The lead-up to World War 2 was characterized by optimism and hope, but as the war concluded, political and economic problems resurfaced. Fear was widespread, and most alarmingly, trust in future stability vanished. World leaders responded to this pressure by announcing an international allied congregation that would hopefully establish long-term financial order: this was the Bretton Woods summit. In July of this year, the world experienced the 70th anniversary of the Bretton Woods Summit, however it went by without the smallest dose of public recognition. In this article, I explore this summit that altered the banking system and established both the IMF and World Bank.
In three weeks from 1–22 July 1944, 730 delegates from over 40 allied nations unified. Apart from the obvious need to settle the financial issues on hand, the delegates also felt a great need for unification in order to reinstate the support they had shared with each other over the past decade. In order to prevent the rise of socialism worldwide, Britain and the United States believed it to be crucial for the corporate sector to display a higher degree of power . So it was decided that this would be achieved by establishing international institutions that would promote capitalist policies and strengthen the corporate sector in its entirety.
The world was changing in a short, explosive time frame. The US had overtaken Britain as the world’s largest economic power, accounting for over one half of the world’s total output at the time of the summit. It was agreed that each country would be obligated to adopt a monetary policy that maintained the exchange rate by tying its currency to the US dollar. Replacing the pound was the first major step. After the three weeks of negotiations, the first of the institutions, the IMF, was created. It allowed the countries to maintain their exchange rates and provide financial assistance if they were experiencing balance of payment difficulties. The IMF however would be needed to bridge temporary imbalances of payments.
The strain of maintaining fixed exchange rates had proved too much for countries in the past, especially when their trade accounts became deficits. The role of the IMF was to deal with this problem by acting as the international lender of ‘last resort’. The Bretton Woods exchange rate system saw all currencies linked to the dollar, and the dollar then linked to gold. However, of the many agreements from the summit that have lasted to this day, the fixed exchange rate system is not one of them. Only twenty-seven years later, in 1971, then-President Richard Nixon severed the convertibility of the US dollar to gold.
The IMF has delivered its share of both benefits and negative consequences for the world. The reasoning behind its creation may well have been to assist in the reconstruction of the world’s international payment system, however what it has promoted ideologically has lead to controversy and doubt. It has faced consistent criticism for the conditions it attaches to loans by creating a “one size fits all” approach, which have been seen as too focused on austerity and the rights of creditors and too little concerned with the welfare of the poor. As Joseph Stiglitz stated, “IMF programs had clearly worsened the East Asian crises”.
The World Bank was created only nine days after the IMF with the main aim to provide loans, advice and other services to over 100 countries. It is the world’s largest contributor to developmental assistance, aiming to reduce poverty and improve living standards. But even it has been criticised for failing to pay sufficient attention to the social and environmental consequences of the projects it funds. Despite ‘representing’ 188 countries, the United States has majority control over it as they provide the most funding according to the quota (i.e. as a nation they provide the highest monetary contribution to the World Bank), but this is seen as unfair in many aspects.
2014 marks the 70th anniversary of the Bretton Woods summit, which went by with barely any media recognition. However, the significance of this meeting is vital to the study of economics and needs to be recognised for its contribution in both a historic and contemporary aspect.