The Bretton Woods Agreement

By Giacinto Auriti

From the period immediately following the last World War, there has been a substantial change on traditional monetary systems, in such a way as to make them particularly relevant for the international jurisprudence, and such as to alter the political and economic balance of markets.

This new system has its origin in the Bretton Woods Agreement on 22^nd July 1944. The work of this conference were based on the two projects presented respectively by Harry White, delegate for the United States, and John Maynard Keynes, British delegate, simultaneously published on 6^th April 1943. Since around these two projects moved the conference and, as we shall see, the arguments and insights contained in them were widely enhancement in later developments of the international monetary system, make it here deserves a quick nod^[1].

The White project - which was based on the realization of the International Monetary Fund - provided a so-called international stabilization fund for an extend not less than $ 5 billion, made up by contributions in gold and currencies of the participating countries.

To this fund could draw the member countries to meet their liquidity monetary needs^[2]. It was provided for this purpose the creation of a monetary unit called Unitas, which would have had, just as reserves, these values.

White in fact considered the Unitas - with a gold content of 137 and 1/7 grains (equal to $ 10 of the time) – as international currency designed in the same way as a kind of representative credit of the values placed at his warranty. In this scheme the gold assumed a position of all relief and also in consideration of the fact that in that time the U.S. was the nation with the largest gold reserves.

According to the White plan, member states were obliged to yield to the Fund in exchange for their respective national currencies, all foreign currencies and gold, which they had come to have in excess compared with the quantity possessed at the time of their adherence to the Fund.

The White plan - which then was broadly welcomed in the creation of the International Monetary Fund - worked as a bank, in which each country appeared as "account holder" using traditional monetary foreign exchange (Gold and the respective currency). The project then was submitted to the limits of growth of the money supply that could not be proportionate to the need of money, ie the increase of economic development, but to the amount of the reserve.

The White project, which gave the appearance of a more reliable because it is based on a gold guarantee, in effect showed no serious expectation that there would be no arbitrary excesses in the issue of currency, as it had to demonstrate the subsequent development of monetary policy.

Also the Keynes project provided for the establishment of a new international monetary unit to be used as reserve: the Bancor, which, however, differed from the American, because did not precede the establishment of a fund of reserves as a condition of its issuance, as the Bancor was conceived purely as an international currency conventional, recognized as part of a currency union between states. For the Keynes plan, the Clearing Union would have to function as an instrument for transformation in Bancor of the equity assets of creditor countries.

In the Keynes plan, therefore, the Bancor came to constitute a new money to be issued - on the assumption of a positive balance - in favour of the country creditor.

The Bancor should have the quality of units of measure of value, but not that to be the object of the value. We know that this is a hypothesis impossible, as it is not conceivable that a unit of measurement without the characteristic corresponding to that of the object to be measured. It would be like designing a kilogram that it had not the quality of the weight or a meter without the quality of the length.

Mr. Palladino captures this aspect of the problem, who defines the amount of Bancor due to each country creditor, such as "theoretical limit of shares that would work as a simple obstacle to the nations debtor and as a basis for action to correct any imbalances and structural pathological"^[3].

Therefore, the Keynes project would not have materialized nothing but the restriction of the same monetary sovereignty of Member countries, namely in considering the Bancor as a parameter value which commensurates the monetary increases of every nation.

The White and Keynes projects, even though they had the apparent affinity, were then structured on two concepts and monetary philosophies completely antithetical.

Both plans contemplated, however, an international institution: respectively a "Fund" for White and a "Clearing International Unit" for Keynes, in order to achieve a common currency and the necessary discipline limitations on the monetary policies of member countries.

The inability to merge into a single project the two solutions, came from the fact that the fundamentals of the two plans moving on two antithetical conceptions of the monetary value: for White the currency had credit worthiness, ie title representative of the values of the reserve, for Keynes the currency had to be purely conventional, that is, free from any form of reserve, while constituting itself reserves for the various central banks.

Both projects realised then the partial purposes, while presenting defects of great importance for different aspects.

The work of the Bretton Woods Conference took place with the participation of 44 nations sent by the President of the United States Franklin Delano Roosevelt.

The presidency was assumed by the Secretary of the U.S. Treasury Morgenthau. The Congress came to the unanimous condemnation of the monetary regime before the last World War, highlighting the need for remove the restriction of the foreign exchange and foreign trade, encouraging international cooperation. In closing speech made by Lord Keynes, was emphasized that the conference had to be considered as the beginning a new experience unprecedented.

"We have accomplished here in Bretton Woods something more meaningful than what is stated in the Final". With these words of Keynes is closed after three weeks, namely 22 July 1944, the work of the Conference.

From: The International Regulation of Monetary System