On July 22nd 1944, finance experts who had spent the past three weeks gathered at a hotel in New Hampshire, produced two documents setting out their plan for the post-war monetary system. In response, The Economist published this leader article on July 29th, paying particular attention to whether the British government should ratify the Bretton Woods Agreements:
THE Monetary Conference at Bretton Woods closed its session at the end of last week with the unanimous agreement of all the participants to the text of two documents, one of them setting up an International Monetary Fund, the other setting up an International Bank for Reconstruction and Development. (The terminology is confusing, since the Fund will conduct a banking business—that is, will deal in currencies—while the Bank is, in the main, a guarantee fund.) The Agreements now go to the governments for ratification, and it has been made clear that no government is committed by the vote of its delegation at Bretton Woods. What has been decided is the form that these two institutions will assume when (or if) they come to birth.
These two documents represent a very substantial achievement. The subject matter was technical and contentious, but 44 delegations have agreed. It is true that the conference presented the unedifying spectacle of a technical gathering being jockeyed by purely political considerations, and the determination of the quotas resembled the process of political chaffering more than an objective attempt to achieve equity. Some of the results are ludicrous. Populous and powerful though the Soviet Union is, and immense as its services to the common wartime cause are, it is fantastic to suppose that its part in the financial transactions of the world either is, or for a very long time will be, at all comparable with that of the United Kingdom—yet the Russian quota is $1,200 million against the British $1,300 million. Or again, nothing save the fashionable political myths of the moment could justify a quota for China larger than that for France or double that for Holland—both of which presumably cover those countries' colonial possessions. The management of the Fund and the Bank will have to rise above this sort of petty huckstering.
On the whole, however, these can be accepted as surface blemishes and they are offset by many reasons for solid satisfaction with the results of the conference. Not the least of these has been the harmonious co-operation of the American and British delegations. In the main, of course, this was due to the ironing-out of differences beforehand. But it has been demonstrated that solutions worked out in advance by the American and British Governments will be accepted by the United Nations as a whole with a minimum of amendment and—so far as can be judged—an absence of resentment or of charges of dictation. This is an omen of great promise.
So far as can be judged from the summaries so far available the two schemes have; in fact, been very little altered from the form in which they emerged from the American-British negotiations. There are, nevertheless, some alterations in the Fund that should be noticed, and it must be said, in candour, that they are not improvements. The item in the joint proposal of last April which was most generally applauded in this country was that which provided for the rationing of a scarce currency and allowed for the possibility of discrimination against a country which persistently failed to make its currency available in sufficient volume. In British eyes, this proposal provided a way out of a dilemma which is greatly feared in this country—the dilemma of being limited in our purchases from sterling countries because we are short of dollars. In the final version, it would appear that this proposal has been dropped. All that is now provided for is that, when a currency is in short supply, the Fund may issue a report "setting forth the cause of the scarcity and containing recommendations designed to bring it to an end." Furthermore, in addition to the omission of this proposal for putting pressure on the chronic surplus country, there are some new provisions for putting increased pressure on the chronic deficit country by taxing it upon the use that it makes of the Fund, in excess of its quota. These two pro-creditor and anti-debtor shifts have altered the balance of the Fund since the April proposals—not by any means fatally, but to an extent of which notice will have to be taken.
It is not possible from the summaries to determine exactly how far the Fund would interfere with the working of the sterling area. It appears that "discriminatory currency practices" are to be eschewed, but this might mean almost anything. British opinion will want to know whether the conference agreed with the view expressed by Lord Keynes in the House of Lords last May, that this did not exclude voluntary agreements between, say the United Kingdom and New Zealand to stabilise the expenditure of each in the other's country. Another matter which needs scrutinising with great care is the time-table proposed. It appears to be contemplated that the Fund shall be in operation within eighteen months from now; but there is also to be an interim period during which exchange controls are still to be permitted. What is not quite clear is whether exchange rates have to be fixed before the end of 1945. If this is the proposal, it is hardly practicable.
The scheme for a Bank for Reconstruction and Development has had less public discussion, but it would appear to raise less contentious issues. Of its total capital of $10 billion (of which $9,100 million has been allotted), only one-fifth is to be called up in the first place and used as a fund for the Bank's own lending operations. The rest is a contingent guarantee fund, by which the Bank can guarantee issues made on the public market either by itself or by other public or private bodies. As Lord Keynes frankly indicated in his inaugural speech to the Second Commission, it will be the American market (or the American government) which will have to find the money; the other countries will bear their share of the risk. Since the guarantees will relate only to interest and service, very large sums could be guaranteed in this way, at a cost to the borrower of only 1 to 1½ per cent above the market cost. This is, in substance, an extension of the League Loan method of the 1920s. And the memory calls up the one great unknown in the Bank's prospects—how many loans are there likely to be which are safe enough to meet the Bank's standards and yet not safe enough to float on their own merits? But whether the scale of its operations proves to be large or small, the Bank will clearly, pro tanto, be rendering a service. It will be a most useful long-term adjunct to the short-term functions of the Fund.
The agreements now come back to the governments for consideration—among others, to the British government. Should they be ratified? Before the question can be answered, it is as well to make a distinction between the content of the agreements and the assumptions on which they are based. From the technical point of view, though they have blemishes, the agreements should be acceptable. That is to say, if the sort of world for which they are designed comes to pass, then those arrangements are probably better, on the whole, than any others to which 44 nations could be brought to agree.
But the assumptions need the most careful examination. The whole structure is based on the assumption that the post-war world will be a place in which the nations will be able to balance their incomings and outgoings within a small margin, without exchange controls on current transactions, without "discriminatory currency practices" and without more than a very limited power to change the gold values of their currencies. The margin is smaller than might be thought at first sight.... Now this is a very large assumption. It is not an impossible one. But before it can be said to be a probable one, all sorts of other conditions will have to be established. This has, of course, been recognised from the start. The sort of world in which the Fund would work would be one in which at least the major countries were successful in avoiding unemployment crises, in which there was a substantial lowering of tariffs and other trade barriers, in which creditors behaved as creditors should, in which debtors did not default—in short, in which balances of payments were naturally brought into equilibrium by expansion, not forced into it by contraction. To ask the question whether these agreements should be ratified is in reality, to ask what prospect there is of a reasonably close approach to such conditions....
What are the prospects of an effective employment policy in the United States?... They will need to be answered before the British government can afford to take the risk of ratifying the Bretton Woods Agreements.... Even in deepest crisis, Schachtism will never pay this country. But it is in the British interest to be free to make the best of a bad job if a bad job is what has to be faced. And the circumstances of the United Kingdom dictate other methods of making the best of a bad job from the Americans. If the circumstances of 1931 were to recur, Britain would wish to be able to allow the pound sterling to find its level and to concert measures for stabilising trade within a group to which all countries that would abide by the rules should have access. A Bretton Woods system would not be in the British interest in times of crisis...