4.4.2 Bretton Woods and John Maynard Keynes

Who makes international economic decisions?


The United Nations Monetary and Financial Conference, commonly called the Bretton Woods Conference, was held in July 1944 at a resort in New Hampshire, United States. The purpose of the conference was to decide upon a framework to ensure economic stability after the war. At that time, most of the 44
allied nations


Allied Powers before Pearl Harbor - dark green

Allied Powers who joined after Pearl Harbor - light green

Axis Powers - orange

Neutral Powers - grey
allied nations at the summit were embroiled in World War II.

Background to Bretton Woods: Why hold an economic conference during wartime? This may seem a strange idea! Would not leaders have other things on their minds? However, by this point in the war, the end was in sight. Leaders of most of the world's nations were very concerned that another depression would occur after World War II similar to the Great Depression after World War I.

When the nations of Europe struggled to repair the damages of World War I, nothing was in place at an international level to help them. Then, the stock market crashed in 1929. This international financial crisis led to the Great Depression, a worldwide economic downturn that hurt people around the world.

The Great Depression had several causes, but no worldwide organization was available to help reduce its effects. Many nations returned to
protectionism
the economic policy of limiting trade by means of tariffs on imported goods, quotas, and anti-dumping laws to protect the industries of a nation; opposite to free trade
protectionism as they tried to strengthen their economies. This led to reduced trade, which some economists believe made the depression even worse. To build up their economic power, nations established trading blocs in which they had special agreements with certain countries.
Bretton Woods
Source: Wikimedia Commons

Keynesian economics: The Great Depression of the 1930s resulted in high unemployment and poverty almost worldwide, but it led to new ways of thinking about how a nation should manage its economic affairs. At this time, a British economist who had studied the economic effects of war,
John Maynard Keynes
a British economist whose ideas had a major effect on modern economic and political theory

Keynes suggested that governments should intervene in the economy as necessary to protect people from the booms and busts of the business cycle. He helped establish the Bretton Woods framework.

He believed that governments could protect their citizens when jobs are scarce by increasing public spending and/or reducing taxation. This would put more money into the hands of the people, which would increase the demand for goods and services and help restore the economy. His policies lost favour in the 1970s when government spending and taxation continued to rise.
John Maynard Keynes, proposed a theory that called for the government to get involved in the economy of the nation. His book, The General Theory of Employment, Interest, and Money, called for governments to borrow and spend money to limit the natural highs and lows of the
business cycle
the boom-and-bust patterns of economic growth and recession that have occurred throughout history
business cycle. Although Keynes' ideas clashed with those of Hayek, he had an important part in developing policies at Bretton Woods.

Development of fascism and communism: The Depression made an opening for both
Communism
an ideology based on socialism as envisioned by Karl Marx

Marx believed that workers (the proletariat) should revolt against the capitalists (the bourgeoisie) and form a society where the means of production are shared equally by everyone. There should be no private ownership of the means of production.
communism and
fascism
a political ideology practised by Italy and Germany prior to and during World War II

Fascism involves a nationalist and authoritarian government with a strong military. It uses private corporations to support its goals and opposes both liberal and communist ideals.
fascism. Both were significant factors leading to World War II, 1939 — 1945. The leaders of the Allies knew that, without some way of dealing with the upcoming financial problems the end of the war would bring, economic instability would increase and perhaps even another world war might result.

The United States was late to enter World War I. After that war, the US adopted a policy of isolationism, opposing any action that would involve the country in another war. It imposed
protectionism
the economic policy of limiting trade by means of tariffs on imported goods, quotas, and anti-dumping laws to protect the industries of a nation; opposite to free trade
protectionism in the form of
tariff
a tax on goods that are produced outside the country imposed by the government of the country to which they are exported

Many countries have reduced tariffs as world trade becomes more free.
tariffs and restricted immigration. During the first part of World War II, while most of the world concentrated on the war, the United States developed its industry. It built and sold more planes, ships, tanks, and guns than any other nation in the world. Its leaders realized this potential could be used to produce consumer goods after the war — more consumer goods than would be needed by the citizens of the United States. However, for the US to benefit from making these goods, people had to be able to afford them.

The actions of the Bretton Woods Conference were designed so that all nations, including the former enemies Germany and Japan, could build an
infrastructure
the basic structures needed for the operation of a community, nation, or organization

In communities and countries, this includes roads, waterworks, communication services, sewage facilities, and facilities generating distributing electricity. It can include tools of information technology.
infrastructure to become part of a large global market. The United States and its allies promoted the idea of globalization before World War II had ended.

The Bretton Woods Conference drew delegates from many nations, including Canada, Britain, Australia, the United States, the Soviet Union, and Mexico. Of all these countries, the United States had the strongest economic and military power. Its industries had not been destroyed by World Wars I and II as those had in Britain, France, the Soviet Union, and much of Europe. Although all nations were hoping for a lasting peace, they all believed that economic stability was the way to achieve it. The United States, as a world power, was hoping for greater expansion of the economic freedom of capitalism, including greater free trade and more open markets.

Canada's role at Bretton Woods: The chief Canadian delegate to the conference was Louis Rasminsky who had a major role in building the post-WW II international monetary system. As a former member of the Economic and Financial Section of the League of Nations, he was a leading world expert on monetary systems. He formulated the "Canadian plan" that was partially adopted at Bretton Woods.

Rasminsky went on to become Governor of the Bank of Canada for 11 years and later received the Order of Canada, the most prestigious award in Canada.

Results of the conference: Members of the Bretton Conference were concerned about another world-wide depression similar to that of the 1930s. They proposed the establishment of two organizations that became very important to development and fiscal balance both in the West and the developing world. These organizations are sometimes referred to as international financial institutions.

  • International Monetary Fund (IMF)
    an international lending institution established with the World Bank in 1944 at Bretton Woods to help nations overcome the economic problems caused by World War II

    More recently, the IMF has become more involved with its member countries to provide advice, debt restructuring, and short-term loans. It has had an important role in helping developing countries deal with their debt issues, often through the use of conditionalities in which the loan or debt restructuring will occur only if the country agrees to implement certain reforms of their economic systems.
    International Monetary Fund or IMF
  • World Bank
    an institution created with the International Monetary Fund at Bretton Woods in 1944

    The World Bank has three main branches:

    International Bank for Reconstruction and Development (IBRD)
    International Development Agency (IDA)
    International Finance Corporation (IFC)

    The purpose of the World Bank is to promote economic development in the world's poorer countries through advice and long-term lending.
    World Bank

A set of international rules also was proposed:
General Agreement on Tariffs and Trade (GATT)
an international agreement dealing with trade between nations, signed in 1947

GATT was result of the Bretton Woods Conference held in 1944 to bring economic recovery after World War II by encouraging reduction in tariffs and other international trade barriers. It was signed in 1947 by 23 countries, including most of Europe, Canada, United States, and other nations. Later, GATT grew to include 75 countries. In 1994, the World Trade Organization replaced GATT.
General Agreement on Tariffs and Trade, or GATT.