It has been almost 7 decades since representatives of the world’s 44 most influential financial economies met in a cosy retreat in Bretton Woods, New Hampshire to give rise to the Bretton Woods Agreement. The retreat was strategically selected as a respite from ongoing deadly conflict and political manifestations of Powers. The treaty gave rise to two institutions that are blending today’s globalised trade and finances: The IMF and The World Bank. This article will assess the initial purpose of the institutions, the history behind the Bretton Woods Conference and more importantly their morphism into institutions as we know them today.

“The International Monetary Fund (IMF) and the World Bank are institutions in the United Nations system. They share the same goal of raising living standards in their member countries. Their approaches to this goal are complementary, with the IMF focusing on macroeconomic issues and the World Bank concentrating on long-term economic development and poverty reduction.” – []

It is interesting to take note of the mission statement that has transformed and adapted over the years since its creation. Critics representing two schools of thought have aggressively researched into the fundamental purpose and effect of the Bretton Woods Institutions (BWIs). While the argument of inadequate representation of South [southern and other underdeveloped economies] at the Bretton Woods is an opinion voiced by most, it is tough to find literature voicing a contrary opinion. I had to pick up the book ‘Forgotten Foundations of Bretton Woods’ by Eric Helleiner to give a chance to the other side of the argument presented through this article. According to Helleiner, the history of the foundations of the Bretton Woods extends back to at least two decades before the meeting.

In the introductory pages of the book, the author investigates the conference as an extension of the New Deal and Good Neighbour Policy which were aggressively pursued by the US after the First World War. Through the course of the book, Helleiner expands on the point that the BWIs were an amalgamation of Anglo-Saxon policies through the 1930s and 1940s that were subsequently joined in by the South; simultaneously opposing the [more popular] argument that these institutions were an imposition of major North players and have been inimical to the growth of Southern and other [underdeveloped] nations.

Prior to the Bretton Woods Conference, the US introduced a policy termed ‘Good Neighbour’ Policy which aimed at uplifting the Latin American economies. There were a number of reasons for which these policies were essential to the functioning of a post world-war financial order. Major reasons for promotion of development at the time were

  1. Immediate threat from the rise of Fascism and Nazi influence in Europe. Europe majorly accounted for absorbing majority of the Latin American economies’ exports. With the outbreak of the war, current account deficits of countries’ were taking wild swings effectively swaying commodity prices. Widening gaps in income levels between the US and Southern Economies were creating a void inviting communism especially after the positive performance being displayed by the Soviet Union [Chomsky: On Power and Ideology].
  2. A need to create a market for bouncing back of commodity prices and create a market for the upcoming golden period of two decades where the world was to witness the fastest global growth ever in the history.

I believe that fractions dividing the two schools of through emerge from the solutions from this point on. While Helleiner argues that development carried in the South was not representative of the colonial exploitation seen in the previous years, certain literature such as the Polak [1957] model narrates a different story altogether. Hellenier gives numerous instances which I explore and later contrast with opposing literature.

Helleiner says that all policies [discussed in the next two paragraphs] were supportive of the South since the Good Neighbour Policies and creation of committees and funds like the IAB were not in the interests of Wall Street. In fact, he says that New York financial interests- often led by W.Randolph Burgess of National City Bank- were mostly critical. Many conservative bankers saw this help as flight from the free-market policies abroad. This also included the fear of all Latin countries defaulting on their loans [page 35]. Nelson Rockefeller proposed that the US buy surplus commodities from the Latin American countries in order to stabilise the export rates owing to the fall in demand in Europe and suggested giving short term loans for balance of payment problems.

Harry Dexter White [American economist] proposed the financial institutions such as the Inter-American Bank aimed at development of infrastructure in the Latin American economies. It was not to be the first international bank to be set up [BIS 1939], however the functioning of the bank is crucial to the policies which Hellenier describes as crucial to the formation of BWIs. It was important for any financial institution being set up to represent the well-being of the underdeveloped nations and not merely treat them as raw material reserve economies. The bank was to provide a line of credit to countries according to the weighted average of contributions. It is important to note that the bank set up only provided credit to national government for infrastructure purposes, currency fluctuations and absorption of exports. In fact, White also proposed the idea that 2/3rds of the credit received for import had to spent on US goods and services.

Helleiner says that all the ideals of the Good Neighbour policy were a great influence on the Bretton Woods and helped create system that was supposed to tackle and help the Southern and there [underdeveloped] economies’ interests. The policies were quickly accepted by the Latin American economies as there was a stress to shift from colonial economies to the one like that of US. In fact, Director of Mexico’s Universidad Obrera, Alejandro Carrillo, told an audience in the US, “If you believe that Latin Americans wish to continue producing only raw material for the US manufacturing industries and remain in that condition forever, you are certainly mistaken. No such opinion prevails in any Latin-American centre.”

To Investigate further, I read a review essay written by C.P. Chandrasekhar who argues that Helleiner misses out certain fundamental points while considering his generosity of the BWIs towards development. The establishment of the BWIs established a form of ‘dollar imperialism’ as no other currency was in a shape to provide the amount of liquidity the world needed at the time. While many at the conference had proposed gold as a measure, the subsequent pegging of currencies to the dollar allowed US carry on large deficits without simultaneous devaluations which ultimately lead to the demise of the system.

While Roosevelt emphasised on the importance of democracy and free-market ideals for appropriate functioning of world trade, the BWIs took upon themselves the responsibility of creating world economic order post Marshall Plan. With heavy western political and financial influence, BWIs [according to Chandrashekhar] propagated policies that privileged the market mechanism over interventionism and the planning principle, even while claiming to further economic and human development. From the point of view of the US, this was required to ensure that the markets and economies of the less developed countries were kept open and, simultaneously, political forces close to the erstwhile Soviet Union and subsequently China were kept at bay.

In fact, according to the Polak model the BWIs were creating problems that they were intended to eradicate in the first place! The policies advocated by the BWIs were curbing national development at the price of liberalisation in order to set ground for capital inflow from the developed nations; the point which the Good Neighbour Policy economists and partners were initially critical of. Whenever current account deficits were too large to be financed with ‘normal’ capital flows, the deficit country had to turn to the BWIs for exceptional financing, in return for which they were required to put in place ‘appropriate’ stabilization and adjustment programmes.

While the Bretton Woods System collapsed during the period of 1968-1973, the BWIs stand still and are more important today than ever. While the underlying principles were those discussed by Helleiner in his book, the BWIs have come a long way from those. While ailing the world trade and development in numerous instances, I can conclude by saying that they do have knots in their working threads.

References and Citations

  • “Factsheet.” The IMF and the World Bank. N.p., n.d. Web. 05 Nov. 2016.
  • Helleiner, Eric. Forgotten Foundations of Bretton Woods: International Development and the Making of the Postwar Order. Ithaca: Cornell UP, 2014. Print.
  • “What Are the Bretton Woods Institutions? – Bretton Woods Project.” Bretton Woods Project. N.p., 2014. Web. 05 Nov. 2016.
  • C.P. Chandrasekhar. “A Window of Enlightenment? Revisiting Bretton Woods to Reinterpret the History of Hegemony.” Institute of Social Studies, Hague, n.d. Web.