The Bretton Woods Agreement

INTRODUCTION It was widely believed by economists and policy makers that the depth and length of the Great Depression of the 1930s was influenced by competitive de-valuations and beggar-thy-neighbor tariffs in most countries. To avoid a return to such difficulties, when World War II ended, forty-four nations met in Bretton Woods, New Hampshire in July 1944 to reach agreement on policies for international exchange to achieve economic stability in the postwar world. The leaders of the conference were Britain (where the major figure was John Maynard Keynes) and the United States (where the major figure was Harry Dexter White). The chief aim was to provide not only a system of fixed exchange rates between nations, but also some basis to help those nations that needed some temporary reserves and those nations that experienced difficulties in adjusting.

Two important institutions were established at the Bretton Woods conference, and both of them still exist, with numerous refinements in policies and methods. The International Monetary Fund (IMF) was formed to deal with issues of international reserves and exchange rates, and to determine whether and under what terms to provide temporary aids to nations experiencing difficulties in international accounts. The major political control of the IMF remain, as at the start, with the major industrial nations of Europe and North America. This system worked reasonably well in generating exchange rates stability until the 1960s, when the U.S. trade deficits made continued reliance on the dollar as the basic international reserve currency difficult, in part because of the limits it imposed on U.S. adjustments. Thus, in the early 1970s the original IMF concerns were altered and the reliance on gold ended. The subsequent years saw a greater frequency of flexible exchange rates, but there was still a need for IMF loans to nations in difficulty. The second institution established at Bretton Woods was the International Bank for Reconstruction and Development (the World Bank) to provide aid at subsidized interest rates to less-developed nations for major construction and overhead projects. The World Bank generally was involved in planning projects, presumably drawing upon its expertise in these matters, but this involvement often has been a source of contention between the Bank and the recipient nations. And, because the Bank does not make grants, but loans (at below-market rates), the money must be repaid, which is often politically unpopular. Nevertheless, the World Bank remains a major source of capital funds for the less-developed world. ∎

ARTICLE I. PURPOSES

The purposes of the Bank are:

• To assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by war, the re-conversion of productive facilities to peacetime needs and the encouragement of the development of productive facilities and resources in less developed countries.
• To promote private foreign investment by means of guarantees or participations in loans and other investments made by private investors; and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital, funds raised by it and its other resources.
• To promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment for the development of the productive resources of members, thereby assisting in raising productivity, the standard of living and conditions of labor in their territories.
• To arrange the loans made or guaranteed by it in relation to international loans through other channels so that the more useful and urgent projects, large and small alike, will be dealt with first.
• To conduct its operations with due regard to the effect of international investment on business conditions in the territories of members and, in the immediate post-war years, to assist in bringing about a smooth transition from a wartime to a peacetime economy.

The Bank shall be guided in all its decisions by the purposes set forth above. . . .

ARTICLE XI. RELATIONS WITH NON-MEMBER COUNTRIES

SECTION 1. UNDERTAKINGS REGARDING RELATIONS WITH NON-MEMBER COUNTRIES

Each member undertakes:

• Not to engage in, nor to permit any of its fiscal agencies referred to in Article V, Section 1, to engage in, any transactions with a non-member or with persons in a non-member's territories which would be contrary to the provisions of this Agreement or the purposes of the Fund;
• Not to cooperate with a non-member or with persons in a non-member's territories in practices which would be contrary to the provisions of this Agreement or the purposes of the Fund; and
• To cooperate with the Fund with a view to the application in its territories of appropriate measures to prevent transactions with non-members or with persons in their territories which would be-contrary to the provisions of this Agreement or the purposes of the Fund.

SECTION 2. RESTRICTIONS ON TRANSACTIONS WITH NON-MEMBER COUNTRIES

Nothing in this Agreement shall affect the right of any member to impose restrictions on exchange transactions with non-members or with persons in their territories unless the Fund finds that such restrictions prejudice the interests of members and are contrary to the purposes of the Fund.