White’s involvement with the Soviet cause did little to increase the confidence of the U.S. administration in White’s creation, the IMF. Though the question of whether or nor White, or certain of his associates in the U.S. Treasury (some of whom went onto the staff of the IMF), were “Soviet agents” has never been unambiguously settled, the suspicions later, in the McCarthyite period, led to a witchhunt in the Fund.27

In the last week of 1945, as the deadline for ratifying the Articles of Agreement drew nearer, Soviet officials in the Foreign Ministry and the Ministry of External Trade drew up memoranda emphasizing the advantages of membership in the new institutions:

  • Participation of the U.S.S.R. in the Fund and the Bank would give us the possibility to have some influence upon credits in the postwar period, and to keep an eye on what happens in these organizations.

  • Being a participant in the Fund and the Bank, the U.S.S.R. can receive credit from these organizations in the case of need. The U.S.S.R. may receive from the Fund relatively cheap short-term balance of payments credit up to $300 million within a period of a year. Credit from the Bank, the charge on which still has not been determined, may be somewhat more expensive than governmental credit.

  • Through participation in the Fund and the Bank, we eliminate possible difficulties in the way of (a) selling out gold on the global market, and (b) in receiving American credits. It is known that Americans made credits to Britain conditional on joining the Fund.28

Between December 26 and 29, Foreign Minister Vyacheslav Molotov almost certainly talked with Stalin, and the tone of the Soviet discussion now changed. Stalin’s brutally realistic mind could never see any purpose in an institution whose function lay in fostering international cooperation: it could only be a disguised instrument for specific national interests. If the United States was interested in promoting some cause, that fact by itself indicated that the U.S.S.R. would be likely to be harmed. Joining the IMF would only give a signal of weakness. The issue might be used, however, as a bargaining tool for obtaining larger foreign assistance. Only a large governmental credit (as had been given to the United Kingdom) would be an adequate compensation for Soviet membership. As White had foreseen, the sticking point lay in the size of the U.S. loan offered to the U.S.S.R. In the summer of 1945, the capital of the U.S. Export-Import Bank had been increased by $3 billion, with $1 billion earmarked for the U.S.S.R. (which hoped for an even larger amount).

There may have been additional considerations. Stalin had invested a substantial amount of his time in preparing, in great secrecy, a currency reform of his own. In the fall of 1945, he brought to his vacation home in the Crimea the Soviet Finance Minister to discuss a plan for reducing the value of the ruble. Membership in an international institution might interfere with changes in the external and internal value of the ruble. Furthermore, the secrecy of economic information was becoming one of Stalin’s major obsessions and a basis for accusations of disloyalty and treason.29

The memorandum prepared in the Foreign Ministry on December 29, 1945, as a result took a much more skeptical stance about the Fund and the Bank than the Soviet papers drafted only a few days before:

  • However in this matter there are more political and economic minuses.…

  • As is known, as the government of the U.S.A. did not offer the U.S.S.R. a credit and in this situation our membership in these organizations could be read as our weakness, as a forced taken under the pressure of the U.S.A. Our negative attitude toward membership in the Fund and the Bank would show our independent position in this matter.

  • The U.S.S.R. as a member of the Bank would assume liability for borrowings of other states, and in the case of inability or unwillingness to repay (as was the case after the First World War) then the U.S.S.R, and other share-holders would carry the burden of other countries’ failure to pay.

  • The gold which the U.S.S.R. would bring into the Fund and the Bank can be taken out of the U.S.S.R. for technical operations carried out by the Fund and the Bank.

  • We should wait some time and see how the work of the IMF and the IBRD develops, so that in the case of necessity we can choose the most convenient moment for subsequent entry in the Fund and the Bank. In this matter we can expect that if there is an interest in our participation, then the main Allied Powers will themselves take measures towards additional invitation of the U.S.S.R. to participate in these organizations.30

Accordingly, Molotov notified the U.S. chargé d’affaires, George Kennan, that for the moment the U.S.S.R. would not subscribe to the Articles.

The Soviet postponement of a decision on membership of the Bretton Woods institutions is a useful chronological mark of the beginning of the Cold War. The U.S. Treasury let out an “anguished cry of bewilderment” at Soviet policy.31 George Kennan’s cable to Washington explaining the motives for the Soviet action, which subsequently became known as the “long telegram,” was a lucid analysis of the present, but also became the first major formulation of the new mood of superpower confrontation. “In international economic matters, Soviet policy will really be dominated by pursuit of autarchy for Soviet Union and Soviet-dominated adjacent areas taken together” One of the rationales for the Soviet stance, Kennan thought, was the Soviet belief that “capitalist world is beset with internal conflicts inherent in nature of capitalist society. These conflicts are insoluble by means of peaceful compromise. Greatest of them is that between England and U.S.”32 This interpretation may have seemed very plausible in the light of the struggle that had taken place in 1945 and 1946 over the interpretation of Bretton Woods.

The Magic Fades

The growing politicization evident during the loan negotiations affected the interpretation of the Bretton Woods agreements by the participants. It made the first meeting of the Board of Governors of the Fund and the World Bank a strained and occasionally bitter and ill-tempered occasion. The magic of New Hampshire had very evidently begun to fade.

The first meeting of the Governors took place in March 1946 at the General Oglethorpe Hotel, Wilmington Island, Savannah, Georgia. Governors from 38 countries, with Lord Keynes as the Governor for the United Kingdom, met to agree on the operating methods of the new institutions. The Chairman of the meeting was Fred Vinson, Morgenthau’s successor as U.S. Treasury Secretary. At the opening session, Keynes gave a warning: “I hope that … there is no malicious fairy, no Carabosse, whom [Vinson] has overlooked and forgotten to ask to the party. For if so the curses which that bad fairy will pronounce will, 1 feel sure, run as follows:—‘You two brats shall grow up politicians; your every thought and act shall have an arrière-pensée; everything you determine shall not be for its own sake or on its own merits but because of something else.’“

In fact, at Savannah the Governors agreed that the headquarters of the new institutions should be in Washington, the political center, and not in the financial metropol, New York. There would be full-time Executive Directors and Alternates.33 Keynes was scathing: this would be “a body of persons who could amount at the maximum to a mob of forty-eight. There can be no adequate work for this number of eminent experts, and such a number of very highly qualified persons, who can be spared from the pressing problems of their own countries, simply do not exist.”34 The new course, he thought, reflected both a shift in economic philosophy (“the boys of the New Deal are now being eliminated”) and in international politics. The U.S. Treasury and State Department in this interpretation wanted to use the Fund and the Bank as a way of retaining control over international economic and financial affairs while using multilateral institutions to remove American policy from the control of Congress. The fundamental goal of the U.S. administration was to “pass on their impending headaches to be treated by the new institutions.”35

The degree of political control by the United States also became evident in the initial appointments made by the new Boards. In both institutions, the first task of the Executive Directors was the creation of a management structure: the appointment of the first Managing Director of the Fund and the first President of the World Bank. The obvious original choice as Managing Director was an American, Harry Dexter White, but the Washington rumor mill was already churning stories about his political contacts. On May 7, 1946, Camille Gutt, who had been Finance Minister in the wartime government-in-exile of Belgium and was the Fund Executive Director elected by Belgium, resigned from this position in order to become the Fund’s first Managing Director. As a consequence, the President of the World Bank could only be an American, and Eugene Meyer, a distinguished but elderly public servant, was appointed. With these two men began a tradition of non-American (and in practice, at least until the present, European) IMF Managing Directors, and American World Bank Presidents. Later, in February 1949, the U.S. influence in the Fund was enhanced through the creation of the position of Deputy Managing Director and the appointment of a Treasury official, Andrew Overby. With a leadership in place, the institutions set about recruiting staff. Initially, since the scope of operations was unclear and in fact remained at a quite low level for a long time, the Fund centered around its intellectually powerful Research Department. The practical problem of convertibility and its timing remained. The enthusiasts for the Bretton Woods ideals could only hope that more study would accelerate the transition.

European Recovery

By the time Britain came to the date set for convertibility, Keynes was dead. British policy in the intervening year had been profoundly miscalculated. Britain had continued to play “Lady Bountiful,” precisely as Keynes had feared, had engaged in large-scale capital expenditure on reconstruction not just at home but throughout the sterling area, and had tried an international experiment in the economics of prosperity combined with the economics of imperialism in the worst of possible circumstances. British convertibility in July 1947 turned into an immediate catastrophe. It lasted just six weeks, led to a massive drain on British reserves, and provoked the eventual reimposition of exchange control.

Many of the problems that emerged in Britain appeared elsewhere in Europe. Other countries too examined the new institutions primarily in terms of national costs and benefits. The report produced in the French Finance Ministry urging acceptance of the Bretton Woods agreements explained that France would not benefit much from membership in the World Bank, because it would not need its loans (which anyway would be used primarily, the report believed, to create markets for U.S. goods). On the other hand, weaker currencies, including the French franc, would gain from the additional reserves created by Fund membership. First, the report showed how France could already draw back its quota by the beginning of 1947; and after that, it would be able to draw dollars.36 France also, like the United Kingdom and the U.S.S.R., saw the ratification of the Bretton Woods agreements as a way of unlocking large amounts of bilateral support in the form of loans from the United States.37

The French report had correctly identified the major problem of postwar Europe as that of the dollar shortage. The international recovery of production put intense pressures on the international financial system, because of the very substantial international capital transfers required. These could only come from the dollar countries. Reconstruction proved to be much more capital intensive and took much longer than the delegates at Bretton Woods had anticipated. It also required much larger resources. In part, this was a consequence of unexpected developments in the United States. In June 1946, the United States relaxed price controls, and within six months, wholesale prices rose by more than 25 percent.38 As a consequence, the real value of the figures agreed in the postwar financial settlement, the capital of the Bretton Woods institutions, as well as the Anglo-American loan, was correspondingly reduced. The new institutions were less than adequately endowed for dealing with the task of postwar reconstruction.

The World Bank’s contribution to postwar reconstruction in 1947–48 was strategically significant, though quite limited in quantitative terms. Loans to some European countries (France, the Netherlands, Denmark, and Luxembourg) were used for dollar purchases of raw materials that would otherwise have been unobtainable (coal, petroleum, and cotton), as well as for capital goods (machinery, ships, railway locomotives, and structural steel). They amounted to $497 million in 1947; until 1953 a further $264 million was lent.39 These loans helped substantially in some ambitious reconstruction programs, notably in Jean Monnet’s Modernization and Re-Equipment Plan launched in 1946 in France. In addition, in 1947 there were relatively limited European drawings from the Fund: $125 million by France, and smaller amounts by Denmark and Belgium. But these figures seem relatively small when set by the side of the United Nations Relief and Reconstruction Agency spending of $10,098 million between July 1945 and June 1947.40

Some economists predicted on the basis of the experience of 1945–47 that the dollar shortage was not temporary and would become a chronic issue. Did not the expansion of production during the war demonstrate the permanent technical superiority of American production? In 1947, the speed of reconstruction in Europe created a balance of payments problem,41 but it was not obvious to contemporaries that this was an indication of potential strength. Many treated it rather as the beginning of a permanent weakness.

The solution offered by the United States to the European problem was announced by Secretary of State George Marshall in his Harvard commencement speech of June 5, 1947. The European Recovery Program (ERP) promised help to Europe, not just in the purchase of necessary foodstuffs but also for capital equipment required in reconstruction. It was the Marshall Plan, rather than the Bretton Woods institutions, which provided the first major step to European recovery. In immediate terms, Marshall Plan assistance appeared to solve the European balance of payments problem. In 1946, the Western European trade deficit with the United States had been $2,356 million, and in 1947 it rose to $4,742 million. In its first year of operation (April 1948–June 1949), the ERP made $6,221 million available, and then $4,060 million in 1949–50 and $2,254 million in 1950–51.42

Underlying the new American approach to the European economic problem was a vision of the future of European olitics that should be promoted as U.S. policy. The U.S. intention was to create a quite new political world in the western part of the European continent. The traditional and destructive Franco-German relationship should be replaced by a federal structure, a United States of Europe patterned after the American example. Only the combination of political strength and material satisfaction could create a society that might resist Soviet expansion. Internally, also, the parts of the new Europe would have to establish a new equilibrium, in which workers and trade unions were locked into a consensus-generating structure. The new approach to social harmony has been characterized by historians as the “politics of productivity” (Charles Maier) or “the productionist philosophy” (Michael Hogan). Creating a new society was to have priority over the limited requirements of balance of payments adjustment.

Indeed, the U.S. Economic Cooperation Administration (ECA), the body that supervised the implementation of the Marshall Plan, came to criticize the Italian, French, and German governments for being too concerned with stable currencies and balance of payments and for being too hesitant in their approach to all-out expansionism. In the case of France, the ECA even wanted to tie funding to the establishment of an adequate social program.43 These suggestions fitted well with a continental European tradition, particularly intense in Catholic countries, which emphasized social harmony and partnership. A new harmony between organized representatives of labor and capital could provide the only successful alternative to the conflictual behavior of the interwar period, which had placed so great a strain on democratic institutions. In the 1930s, Dutch and Belgian social democrats had worked on plans for an anti-fascist and anti-communist alternative to the pure market economy; and such conceptions also guided the Christian Democrats of Italy and Germany.44

It was in relation to Germany that the Marshall Plan approach offered the most startling contrast with the previous direction of American policy. In the wartime plans, it had been assumed that Germany would be treated as a defeated power and permitted to operate only at very low levels of industrial production. The major policy directive of 1945, Joint Chiefs of Staff Directive 1067, envisaged a deindustrialization compatible with Treasury Secretary Morgenthau’s plans for a depopulated and agrarian Germany. As late as 1946, the Allied Levels of Industry Plan proposed to reduce economic activity to 70–75 percent of the 1936 level.45 Already by this time, it had become apparent that Europe constituted a complex and interrelated economy and that a doughnut recovery for Europe, with an empty German center, would require a completely new, and for practical purposes unrealizable, industrial structure. Secretary Marshall’s Harvard speech presented German and European recovery as inseparably interconnected. European recovery would not occur if German industrial output were neglected. Marshall explained to the U.S.S.R.: “What is required is a European solution in a Europe which includes Germany.” John Foster Dulles commented: “As we studied the problem of Germany, we became more and more convinced that there is no economic solution along purely national lines. Increased economic unity is an absolute essential to the well-being of Europe.”46

The Organization for European Economic Cooperation (OEEC) created as part of the Marshall program was envisioned as a “focal point around which closer Western European economic cohesion can be built.”47 It might even be seen as an embryonic form of a future European government, in which the United States would have a role (as an “associate” member).

In order to make payments within the economically highly interdependent European area, some sort of clearing system was required. Otherwise, payments difficulties would lead to an indefinite continuation of the existing bilateralization of trade, which would work in a highly restrictive way and stifle the incipient European recovery process. Some plans for what amounted to a European payments union were prepared already in 1947: by the Committee on European Economic Cooperation created in 1947, as the result of an Anglo-French initiative, as well as within the IMF, where some of the staff (notably Robert Triffin) worked on a scheme for applying the principles of Bretton Woods to the European situation.48 But the formal proposal for an European Payments Union (EPU) came in December 1949 from the ECA. It was designed as a provisional measure “until it is possible to establish, by other methods, a multilateral system of European payments.”49

In many ways, the EPU looked like a European version of the Bretton Woods agreements that preserved the concept of automaticity so important in Keynes’s original vision. The new mechanism required an initial capitalization. As in Bretton Woods, its members committed themselves to eliminate trade discrimination. There would be an automatic offsetting of bilateral balances. But, unlike the Keynes plan, the European arrangements did not associate the clearing union with the provision of substantial amounts of credit. Only within the period of one month did the system extend an indefinite credit: at the end of the month the Bank for International Settlements would carry out a general settlement as agent for the Payments Union. Each participant country had a line of credit fixed on the basis of a quota calculated on the basis of trade within the EPU area. Debit and credit positions were treated almost symmetrically, as in Keynes’s Clearing Union proposals. Credits or debits up to 20 percent of quotas were permitted within the EPU; as deficits went beyond this limit, an increasing proportion of the balance had to be paid in gold. Credit positions over 20 percent were to be half paid off in gold, and half in other currencies. The Payments Union, as a system of settlements conducted through an agent, needed no permanent staff. What distinguished it from the Bretton Woods plans, and what made it substantially less contentious, was the small volume of credit proposed within the EPU.50 Some of the proponents of the EPU even saw it as an embryo of an alternative world organization that might deal with the problem of the dollar shortage.51 It was, however, fundamentally at odds with the philosophy of Bretton Woods. The IMF had as a major objective the restoration of convertibility and the elimination of discrimination; while the raison d’être of the EPU was discrimination against the dollar as a way of restoring a limited convertibility (albeit in the context of a code of trade liberalization).

The Marshall Plan and the EPU allowed a substantial diversity of national experiments in forms of economic policy, organization, and management. France had been an enthusiastic participant, because without external assistance, jean Monnet’s strategy for increasing and directing investment (“indicative planning”) would have run into balance of payments constraints. At the same time, after 1948 Germany under the guidance of Economics Minister Ludwig Erhard began a radical program of decontrol of prices and wages of such severe simplicity that it appalled American military and industrial planners.

The critical diplomatic difficulty that for some time held up the implementation of EPU was how Britain and its sterling balances problem could be accommodated in such a system. Britain opposed any scheme that would allow sterling balances to be run down to make European payments; at the same time, it tried to require countries that appeared likely to accumulate new credit positions within EPU (Italy and Sweden) to accept sterling balances in settlement. Without such special assistance to Britain, many British policymakers feared that EPU would merely reproduce in a European setting the humiliations of the 1947 return to convertibility. The Governor of the Bank of England, an institution that had come to regard anything close to convertibility with allergic sensitivity, wrote that he regarded the EPU proposals “as an attempt by some Americans (with strong support from Belgium) to force Europe (under threat of loss of ECA dollars) prematurely back to a form of gold standard.”52 In the end, Britain was driven in by the lure of American help—$600 million were provided to support the EPU—and the threat that otherwise France, Italy, the Netherlands, and Belgium (Finebel) would conclude a payments union of their own, and in practice exclude Britain from European trade. A plan devised by a Director of the National Bank of Belgium, Hubert Ansiaux, provided an acceptable solution to the British sterling balances concern. The credit, but not the gold portions of EPU claims, could be exchanged for sterling balances; and previous sterling balances accumulated by European countries should be channeled through the EPU.

Political Blocs Emerge

Although Marshall aid in theory was available to all European countries, and Czechoslovakia and Poland participated in the initial discussions, in practice ERP became part of the politics of the new era of the Cold War. Like the U.S.S.R., other members of the new institutions found the prospect of supplying information to an international institution situated in and apparently controlled by the United States politically irksome and even painful. But the debates about the economic data required by the Fund also reflected a more general political hardening. Czechoslovakia and Poland in 1950 tried to expel the Chinese Nationalist government in exile in Taiwan from the Fund; and when they failed, Poland withdrew immediately.53 Poland’s case was articulated in a way designed to appeal to other European members of the Fund, still smarting from the U.S. pressure to devalue their currencies in 1949 (see below, pages 94–95). In its final defiant letter to the Fund Executive Board, Poland stated that its objections were in part the result of the Fund’s role as a “submissive instrument of the Government of the United States” and its “attitude in respect to the selfish policy of the United States Government & which lately forced upon a number of [West European] member countries the devaluation of their currencies.”54

Czechoslovakia, however, stayed in the Fund although soon after the communist coup in February 1948 it began not to provide the statistical information required under Article VIII. A law of 1950 made sending “economic or official secrets” for the benefit of a foreign power an offense severely punishable. In the show trial of Vladimir Clementis in November 1952, the prosecution argued that the death penalty might be applied to those who had allowed foreigners to gain an “accurate impression of Czechoslovakia’s economic position.” But Czechoslovakia remained a member of the Fund until it was declared ineligible to use Fund resources in 1953 after introducing a new par value without consulting the Fund.55 In August 1954, a motion that Czechoslovakia should be asked to withdraw was passed by the Executive Board (the only case of an expulsion in the Fund’s history).56 Later Cuba, when threatened with a declaration of ineligibility to use the Fund’s resources as a result of arrears, announced its own withdrawal (in April 1964).

The Death of Automaticity

Even in Western Europe, however, the role of the IMF was being steadily reduced. The universalist Bretton Woods institutions were pressed out of the administration of ERP. The critical decision of the IMF was taken on April 5, 1948, and termed “the ERP decision.” The Board’s resolution was that “For the first year the attitude of the Fund and ERP members should be that such members [participating in the ERP] should request the purchase of United States dollars from the Fund only in exceptional and unforeseen circumstances.” The hostility of the U.S. administration to using the IMF in the planned reconstruction of Europe may have reflected the outcome of the political attacks on White and the men he had recruited to the Fund staff, and a feeling that the Fund was in consequence unreliable. The argument presented by the United States was a rather different one, however: that the reconstruction of Europe was provided for in the Marshall Plan and that it was not appropriate to duplicate the effort of financial assistance. The Fund had a different and rather limited function, in advising exchange rate policy. The U.S. Executive Director argued with remarkable prescience that “the advisory and consultative powers of the Fund will in time come to be regarded as far more important than its financial lending powers.”57 This left the IMF at least an opportunity to rehabilitate itself in the eyes of the U.S. administration.

At the same time as the Board took the ERP decision, the United States pressed that the Fund should be an active lender outside the geographical framework of the ERP. “It seems desirable, however, that the Fund be lenient in applying this test [temporary disequilibrium] to dtawings by members other than ERP countries where the amount requested, in combination with all previous drawings by the given country, amounts to 25 per cent or less of the country’s quota.”58 The idea that there was a near automatic right to draw the first tranche (the gold tranche) formed the beginning of the evolving understanding about the use of the Fund’s resources.

In the light of the dramatic decline of drawings on the Fund, the staff worked on a proposal that might bring the institution back to life. In 1948, shortly after the ERP decision, an internal memorandum suggested that the payments positions and prospects of members should be evaluated twice yearly and used as the basis of a determination of eligibility to use Fund resources.59 In 1949, the U.S. Executive Director at the Fund, Frank Southard, suggested the establishment of a repayment plan with a five-year maximum period, but was opposed by some European Directors, who pointed out that no time limit had been set in the Articles of Agreement. Both the American proposals and those of the Fund were very controversial and raised fundamental issues of principle about the management of the Fund’s resources. The most powerful objection to a case-by-case discussion of particular policies was that it would lead to what the Dutch Executive Director J.W. Beyen termed “arbitrariness.” It could “easily mean the use of the Fund’s policy for what happens at a given moment to be U.S. Treasury policy.”60 The French Executive Director wrote to his authorities about the “tendency currently prevailing” under Gutt and Southard toward the “abusive” extension of the Fund’s discretionary powers. Privately, many Europeans believed that the new approach was intended to allow the United States to apply a political conditionally.61 In 1950, the U.S. Executive Director wrote to the Secretary of the National Advisory Council that “the British (and possibly some others) still hold to the view that members should have the right to draw automatically, unless they have been declared ineligible. But an overwhelming majority of the Board and Staff agree that ‘automaticity’ is a dead issue.”62

On November 7, 1950, Managing Director Camille Gutt told the Executive Board that in the light of the improved world payments situation, the Fund was prepared to tell countries ready to take serious steps toward implementing Fund policy over convertibility that “we are quite ready to help them overcome these risks, by letting them rely on the resources of the Fund.” Lending action would rehabilitate the Fund’s rather damaged reputation. “It makes us appear not only as a debating society but as an executive organization, acting not in order to prevent its members from having access to the resources of the Fund (as some people thought we were acting) but to help them, with due and reasonable safeguards, to have access to the rsesources of the Fund, in order to fulfill the purposes of the Fund. It means an end to out relative immobility and constitutes an actual, a real step towards the attainment of out essential goal.” The U.S. response was positive, but demanded a close surveillance of the Fund’s programs: “We are inclined to believe that the Fund would have to review at three-month intervals the developing situations of those members whose action programs had been approved by the Fund.”

This extensive discussion still did not lead to any action. The United States believed that, of the eight leading European members of the Fund in the early 1950s (the United Kingdom, France, Italy, the Netherlands, Norway, Denmark, Belgium, and Sweden), only the last two were properly qualified to borrow. “The other six are faced with internal and external financial situations which would appear to preclude use of the Fund’s resources. Some major non-European countries, such as India, Pakistan, and Japan raise similar questions.” On the other hand, those “‘blue chip’ countries” that “can readily meet out criteria” (Southard listed Canada, Mexico, and Cuba) “are unlikely to need to draw on the Fund in the near future.”

The most important breakthrough came with a proposal originating with Gutt’s successor as Managing Director, Ivar Rooth. Rooth proposed a policy of linking increasingly stringent conditions to different levels of borrowing. The drawing by members of the first 25 percent of their quota (the “gold tranche”) would be automatic; but for larger sums, there would be an application of conditionality and surveillance (though these terms were not used at the time). Above this, drawings would be treated in units of 25 percent of the quota, known as “tranches” (so that 125 percent of quota drawings represented the use of the “first credit tranche”). The Fund’s resources should generally be repaid (“repurchased”) within a maximum period of three to five years. Rooth’s scheme used financial incentives to encourage short-term borrowing of small amounts from the Fund and discourage longer-term drawings by imposing higher charges. The United States fully backed this attempt to revive the Fund’s activity: “This small amount of automaticity [the minimal conditionality of the first 25 percent of a member’s quota] would be quite useful. It would encourage countries to place some reliance on the Fund. It would make the automatic repurchase mechanism entirely palatable, whereas at present countries resent having to repay the Fund in gold with no reassurance whatever that they can draw again.”63 Greater use of the Fund by its European members became possible now, once the end of the European Recovery Program made the IMF’s “Marshall Plan decision” an irrelevance.

This method of operation was approved by the Board on February 13, 1952. In association with a provision for approving drawings in advance, should they be needed, in October 1952 (giving approvals for “stand-by” facilities), the basis for increased activity by the Fund as a financial institution had been laid. The stand-by arrangement, which made balance of payments support available on condition that certain policy measures were taken, and subjected these measures to a performance test, became the most characteristic form of Fund financial activity. The first of these arrangements was a six-month $50 million program for Belgium, which was used by the Belgian government to support the operation of the European payments system. After this breakthrough, the granting of waivers under Article V, Section 4 to members allowing them to draw more than 25 percent of quota in the course of one year became commonplace.

At the same time a set of rules emerged. In the course of providing aid to Finland in 1952 it was established that in order to secure the principle of revolving access to Fund resources, drawings should not be for more than three years. The technical basis of the Bretton Woods system was thus established. It depended on a limited automaticity in regular transactions and increasing amounts of discretion corresponding to increasing macroeconomic imbalance as revealed by the balance of payments. The newly created financial incentive structure could be—and was—used to motivate countries to adopt further degrees of liberalization and to create in practice the world which at Bretton Woods had been glimpsed only as a vision.

The IMF did develop in other ways at this time. The new liberal world, it rightly believed, would depend on greater amounts of information being available to national policymakers, and perhaps to a wider public, about developments in other countries. The first Managing Director, Camille Gutt, concluded that a major effort should be made both to supply that information and to publicize the work of the Fund.64 There existed a valuable precedent for this use of information and analysis by an institution seeking a greater influence on policy. During the almost moribund period in the history of BIS, after the failure of world economic cooperation in the Great Depression, it built up a unique reputation based largely on the quality of the published analysis given in the Annual Reports prepared by its chief economist, the Swede Per Jacobsson. The IMF very quickly emerged as a valuable source of information on international finance. The first issue of International Financial Statistics was published at the beginning of 1948, along with a methodology for the presentation of balance of payments statistics (the Balance of Payments Manual). From 1950, the IMF Staff Papers became a major professional journal, presenting to the Fund’s economists an outlet for their academic work, and for the public a source of significant contributions to the theory of international finance. Knowledge and analysis, or what Southard had called “the advisory and consultative powers of the Fund,” could become a vehicle for institutional assertion and influence.

A number of these academic articles both laid a foundation for the development of international economics and effectively bridged a gap between theory and practice. In particular, an article by Sidney Alexander in 1952 attempted to deal with the question of why there had been an increase in output less dramatic than expected in the wake of the European devaluations of 1949.65 In the answer he gave, he paid less attention to the effects of devaluations on relative prices of imports and exports, which had been the subject of traditional analysis, and more on the effects of changes in currency values on income levels. The key to the income analysis was an estimation of the “absorption,” the extent to which produced goods were consumed or invested domestically. An alternative approach, which also linked the discussion of the domestic to the international economy, was the monetary approach to the balance of payments, outlined by J.J. Polak in an article which will be discussed more extensively later (Chapter 5). A third major founding stone of the modern theory of international economics was an article of 1962 by Robert Mundell, which argued that—in a fixed rate system—monetary policy should best be used to achieve external objectives (balance of payments adjustment) and fiscal policy should be used for domestic objectives (such as output growth or full employment). This approach was supplemented in the same year by an article by Marcus Fleming, in which the greater effects on expansion exercised by monetary policy in a floating exchange rate regime were examined.66 Together these articles provided a basis for deciding the problem of policy assignment, which policy should be most appropriate for achieving a particular desired outcome. In terms of policy analysis, these articles quite accurately prophesied many of the problems of the floating exchange rate system that emerged in the 1970s and 1980s. The theories developed in the Fund in this way gave for the first time a satisfactory intellectual foundation to the major issues of international monetary policy: the effects of domestic performance on the current account and the circumstances in which monetary instruments should be used as a tool of national policy.

The institutions created at Bretton Woods were fundamentally unsuited to the combination of the international political climate of the early Cold War and the prevalence and persistence of the managed exchange and trade regimes inherited from the 1930s and the experience of war. The Marshall Plan and the initiatives associated with it, especially the European Payments Union, produced a much more effective immediate mechanism for promoting recovery and creating incentives for the earliest steps toward trade liberalization. Running what became more and more a key currencies system with the legal obligations and institutions created at Bretton Woods (which had been intended for the management of a quite different international financial order) was rather like flying to drive along a road with a machine constructed for flying. It can be done, but it is rather cumbersome and might appear to many observers as counterproductive.

For the early part of the transition, the Bretton Woods twins appeared to almost all observers as moribund. Camille Gutt, faced with the conflicts over policy on drawings, wrote in a private letter to the Governor of the Bank of England, that if there was no solution “you can, to my mind, write off the Fund.”67 The U.S. Executive Director of the Fund later remembered that the Fund’s staff had approached him and “really wondered what the United States thought it was doing in virtually closing down the Fund, which in a sense we really were doing.”68 The first two Managing Directors of the Fund, Gutt and Rooth, both subsequently used nearly identical phrases to describe their experience of the nascent institution for international monetary cooperation: “the worst years of my life.”69 The other postwar pillar originally envisaged to supervise trading relations, ITO, never materialized, and the more limited aims, provisional character, and less global (but ultimately very persuasive and successful) vision of the GATT were a perfect reflection of the nature of the political and economic transition of 1944 to 1948.

Nevertheless, the Bretton Woods formula, with its very strict legal code regulating international economic relations, which was of little apparent relevance in the postwar climate of exchange restrictions and controls and multiple exchange rates, existed as a ready-made framework for the moment when convertibility would arrive. The fundamental thought of Bretton Woods, that it was essential to have in place a viable framework negotiated before the end of wartime hostilities, proved to be essentially sound, It was only that the delay after which the institutions would come into effective operation proved to be much longer than had been envisaged in the summer of 1944.

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