Chapter Title: BRETTON WOODS: THE LEGEND, THE REALITY - 1944-1994

Book Title: Perspectiva económica y social

Book Author(s): Joseph Hodara
Published by: El Colegio de Mexico

Stable URL: http://www.jstor.com/stable/j.ctvhn0882.9

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms
This content is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives
4.0 International License (CC BY-NC-ND 4.0). To view a copy of this license, visit
https://creativecommons.org/licenses/by-nc-nd/4.0/.

El Colegio de Mexico is collaborating with JSTOR to digitize, preserve and extend access to
Perspectiva económica y social

This content downloaded from

186.69.121.129 on Sat, 10 Oct 2020 05:03:09 UTC
All use subject to https://about.jstor.org/terms
 BRETTON WOODS:
THE LEGEND, THE REALITY- 1944-1994*

I should like to start by expressing my appreciation to PRIMA, and in particu-

lar to Joan Brodowsky, for inviting me to address the membership on the sub-
ject of the so-called Bretton Woods institutions. I hope that what I am to say
may be useful to you all in the understanding not only of history but also of
current affairs, and may also assist you in wondering where all this may lead to.
There is no doubt that money matters -as we have been reminded in re-
cent weeks- are paramount in international relations as well as in every sphere
of domestic affairs. The Bretton Woods Conference --officially, the United
Nations Monetary and Financia! Conference- held in an isolated place in
New Hampshire from July 1 to 22, 1944, was meant essentially to establish
sorne order in the international currency system in the postwar period, as part
of a set of proposals, including the United Nations Charter itself, intended to
contribute to the maintenance of "peace and prosperity" -the favorite phrase
of the politicians- once World War II was over. Trade, money and flnance
were to be important components in the building of a postwar order to assure
peace and to improve living conditions throughout the world.
Last year was the 50th anniversary of that Conference. There seems to be a
fascination with 50th anniversaries, and 1 am sure we shall be commemorating
many others in the next few years. Apart from the myth of being 50, which last
year brought together scholars, central bankers, flnancial experts, politicians,
journalists, and many non-governmental organizations, to look backward and
forward into the experience and doings of the Bretton Woods institutions, a
serious effort has started in many spheres to evaluare the signiflcance and use-
fulness of international organizations. The world has changed a great deal in
50 years, and will continue to do so. Do not the international multilateral or-
ganizations need to evolve to meet new challenges?
I shall come back to this question later. First, allow me to go briefly into the
background and to trace the role played, in this case, by the two major institu-
tions created at the Bretton Woods Conference: the International Monetary

* Professionals in MexicoAssociation, PRIMA, México, 17 de enero de 1995 (mimeografiado).

[127]

This content downloaded from

186.69.121.129 on Sat, 10 Oct 2020 05:03:09 UTC
All use subject to https://about.jstor.org/terms
128 BRETTON WOODS

Fund (IMF) and the World Bank-originally named the lnternational Bank for
Reconstruction and Development, also known now as the World Bank Group
since it has had sorne offspring.
1 happen to have participated, as a member of the Mexican delegation to
Bretton Woods, in the birth of the IMF and the World Bank. 1 was also present
at the 25th anniversary, when there were still a great many survivors, but by the
time the 50th anniversary carne last year my interest in these organizations had
lost its focus, for the picture had become much broader and increasingly com-
plex, way beyond monetary and financial affairs. Nevertheless, 1 was invited to
listen in on a meeting in Washington last July concerning a report prepared by
a Bretton Woods Commission for the 50th anniversary; and later, in October,
1 had the unusual opportunity to revisit the place, Bretton Woods, to partici-
pate in an inter-generational conference on the birth, early growth and maturi-
ty of the two major institutions and their relevance to today's world and to-
morrow's. lt was good to renew acquaintance with a few veterans -we finally
objected to being called survivors (had the ship already sunk? we asked)- but
even more exciting to meet a generation ofyoungsters from NGOs in many coun-
tries whose concerns were about the future.
In Mexico, at the Bank of Mexico, where 1 worked in the Research Depart-
ment, we first heard in June 1942 of plans being developed by the US Treasury
for postwar monetary stabilization, the freeing and expanding of trade, the
management of price fluctuations in basic commodities, and the resumption of
capital movements for European reconstruction and for world development.
Within the next 24 months, other plans and ideas were launched by Great Brit-
ain, Canada and sorne of the European governments in exile, and consultations
began with many countries, including Mexico and Brazil in Latin America, and
a number of others on the Allied side, including the Soviet Union. The various
plans evolved and were boiled down to two immediate proposals: to create the
IMF and the World Bank. This is what, after 22 days ofintensive work, was ac-
complished by 44 delegations sitting at the spacious Mt. Washington Hotel in
July 1944. By late 1946 both organizations were formally established and by
early 1947 they initiated operations from their Washington headquarters.
Befo re World War 11, and especially after the Depression of the 19 30s,
economic and financial disorder prevailed in Europe and in many other places,
and, among other things, the US, the UK and France were hard put to keep
the dollar, the pound and the franc in a stable relation with one another. lnsta-
bility was a reflection of trade restrictions, price fluctuations, inflation, and
short-term financial capital movements, as well as of protectionism, exchange
controls, and political disruptions in Europe. A better world after the Axis pow-

This content downloaded from

186.69.121.129 on Sat, 10 Oct 2020 05:03:09 UTC
All use subject to https://about.jstor.org/terms
 THE LEGEND, THE REALITY- 1944-1994 129

ers were defeated would have to include monetary stability, the expansion of
trade and European reconstruction.
All this was clearly stated in the postwar plans. The proposals for the IMF
were to be part of the new system, to replace not only the instability of the de-
pression years, but to avoid earlier mistakes, such as returning to the gold stan-
dard, which was too rigid.
As to world trade, plans were drawn up separately for an lnternational
Trade Organization (ITO), to favor multilateral trade negotiations-following
the limited success of the bilateral agreements mostly negotiated by the US
during the l 930s. The ITO was to be part of a Havana Charter which also was
to deal with employment and development; but the lack of consensus, and the
reluctance of the US Congress to ratify the Charter, resulted only in a negotiat-
ing mechanism being temporarily left to operare out of Geneva -this was the
GATT, also almost 50 years old now.
With respect to European reconstruction, which the World Bank was in-
tended to finance, the US itself and Western Europe, under the Marshall Plan,
amply took care of the basic financial needs and contributed also to monetary
arrangements and intra-European cooperation.
The World Bank only granted three modest loans to European countries,
and by 1948 was ready to make loans for "development". Unfortunately, at
Bretton Woods, where understandably the Marshall Plan could not even have
been guessed at, the reconstruction purposes of the Bank were heavily insisted
upon, and ir was only through the efforts of a few delegations from developing
countries, primarily the Mexican delegation, that the development financing
purpose was put more in focus -after all, European reconstruction would not
last forever. Nevertheless, it is clear from basic documents of the planning peri-
od, from speeches at the Conference, and even from the early years of the World
Bank's operations -1 have researched into this- that "development" was not
clearly understood. The Bank was thought to be an agency like any other bank
only more willing to take long-term risks, properly guaranteed by the borrowing
countries governments in each case; it stood ready to finance projects in the
fields of electric power, road building, irrigation and the like, provided they were
"bankable'', but without much relation to the country's overall development
policy or programs. lt took the Bank many years to start looking at "program
loans" rather than at isolated "project loans" -1 might add that operations with
Mexico from 1948 to 1952 were instrumental in that change of focus. lt took
even more time for the Bank to get involved in development policies.
There was a long "learning process" for both the IMF and the WB. The IMF,
under a complicated legal charter, had to concern itself at first mainly with

This content downloaded from

186.69.121.129 on Sat, 10 Oct 2020 05:03:09 UTC
All use subject to https://about.jstor.org/terms
130 BRETTON WOODS

helping the UK restore convertibility to the pound sterling, and helping other
European countries. Countries could borrow temporarily from the Fund, up
to specified limits, and could negotiate new exchange rates under certain con-
ditions. The IMF quickly had to assist sorne developing countries which went
through trade and financia! crises in the immediate postwar period -for in-
stance, the Mexican devaluations of 1948-49, and Chilean and other Latin
American balance of payments issues. Over many years, the IMF helped coun-
tries to get rid of exchange controls and the distortions they implied. lt became
dear that overvalued exchange parities had to be adjusted, but also that the IMF
had to obtain commitments on budget policy, control of money supply and
other variables from the countries in difficulty in exchange for temporary sup-
port to restore stability. This is still a big issue today.
However, the IMF was never powerful enough to obtain commitments
from the major industrially-developed countries, including the US. Thus by
1971, shortly after the 25th anniversary, it lost any influence it may have had
when the US, by suspending convertibility ata fixed price of dollars into gold,
allowed the dollar and all other currencies to start "floating", that is, to be reg-
ulated only by the market and/or interventions by the central banks. What lit-
tle coordination on major exchange rates took place after that was finally left to
the Summits of the Group of Seven (G-7). The European Community made
its own arrangements for the currencies among its members.
In looking into the reasons for the decline of the IMF, apart from the origi-
nal purposes -which were less multilateral or global in nature than should
have been imagined-, part of the answer lies in the spectacular success of the
leading economies of the world in achieving growth and high incomes through-
out the 1950s and l 960s. A recent review of the Bretton Woods system starts
out with the following:

In the five decades following World War 11, the world achieved a remarkable record
of economic growth. In the first 25 years after the war, advanced industrial coun-
tries grew nearly twice as rapidly as in any comparable period before or sin ce ... 1

The remarkable record was shared at the time by many developing coun-
tries. As world trade expanded, export prices improved and moderare foreign
capital flows returned, major Latin American countries and others made con-
siderable progress. Asian Pacific nations also gota start, and did even better.
1 Barry Eichengreen and Peter B. Kenen, "Managing the World Economy under che Bretton

Woods System: An Overview", in Peter B. Kenen, editor, Managing the World Economy: Fifiy ~ar.r a.fter
Bretton Woodr. Washington, lnstitute fur lnternational Economies, September 1994, Chapter 1, p. 3.

This content downloaded from

186.69.121.129 on Sat, 10 Oct 2020 05:03:09 UTC
All use subject to https://about.jstor.org/terms
 THE LEGEND, THE REALITY- 1944-1994 131

lt was only in the 1970s that a new stage set in, both in the industrially-
advanced nations and in the developing countries, when slowdowns in pro-
ductivity growth in sorne industries, the heavy weight of social welfare costs in
certain countries, and, finally, the jolts in world petroleum markets, had a neg-
ative effect which affected all trading partners and, obviously, growth rates.
This is how the overall review quoted earlier states the experience of the second
25 years and the current prospect:

... The productivity slowdown in the industrial countries, the rise in unemploy-
ment, especially in Europe, and the challenge posed by the end of the Cold War
ali raise the question of whether the postwar period constitutes an exceptional half
centuty that has now drawn to adose. 2

During the last 2 5 years, beginning with the US decision to let the dollar
float and let the price of gold be determined in the commodity markets, the
IMF started its decline in world status and in the fulfilment of its objectives.
During this period, practically all its operations have been conducted with the
developing countries, including the dozens of new states created since decolo-
nization and through independence movements in Asia, Africa and the Carib-
bean, and now in Eastern Europe. This is not to say that the IMF was not in-
strumental in helping countries in need to have access to more international
liquidity, through the issue of Special Drawing Rights, standby agreements
and emergency funding measures, thus contributing to periods of monetary
stability. However, the Fund has not been provided with sufficient resources to
meet the overall needs, and it has not been capable ofinfluencing the course of
events in the major industrial countries. In addition, ever since the oíl shocks
and the vast multiplication ofinternational money flows, the IMF has in effect
been bypassed. lt can play but a limited role in shoring up a country facing a
capital flight ora structural balance of payments crisis.
This carne out clearly at the 50th anniversary meetings. In particular, a
Bretton Woods Commission made a strong case for giving the IMF a strength-
ened role in international monetary coordination, which also involves improv-
ing what are termed macroeconomic policies, obviously in the leading industri-
al countries themselves. 3 There was little support, even on the part of the IMF

2 lbid.
3 Bretton Woods Commission, Bretton WtJodr: Looking to the Future - Commission &port.
Washington, July 1944. The Commission consisted of over 45 personalities and experts, con-
vened by Paul A. Volcker on behalf of che Bretton Woods Committee, a non-proflt organization
in the US.

This content downloaded from

186.69.121.129 on Sat, 10 Oct 2020 05:03:09 UTC
All use subject to https://about.jstor.org/terms
132 BRETTONWOODS

Director himself, for the Commission's proposals, Muddling through seems to

be the name of the game ...
Nevertheless, the IMF, over the years, has intervened considerably in mon-
etary management in developing countries, and has espoused fairly rigid poli-
cies and conditions in countries needing its support, frequently in combina-
tion with the World Bank. lt has developed a reputation for being narrowly
concerned with a few indicators of a monetary, financia! or trade nature, at the
expense of growth, employment and other leading aspects of an economy. lt is
also accused of "imposing" its policies with little regard for particular local cir-
cumstances.
Whether the IMF has a more promising future is yet too early to tell. The
major currencies are beyond its influence, and European countries, Japan and
the US deal among themselves in these matters. World trade is again expand-
ing (though protectionism is still rampant), a new international trade organi-
zation is about to be set up {the WTO), and common markets and regional blocs
are giving rise to a more decentralized "system". Many argue that organizations
such as the IMF, and others, should be more open, and more subject to scrutiny
by NGOs that are concerned with broader issues.
The World Bank also played a role in the first 25 years in financing devel-
opment programs, once the idea of development as such became understood
and accepted. The role of externa! long-term financing on a program basis, not
just for isolated projects, was recognized as significant in raising the ability of
developing countries to implement full-fledged investment programs. The WB
started out with a bias for privare investment projects but moved quickly to fi-
nancing government-owned corporations (for instance, electric power plants)
and government-sponsored development schemes {for example, in agriculture).
lt also participated in the soft loan aspect of development support through its
International Development Association, and in private direct investment proj-
ects through its lnternational Finance Corporation. Other mechanisms were
established later for the guaranteeing of foreign investments.
In the 1970s, the WB Group expanded its interest to a view of development
as a whole, including education, training, health, science and technology, rural
improvement, population policies, and, more recently, the problem of poverty
and the support of environmental programs and policies. Thus the Bank, in ad-
dition to covering a broad field ofinterest, had in many cases a strong influence
on development strategies. Critics see the Bank as "dictating" what a country
should do about development, deregulation, market mechanisms, privatiza-
tion, food supply, tax policy, poverty alleviation, etc. There is something in the
critique, for the Bank is peopled mostly by nationals of the developed, market-

This content downloaded from

186.69.121.129 on Sat, 10 Oct 2020 05:03:09 UTC
All use subject to https://about.jstor.org/terms
 THE LEGEND, THE REALITY- 1944-1994 133

economy countries, who have an idiosyncratic view of growth and development,

as if there were not many paths to development.
A number of regional multilateral banks also arose, in Latin America (for
instance, the lnter-American Bank, IDB), Africa and Asia, and in certain sub-
regions. Gradually, these banks adopted similar outlooks and modes of opera-
tion to those of the World Bank. The European Community also established a
fund for grants and loans to its less developed member countries. Many bilat-
eral programs contributed on the side to the financia! needs of the developing
countries.
However, during the second 25 years, approximately from the time of the
oil shocks, the WB was also bypassed, as had the IMF, by the emergence of un-
controlled capital movements. During the 1970s and through mid-1982, de-
veloping countries found they could borrow more easily and quickly, though
at higher cost and sometimes irresponsibly, from the petrodollar markets, that
is, from the world commercial and investment banking system in Europe,
North America and Japan, where such funds were held. This was the period of
rapid and increasing externa! indebtedness of the developing countries, not
necessarily wisely conceived --especially when sorne countries ended up by
borrowing at very short-term only to pay interest on past loans-. The WB was
largely ignored, and apart from issuing sorne warnings and compiling useful
statistics on externa! debt, had little influence on events. The deep debt crisis
of the 1980s caught the WB with only limited resources and no power oflever-
age. lt played a limited role at the end of the 1980s, upon US initiative, in
helping to restructure sorne externa! debts -mainly through the principie of
having countries borrow from Peter to pay Paul, without any basic solution
being introduced- and has since gradually begun to restore sorne of its influ-
ence on borrowing countries. Nevertheless, as with the IMF, it is a limited in-
fluence, and it is more in the nature of advice and orientation of policies than
in actual financing of needs.
What the Bretton Woods Commission has called the "development assis-
tance" role of the WB Group4 has yet to be adopted and implemented. lts recom-
mendations on the Bank also fell upon deaf ears last July. The Bank, moreover,
has become a net receiver of funds from the developing countries -repayments
and loan service exceed new disbursements. lt has also become, in the opinion of
the Bretton Woods Commission, inefficient and overstaffed.
Last October, atan NGO international conference on "Bretton Woods Re-
visited", much was made by certain authors of papers and discussants of the

4 !bid.

This content downloaded from

186.69.121.129 on Sat, 10 Oct 2020 05:03:09 UTC
All use subject to https://about.jstor.org/terms
134 BRETTON WOODS

limitations ofboth the IMF and the World Bank Group, and of the need for more
openness. But whatever might be done to improve their nature and processes,
the basic premise for a proper evaluation today, should be to focus on the chang-
es and realignments the world economy has been undergoing. First, the IMF
and the WB Group are no longer unique or even play a major role in the field
of their objectives. Secondly, the relative position of different regions and areas
has changed, sometimes not for the better. Third, new issues of globalization
have arisen, in a world of instant information. This new prospect includes:
the vulnerability of financia! markets to vast speculative movements of money,
the breakdown of the communist system and its replacement by unstructured,
even chaotic, market mechanisms, the incapacity of the large market econo-
mies to maintain steady growth, the population explosion and the consequent
migrations to the North, an increasing destruction of the environment, rising
gaps between the rich and the poor among regions and within countries.
These are matters that the Bretton Woods institutions were not meant to
deal with, nor are they equipped to do so. lt would be too easy to say the IMF
and the World Bank are obsolete, orare no longer justified, but it is equally too
easy to prescribe their radical updating. Many believe that international orga-
nizations, which tend to acquire alife of their own but eventually are what
governments make of them, need to be not only overhauled but also integrated
in to new mechanisms of international cooperation and participation. lt would
be the wrong signal merely to downscale them or shut them down, for some-
thing would have to be invented in their place.
This is perhaps the challenge, but nothing is yet in sight that would en-
courage or lead to a purposeful restructuring of international monetary and fi-
nancia! affairs in the new age of globalization. The initiative must come from
the national societies and the governments representing them; it is unlikely to
come from the Bretton Woods institutions as they are now known. In a com-
plex and unstable global society, nothing should be left to chance, so there is
hope that, among other things, new sets of rules for monetary and financia!
cooperation will be worked out for the 21st century. Developing countries in
particular, and the transformation economies of the former communist states,
are in need of sizable externa! resources, through trade or through financia!
support and foreign investment, to make up for the years, even decades, lost,
and to build up investment capacity to improve the living standards of the
coming generations.

This content downloaded from

186.69.121.129 on Sat, 10 Oct 2020 05:03:09 UTCUTC
All use subject to https://about.jstor.org/terms