Bretton Woods 1944 - LIMUN1).pdf4 Bretton Woods 1944 London International Model United Nations 2020...

1

Bretton Woods 1944

London International Model United Nations

21st Session | 2020

2

Bretton Woods 1944

London International Model United Nations 2020

Table of Contents

Bretton Woods 1944: Establishing a Global Economic

Order 6

Introduction to Committee 6

Introduction to the Topic 8

Timeline of Events 9

Discussion of Past Problems 13

Discussion of the Contemporary Problems 25

Bloc Positions 30

Conclusion 32

Questions a Resolution should answer : 33

Further Reading 33

Bibliography 34

3

Bretton Woods 1944


Dear Delegates,

It is our upmost pleasure to welcome you to this year’s London

International Model United Nations Conference 2020, one of the largest

and most prestigious conferences in MUN. LIMUN prides itself on its

diverse and innovative delegates and complements it with similarly

diverse and innovative committees! To this end, the Bretton Woods

Committee is a perfect example, merging complex historical issues with

the contemporary need to reflect on past events to shape the future.

The Bretton Woods Committee promises to be a challenge for all involved

as we seek to create a new financial system following the catastrophe of

WWII. The year is 1944 and the war is still raging on behind us as the

root causes of the war are starting to become apparent. The failed global

economic system must be changed and thus the allied finance ministers

and delegates meet today to discuss how it should be set up.

Furthermore, reconstruction will doubtless be an issue for the ravaged

European continent - how shall we facilitate this?

INTRODUCTION LETTER

4

Bretton Woods 1944


These are just some of the questions delegates will face during LIMUN

2020. However, you are not alone. We, the chairs, will be there to guide

you every step of the way and look forward to meeting you all this

February. If you have any questions, please let us know, and we can

come into the conference ready and prepared!

Yours Truly, The Chairs Philippe and Luke

5

Bretton Woods 1944


Director - Philippe Lefevre

Dear Delegates,

My name is Philippe and it is my honour to be your director for this LIMUN

Bretton Woods Committee, a brand new and exciting chance to reshape

the global economy following WWII. I am currently a student at KU

Leuven in Belgium studying a master’s in International Politics (when I’m

not at MUN). I have been MUNing for just over 3 years now, and LIMUN

will count as almost my 40th conference since starting.

I am big believer in the skills that MUN can teach you and it is this I wish

to highlight through my directing this committee. The things you learn

through your research, debate and participation will resonate throughout

your professional and personal life in ways you might not know. In this

way, I encourage all delegates to come in with an open mind and I look

forward to meeting you all in London!

Assistant Director - Lukas Hoffman

Lukas is 22 years old and after finishing his Bachelor studies in economics

at the University of Hamburg, is now pursuing his master’s degree in

economics at the University of Uppsala. He is captured in the parallel

universe called MUN for six years now and his preference for unusual

topics already brought him into the League of Nations, the Belt and Road

Initiative Forum and the Peace of Westphalia, so Bretton Woods only

seems like a logical next step. When he is not studying or doing MUN-

stuff, he spends his time reading, wandering through Swedish forests or

cooking for himself and his friends. He is incredibly excited for a weekend

full of intense and technical debate about nothing less than the

reorganisation of the world’s economic system!This is an Easter egg, well

done

6

Bretton Woods 1944


Bretton Woods 1944:

Establishing a Global

Economic Order

Introduction to Committee The Bretton Woods Conference, more officially known as the United

Nations Monetary and Financial Conference, is a conference set to discuss

the reorganisation of the economic system following the upheaval caused

by World War 2. 44 Nations joined the conference, comprising most of the

allies of World War 2, represented by over 730 delegates.

The conference itself was held in the Mount Washington Hotel in Bretton

Woods, New Hampshire (hence the name Bretton Woods) and across the

three weeks of debate, delegates debated upon new ideas for the global

economic order.

7

Bretton Woods 1944


Delegates during this committee will be representing the heads of each of

the 44 delegations. Please check further reading to find a document

where you can find exactly who you are as part of the 44 delegations.

The committee itself was split into three commissions, the first tackling

the creation of an International Monetary Fund, the second tackling the

International Bank for Reconsruction and Development and the third

tackling all other matters. Delegates should be aware that in this

representation of the committee, we are combining all three commissions

but primarily tackling commissions I and II.

Some of the delegates involved in the conference in 1944. From left,

Mikhail Stepanovich Stepanov (USSR), Harry White (UK) and Vladimir

Rybar (Yugoslavia)

8

Bretton Woods 1944


Governments Invited to the Bretton Woods Conference

Introduction to the Topic

During the course of WWII. The United States and Allies recognised the

opportunity and need to reorganise the global economic order, to

liberalise trade between countries and reject the protectionism of the

past. To fulfil these ideas, the finance ministers of the United and

Associated Nations (mostly the allies of World War II) would come

together to discuss how this liberalisation and institutionalisation of the

world economy would function.

The crux of the conference was to do away with the economic nationalism

that pervaded global trade before the 1940s, from Empire’s preferential

trading blocs to the gold-based devaluation and tricky trade of the early

1900s. It was also clear that the way debts and economies worked

together post World War I helped to trigger the current conflict we are

facing now. Therefore, a new way to solve such stifling trade must be

found.

Australia

Belgium

Bolivia

Brazil

Canada

Chile

China

Colombia

Costa Rica

Cuba

Czechoslovakia

Dominican Republic

Ecuador Egypt El

Salvador Ethiopia (P.

4) French Committee

of National Liberation

Greece Guatemala

Haiti Honduras

Iceland India Iran Iraq

Liberia Luxembourg

Mexico Netherlands

New Zealand

Nicaragua Norway

Panama Paraguay

Peru Philippine

Commonwealth

Poland Union of

South Africa Union of

Soviet Socialist

Republics United

Kingdom United

States of America

Uruguay Venezuela

Yugoslavia

Ecuador

Egypt

El Salvador

Ethiopia

French Committee of

- National Liberation

Greece

Guatemala

Haiti

Honduras

Iceland

India

Iran Iraq Liberia

Luxembourg Mexico

Netherlands New

Zealand Nicaragua

Norway Panama

Paraguay Peru

Philippine

Commonwealth

Poland Union of


Soviet Socialist

Republics United

Kingdom United

States of America

Uruguay Venezuela

Yugoslavia

India

Iran

Iraq

Liberia

Luxembourg

Mexico

Netherlands

New Zealand

Nicaragua

Norway

Panama

Paraguay

Peru Philippine

Commonwealth

Poland Union of


Soviet Socialist

Republics United

Kingdom United

States of America

Uruguay Venezuela

Yugoslavia

Peru

Philippines

Poland

Union of South Africa

Union of Soviet -

Socialist Republics

United Kingdom

United States of -

America

Uruguay

Venezuela

Yugoslavia

9

Bretton Woods 1944


In 1943 the first information meetings of experts from Canada, China,

France, the UK and the US on the creation of a new economic system

began (US State Department, 1948). This was followed in 1944 with joint

reports by said countries on the creation of an International Monetary

Fund and other stability mechanisms. These reports form the basis of the

plan to be developed in Bretton Woods. In May 1944 the President of

United States Franklin D. Roosevelt issues the invitation to 44 United and

Associated Nations to come to Bretton Woods in July 1944 to discuss

these reports and plans further.

So here, on the 1st of July 1944 we gather in Bretton Woods, New

Hampshire to begin debate on the stabilisation and improvement of the

international financial system. However, before we begin immediately

talking about the matters at hand, we must understand how problems

came to be!

Timeline of Events

The economists and delegates of 1944 were well versed with the issues

that pervaded the international financial system before their time.

However, we might need a bit more rehearsal on the events. Below is an

timeline of some of the key financial events that lay the groundwork for

the Bretton Woods conference. You need not know all of them by heart,

but the issues they raised are of critical importance to remember.

1870-1914 – Classic Gold Standard

The currencies of the main world economies are convertible into gold. The

main goal of the central banks is to maintain the gold convertibility of the

currency. Together with a regime of free trade in a time of peace this lead

to economic prosperity for several decades (Eichengreen, 1996).

10

Bretton Woods 1944


1914-1918 – First World War

The First World War had immensely important political consequences but

it also had many consequences for the world’s economic system. Not only

did it terminate the economic pre-war order centred around the classic

Gold Standard and a regime of relatively free trade but it also shifted

economic and political power away from the European powers the United

Kingdom, France and Germany to the United States of America. Not only

were the USA militarily war-deciding for the Entente Powers, but their

economy was also making critical decisions, as they were already

supplying France and the UK with weaponry and supplies before they

formally entered the war. As a result they were a big creditor of the other

Entente Powers at the end of the war (Kershaw, 2016).

1919, 28th of June – Treaty of Versailles

The treaty of Versailles was one of the five peace treaties which ended

the war between the Central and Entente Powers and was negotiated

between Germany and the Entente. With the Treaty Germany accepted

the responsibility of the war and agreed to pay reparations (Kershaw,

2016).

1920-1921 – After-War Recession

The years after the Treaty of Versailles saw a short but heavy recession in

Europe as well as in the United States. The economy of the war parties

was geared towards armament for which the demand was missing after

the war. Europe’s economies were hit by a low domestic demand in the

aftermath of the war, while in the USA mainly farmers were hit by the

decreasing prices for agricultural goods after agricultural production in

Europe increased again after the war (Pressler, 2013).

1921-1929 – “Roaring Twenties”

11

Bretton Woods 1944


The 1920s after the recession at the start of the decade were known as

the “Roaring Twenties”. Mainly the American economy experienced a long

and pronounced boom fuelled by new technological innovations, such as

the mass production for automobiles, and an increased purchasing power

of the population. During these years the US definitively superseded the

European countries as the leading economy of the world (Pressler, 2013).

This period of growth was postponed in Europe. The economies of

Germany and France only recovered in the mid-1920s, while the economy

of the UK never really recovered until the end of the decade (Feinstein,

1997).

The Roaring 20s in the US

1923 – Ruhr Occupation and Hyperinflation

To secure the German reparation payments French and Belgian troops

occupied the Ruhr Valley in 1923. The German government called for a

general strike for the duration of the occupation and printed money to

compensate the workers. Over the course of only one year, the price of

the US Dollar increased from 8,000 to more than 4.2 billion Reichsmark.

12

Bretton Woods 1944


Germany fell into hyperinflation. To reanimate the German economy the

value of the currency was fixed to the value of land capital (Pressler,

2013).

1924 – Dawes Plan

After the hyperinflation was overcome, the Entente powers restructured

the German reparation payments. A plan introduced by the US American

economist and politician Charles Dawes, introduced mainly at the behest

of the United States, the annual rate was lowered to one billion

Reichsmark and international loans were granted in order to build up the

German economy (Pressler, 2013). This led to a significant improvement

of the political and economic situation. The inflow of American credits

even led to a slight boom in the late 1920s (Herbert, 2014).

1924 – Germany returns to the Gold Standard

Shortly after the end of the hyperinflation Germany returns to the Gold

Standard. Due to the inflation only at a tiny fraction of the pre-war parity

(Feinstein, 1997).

1925 – The UK returns to the Gold Standard

Following Germany, also the UK returns to the gold standard – to pre-war

parity. The decision to return the gold convertibility of the Pound to the

pre-war level is mainly motivated by prestige reasons (Feinstein, 1997).

1926 – France Returns to the Gold Standard

France returns to the Gold Standard at 20% of the pre-war parity. Other

than in the UK, the main consideration is not to show economic strength

by returning to pre-war parity, but which rate would benefit the French

(export-)economy the most (Pressler, 2013).

24th of October – Black Thursday

13

Bretton Woods 1944


The slump of the stock market prices on the “Black Thursday” and the

“Black Tuesday” five days later marks the begin of the Great Depression

in the USA (Kindleberger, 1973).

1929-1934 - Great Depression

The Great Depression which broke out in the US in 1929 and spread to

the rest of the world in the subsequent years, was an economic crisis of a

until then unknown extant (Pressler, 2013).

June 1930 – Enactment of the Smoot-Hawley Tariff Act

The Smoot-Hawley Tariff Act was originally meant to protect US American

farmers by imposing punitive tariffs on foreign agricultural goods.

Through a dynamic known as log rolling (to gain the support for a

punitive tariff on the goods important for his constituency, the member of

the house supports punitive taxes on the goods important for the

neighbouring constituencies and so forth) it culminated in an act that

imposed punitive tariffs on 20,000 goods. Trade partners respond by

imposing punitive tariffs themselves (Pressler, 2013).

1931 – The UK abolished the Gold Standard

During the crisis of the British export industry, following the enactment of

the Smoot-Hawley Act and the subsequent international tariff increases,

the UK is forced to abolish the gold standard (Pressler, 2013).

Discussion of Past Problems

The Second World War was without a doubt a highly disruptive event for

the world economy but already before there were many problems which

had afflicted the world economy. The symptoms of these problems might

have been cured but most of the underlying problems themselves still

remain unsolved.

14

Bretton Woods 1944


War Debt and Reparations

The First World War devastated large parts of Western Europe and lead to

a drop in international trade proved to be enormously costly for the

involved states. Not only millions of human lives were lost but the war

also demanded tremendous amounts of financial resources (Kershaw,

2016). To cover these requirements the European states lent money from

their population. While the Central Powers Germany and Austria were

largely isolated from the international capital markets, the states of the

Entente also relied on each other to cover their expenses. France and the

other European states were financially backed by the UK and at the end of

the war the European allies owed the US about twelve billion US Dollars

(Pressler, 2013).

When the defeated Central Powers and the victorious Entente gathered in

Paris 1919 to discuss the conditions of the peace, the approaches of the

Entente powers were very different: While the American president

Woodrow Wilson was willing to offer Germany a forthcoming, mild peace,

his French and British allies insisted on major concessions, territorially as

well as economically (Kershaw, 2016). Germany should be held

responsible for all war damages it had caused during the war. France and

the UK hoped to repay the war credits they had taken with their own

population but also with the US with German money. An illusory demand

considering that the German government itself had taken almost 144

billion Reichsmark of debts itself. Still, the exact amount of the

reparations Germany should pay was determined to be 132 billion

Reichsmark in 1921 (Pressler, 2013).

The young British economist John Maynard Keynes who participated in the

negotiations as a member of the British delegation, noted in his work “The

Economic Consequences of the Peace” that the Treaty of Versailles would

not contribute to a sustainable order after the war. The economic

constraints the victorious powers had imposed on Germany without

15

Bretton Woods 1944


offering way to restore the German economy, would lead to economic and

political conflicts (Keynes, 1920).

Keynes’ beliefs should proof true as the reparations were one of the main

reasons of political conflict during the 1920s, for example when French

and Belgian troops occupied Germany’s main industrial area the Ruhr

Valley in 1923 after Germany had not paid its reparations. The German

government called for a general strike in the area and promised to

compensate the workers. The government generated the needed financial

resources by printing money and already a few weeks later Germany fell

into hyperinflation (Pressler, 2013).

Hyperinflation in Germany

The Dawes Plan which was agreed upon in 1924 brought some ease to

Germany by lowering the annual rate of reparations and granting US

American loans (Pressler, 2013). Although this led to an improvement of

the German political and economic situation and even a slight boom in the

late 1920s, the underlying problem of the war reparations remained

unsolved. Germany would need to repay its debt for many Generations

(Herbert, 2014).

16

Bretton Woods 1944


Crisis in the US American Agricultural Sector

During the war, the agricultural production of Europe was not high

enough to sustain its population. American agricultural products filled this

gap and US American farmers increased their production, took loans and

made investments in machinery as for example the first tractors which

were affordable for the majority of farmers (Pressler, 2013).

When the war in Europe was over, the worldwide agricultural production

increased what led to a decrease in the prices of agricultural goods.

American farmers were not able to sell the surplus supply they had built

up during the war for profit. Many farmers were not able to repay the

loans they had taken to undertake additional investments. As a

consequence, banks which had given out credits to farmers to a large

extent got in trouble because they needed to amortise credits to a large

extent. The crisis in the farming sector hit entire regions and even when

the US American economy was flourishing during the “roaring twenties”,

the farming sector did not recover. The 1920s were a decade of growing

inequality between rural areas and cities in the US (Pressler, 2013).

Overvalued and Undervalued Currencies

While the USA already returned to the convertibility of the US Dollar into

gold to the pre-war parity in 1919, the European States waited a few

more years to undertake the step. Germany returned to the gold standard

in 1924. After the hyperinflation Germany basically had a new currency,

so it did not need to worry about devaluating its populations savings

anymore. As a result, Germany returned to a rate that was only a tiny

fraction of its pre-war parity (Pressler, 2013).

The situation was different in the UK and France, where the old money

from before the war was still in circulation. To not fall behind its rival

Germany, the UK returned the Pound Sterling to gold convertibility in

17

Bretton Woods 1944


1925 – to pre-war parity in order to not devaluate its populations

monetary assets. As the many other northern European countries

returned their currencies to pre-war parity (Feinstein, 1997). Especially

for the UK the move to return to the pre-war parity was not without cost.

To the new exchange rate, the Pound Sterling was massively overvalued.

This was not only dramatic for the British export industry as British

products became more expensive in terms of foreign currencies but it

became also a lucrative business to exchange Pound Sterling into gold,

use this gold to buy Dollar and make investments in the USA. In order to

stop the outflow of gold reserves the Bank of England needed to increase

the interest rates. As credits became very expensive, this led to a

decrease of investments and deflationary pressure what imposed even

more strains on the British economy. The economy of the UK did not

experience “Roaring Twenties” but remained in crisis until the 1930s

(Pressler, 2013).

France already experienced high inflation rates after the war, so French

policymakers were less concerned with the saving of their population

when they returned their currency to gold convertibility. The franc only

returned to about 20% of the pre-war parity. In contrast to the

overvalued Pound Sterling the Franc was undervalued under the new

exchange rate. British gold was now also flowing out to France. The inflow

of British gold and the export industry which was flourishing due to the

favourable exchange rates, lead to a boom of the French economy in the

late 1920s. This boom was however mainly achieved at the costs of the

French neighbours mainly the UK (Feinstein, 1997).

In an economic system with flexible exchange rates the Pound Sterling

could have depreciated vis-à-vis the US Dollar and the Franc. British

exports would have become cheaper for American and French customers

and the economy could have recovered. In the regime of fixed exchange

rates under the gold standard this was not possible. The only way for the

18

Bretton Woods 1944


British economy to recover was an adjustment of the real price level

through deflation. This would have been very painful as it would have

required significant cuts in wages. To at least achieve some relief, the

president of the BoE and other European central bank presidents,

convinced the Federal Reserve Bank (FED) to lower the interest rates in

order to reduce the outflow of gold reserves from the UK to the US.

However, the interest rate cut was not pronounced enough to stop the

recession in the UK, while it fuelled the stock market boom in the US and

thus contributed to the crash that ultimately lead to the Great Depression

(Pressler, 2013).

The Great Depression in the USA

The Great Depression was the largest economic crisis the world had ever

seen in the late 1920s. It broke out in October 1929 after the equity

prices at the US American stock exchange collapsed. On the “Black

Thursday” and “Black Tuesday” millions of Americans lost a great

proportion of their savings, credits could not be paid back and many

banks were forced to depreciate high proportions of the loans they had

given out (Kindleberger, 1973).

The contemporary understanding of economic crises, prevented the

Federal Government under President Herbert Hoover from decisively

intervening in order to lessen the effects of the crisis. Crises were seen as

temporary and beneficial for the economy as they cleansed the economy

from unprofitable companies after a boom and thus contributed to its

long-term success. In times were the consumers used the majority of

their income for the purchase of vital goods as food, this might have been

true as the private demand would have remained fairly stable in times of

economic crises but in US American consumer society of the 1920s,

private households reduced their consumption of non-vital goods with

fatal consequences for the economy (Pressler, 2013).

19

Bretton Woods 1944


The Great Depression in the US

Although Hoover called upon the States and municipalities to increase

their investments, he did not consider it a responsibility of the Federal

Government to provide the necessary funds as he believed that a

balanced state budget was necessary to maintain the trust of the

population into the economic system. Therefore, Hoover’s economic policy

was rather passive: Neither did he intervene to rescue insolvent banks

nor did he stimulate the domestic demand (Kindleberger, 1973). His

attempt to stabilise the situation for American farmers by imposing

punitive tariffs on foreign agricultural goods culminated in the Smoot-

Hawley Tariff Act which imposed punitive tariffs on more than 20,000

imported goods. That trading partners responded with punitive tariffs on

there is obvious. Not only did the act not help the US American economy

whose main problem was the low domestic demand but it also disrupted

international trade and lead the way to a new era of protectionism. By the

end of Hoover’s term, the stock market values had fallen by almost 90%,

20

Bretton Woods 1944


the unemployment rate rose from 5% to 25% and the GDP declined to

merely 56% of the pre-crisis level (Pressler, 2013).

Not only the hesitant actions of President Hoover but also the

conservative monetary policy of the FED have been later on identified as

one of the reasons why the Great Depression dragged on for so long. To

avoid a suspension of the Dollar-gold convertibility, the FED did neither

lower the interest rates, extend the money supply nor granted loans to

stabilise banks in financial troubles. While an increase of the money

supply could have lessened the symptoms of the Great Depression by

pumping more money into the economic cycle, the bankrupts of several

banks in fact lead to a contraction of the money supply because less

credits were granted. In their seminal contribution Milton Friedman and

Anna Schwartz calculated that the money supply declined by one third

from 1929 to 1933 (Friedman and Schwartz, 1963).

The US American economic policy changed fundamentally with the

election of President Franklin D. Roosevelt, whose economic program the

“New Deal” successfully combined measures to restore the trust in the

financial system and demand stimulating economic policies and managed

to stabilise the American economy. Although Roosevelt principally

believed in free trade kept the punitive tariffs imposed by the Smoot-

Hawley Tariff Act in place to regenerate the domestic agricultural and

industrial production through restricting the supply in order to stabilise

the prices. While Roosevelt’s economic policy had a positive impact on the

domestic economic situation in the USA, its overall implications for the

world economy were rather negative. He increased the price of gold in

Dollar, before completely abolishing the gold standard in 1933, and thus

devaluated the Dollar vis-à-vis other currencies. Not only was that a

typical example of a beggar thy neighbour policy but by ending an

international economic conference in 1933 with his “bombshell message”

21

Bretton Woods 1944


he also refused to return to an economic order that was based on

international cooperation (Pressler, 2013).

The Great Depression in the UK

In the UK the first reactions on the crisis that was beginning in the US

were positive: The collapse of the stock market prices, finally gave the

BoE some leeway to decrease the interest rates. Allowing companies to

take investments and to partially regain their competitiveness. The main

reason why the “Great Slump”, as it was called in the UK, had such a

negative effect on the UK was that the crisis also led to the collapse of

international trade, for example with the enactment of the Smoot-Hawley

Tariff Act in 1930. This led to a sharp increase of the unemployment rates

especially in the regions where the “old” industries, coal, steel,

shipbuilding and textiles were dominating (Pressler, 2013).

Other than the FED, the BoE was attempting to stabilise other European

banks who had gotten into financial trouble. Thus, the BoE was lacking

reserves to stabilise the Pound Sterling when the economic situation in

the UK worsened in the early 1930s. The BoE was left with no other

choice but to end the convertibility of the Pound Sterling into gold. With

the end of the gold standard the British economy was able to recover, low

interest rates and weak Pound were helping the British export industry

and although the internationally very high tariffs remained an obstacle,

the farewell from the gold standard brought the UK into a very favourable

economic position among the world’s economies in the 1930s. Other

countries such as the Commonwealth or Scandinavian countries followed

the British example and also abolished the convertibility of their

currencies into gold. Instead they tied their currencies to the Pound

Sterling (Feinstein, 1997).

The Great Depression in France

22

Bretton Woods 1944


Until 1931, the economic situation in France was fairly stable. The weak

Franc was helping the French export industry while the agricultural sector

mainly relied on the domestic market and was protected by high tariffs on

agricultural goods. This situation shifted when the UK abolished the gold

standard in 1931. Now it was France whose currency was overvalued and

whose government got under pressure. As the UK a few years before the

French government was determined to keep the gold convertibility of the

Franc which led to recession and deflation. Although the unemployment

rates did not rise as high as for example in the UK or the US, the difficult

economic situation led to an erosion of the political stability in France.

Changing majorities of left and right forces did not succeed in solving the

crisis. The economic conditions in France remained difficult until the

1940s (Feinstein, 1997).

The Great Depression in Germany

Other than France, Germany was hit by the Great Depression relatively

soon after its beginning in the USA. The inflow of US American credits to

Germany after the end of the hyperinflation lead to a slight boom but the

economic institutions of Germany themselves were still weak and relied

on the inflow of US American credits. When the Great Depression broke

out in the USA, this inflow stopped and the German economy began to

drift into recession. As in France, the crisis in Germany led to an extreme

polarisation of the political landscape. The end of the coalition

government of the moderate political powers over a disagreement on the

height of unemployment benefits, brought a centre-right government und

Chancellor Brüning into power. Brüning had no majority in the parliament

and mainly governed through presidential decrees. Scarred from the

experience of the hyperinflation, Brüning was determined to keep the gold

parity of the Reichsmark and opted to fight the crisis with a strict

austerity policy. Although he successfully renegotiated the reparation

payments Germany was obliged to pay, his severe cuts of social benefits

23

Bretton Woods 1944


gave him the byname “Hunger Chancellor”. Brüning was forced to resign

in 1931 after a series of bank failures which contracted the money supply

and worsened the economic conditions in Germany. Although in 1931

worse was prevented by introducing capital controls and banking holidays,

short-lived subsequent governments also failed to end the economic crisis

(Pressler, 2013).

The crisis in Germany should drag on until the takeover of the National

Socialists. With a mixture of demand stimulating expansive fiscal policy,

protectionist trade policy, exchange limitations and the rearmament of

the German military, Hitler and his helpers reduced the still high

unemployment rates of the year 1933 to full employment in only a few

years. As frequently pointed out by economic historians, this economic

policy was not sustainable in the long-term and in its logic, it did not need

to be. The main goal of the national socialists was to make the German

economy ready for war, the costs were to be paid by others (Pressler,

2013).

In general, the flaws of the economic system of 1929, the Great

Depression and the poor crisis management of policy makers during the

crisis played an important role for the outbreak of the Second World War,

as it was the crisis who brought Hitler into power and gave him and his

regime economic successes in the first years and thus inner political

legitimation (Herbert, 2014).

Protectionism and “beggar thy neighbour” policies

As already briefly mentioned in the last section one of the side effects of

the Great Depression was the return of protectionist policies. The most

extreme example probably is the trade policy of the national socialists

whose goal was a state that would be independent from international

trade and would produce all necessary goods itself. The Nazi regime

24

Bretton Woods 1944


introduced import restrictions: The import of resources like oil which

Germany could not produce itself needed to be confirmed by the regime’s

authorities while the import of consumption goods was completely

abolished (Pressler, 2013).

But not only the rise of autocratic regimes contributed to the downfall of

international trade. Also, in the USA, one of the world’s oldest

democracies imposed several policies with negative impact on

international trade. The Smoot-Hawley Tariff Act which was implemented

under the Hoover administration, imposed punitive taxes on over 20,000

goods and prompted several other countries to impose punitive tariffs

themselves. This rather protectionist policy was continued by Hoover’s

successor Franklin D. Roosevelt. Although he principally believed that free

trade would be desirable, his “New Deal” only brought forward the

reforms which were necessary for the US American economy and imposed

them regardless of possible adverse effects, e.g. the depreciation of the

US Dollar had on other countries (Pressler, 2013).

Already before the crisis, France had profited economically from the

weaknesses of his trading partners. The economic strength of France in

the late 1920s was largely based upon the undervalued France. Thus,

accepting that the own economic boom caused a recession in the UK

which was the only country that adhered somewhat to the principles of

free trade (Pressler, 2013).

As shown above the growing protectionism in the years prior to the

Second World War contributed to economic distress and the rise of

populist movements and nationalism. A new economic order would need

to contain rules for fair and sustainable international trade in order to

contribute to political stability.

25

Bretton Woods 1944


Discussion of the Contemporary Problems

Debate at the Bretton Woods conference will be focused around the

creation and running of two main institutions as well as a host of other

problems that we should (time permitting) find solutions for. As

mentioned, many of the ideas for these institutions had been based on

previous plans provided by the early allies of WW2 so we will be taking a

closer look at these plans and some of the areas where they most

diverged.

Many of these plans are heavily simplified and delegates are encouraged

to investigate them in more detail in the further reading. Furthermore,

none of the plans were esteemed to be final and many revisions were

made before their deliberation in 1944.

Keynes and White at the Bretton Woods Conference, the two had very

diverging ideas on the Institutions in the new economic order

26

Bretton Woods 1944


The Keynes Plan

Written in draft in 1941 and shared in 1943, the plan written by Lord

Keynes from the UK was one of the most influential documents of the

early discussions about reshaping the economic system.

A key part of Keynes plan was the creation of an International Currency

(or clearing) Union. This institution would be based on a new type of

currency, sometimes called Bancor, which would be fixed in terms of gold

and exchangeable by the British Commonwealth, US and all other

members of the Union. The purpose of this union was to allow the

clearing of debts between countries. As only bancor would travel between

its members, then debts and banking can be easily dealt with. The UK and

US in this regard would be founding members and hold a special position,

with central banks of Union members running the day-to-day operations.

Countries would be able to take and deposit money from this Union with

overdraft facilities for many being outweighed with the credit system

upheld by members with more bancor. It would function, fundamentally,

as a reserve bank for central banks with the Pound Sterling and US Dollar

initially setting the rate of exchange of the bancor.

The maximum allowance of debt would be in proportion to their foreign

trade but there would be no need to limit the credit balance of a country.

From the start of the Union, a “quota” of each country would be se based

on the sum of a countries exports and imports of three pre-war years.

Then, A country could only increase their debit balance by a quarter of

the quota and be charged 1% of their quota to the reserve fund of the

union.

27

Bretton Woods 1944


The Bancor, as mentioned, would function as a “quantum” of international

trade, not determined by the gold industry or one countries production of

their currency, but by the requirements of the international system.1

The White Plan

Harry Dexter White formed another backbone to the plans introduced in

the Bretton Woods conference, and his final plan was issued in 1943 by

the US Treasury.

White’s plan revolved around the creation of an International Stabilization

Fund (of the United and Associated Nations). The Fund would help to

restore balance of payments to countries without having to exploit

international trade in order to create this. It’s primary purpose therefore

was to stabilise exchange rates of currencies of the United Nations. It

would consist of gold and all the currencies of member governments

where each member would give a quota from its central bank, the total of

which should equal at least $5 Billion.

The Fund would have a monetary unit called the unitas, equal to $10 of

gold. The value of this would not change without 85% of the member

states voting in favour of changing it. Following the creation of the fund,

each country would then establish their currency in relation to the unitas.

The powers of the fund would primarily be to buy, sell and hold gold (or

government securities) and sell them to other member countries. Along

with this, it could also sell currencies of members to other members in

order to keep the exchanges of currencies stable. It can also handle

1 Keith Horsefield, J. (1981). The IMF 1945-1964 Vol III: Documents. p3-30

28

Bretton Woods 1944


repayments and loans provided it receives collateral and that a plan for

repayment be created.

Finally the fund will be administered by a board of directors, with all

members appointing a director who will stay for 5 years. The voting

power of the members will be based on their quota, each starting with

100 votes and the country with a higher quota receiving 1 extra vote for

each 100,000 unitas (or $1 million) with no country being able to have

more than 25% of the votes.

The member states must oblige themselves to maintain exchange rates

established by the funds, not to engage in other countries to undermine

these exchange rates and remove all restrictions to transfer foreign

transactions. Alongside this they are asked to cooperate with others to

regulate movements of capital, not to enter new clearing arrangements

and to help give the fund with information it may need. 2

The French Plan

The French plan also relied on a fundamental institution, in this case

called the Monetary Stabilization Office. The office would be based upon

an agreement nations sign, which would contain certain conditions that

help keep the stability of the monetary system.

Firstly, it would fix the exchange rate of participating countries that could

not be changed without an agreement of all. The stability would then be

kept by central banks who would buy and sell currencies to maintain this

rate. For this to occur, foreign exchange control must be relaxed. Foreign

exchange could then be used to make payments in those currencies.

2 Keith Horsefield, J. (1981). The IMF 1945-1964 Vol III: Documents. p37-97

29

Bretton Woods 1944


However, a limit would be set for the amount of exchange that each

country could use.

As a guarantee in case countries would depreciate their currency, they

would have to give collateral, in gold or other securities. Inflationary risks

would have to be tackled through sterilization, meaning that in general

countries deposit their currency to other countries and when inflation

happens the country suffering inflation would take back this currency

without losing control of its own circulation.

This plan is similar to one used before between the period of 1920-1940

noted as gold exchange standard. The main difference is that there would

not be complete confidence of a currency allowing countries to react

against competitive devaluation.

The Canadian Plan

The Canadian Plan was seen to be an alternative to the British and

American Plans, with stress given to the action needed to take by

institutions to retain control of any monetary union. The main issue

Canadian economists highlighted was the lack of extension of credit to

achieve quick resettlement of debts following the war. Therefore, credit

needed to be available to re-establish trade as soon as the agreement

comes into force.

In the Canadian plan, both a clearing mechanism and an exchange rate

mechanism would need to be set up, alongside a substantial fund to settle

debts and shortages following the war. Similar to both the British and

American plans, quotas would need to be determined and subscriptions

set up to pay the deposits to the monetary union in full, up to a total of

30

Bretton Woods 1944


$8,000 Million. Loans would therefore only be available up to 50% of the

quotas of the country.

A unit of currency would also need to be created for this Union, consisting

of 137 1/7 grains of fine gold. Exchange rates would therefore be fixed in

terms of rates of local currencies and gold.

Much of the Canadian plan is a synthesis of the British and American plan,

with more focus set on the initial action to be taken following the

agreement and Union coming into force.

Bloc Positions

The United Kingdom

- The United Kingdom’s main concern in the course of the Bretton

Woods talks was to avoid the destruction of the privileged position

sterling had before the war. Furthermore, the UK was in substantial

debt during the war and an efficient and effective way to handle

these debts (mostly to the US) and maintain exchange rates at the

same time was of upmost concern.

- The UK is seen as one of the two economies of primary concern with

the new economic order, along with the US, but their early

dominance in the debate of a monetary order was watered down

with the joint statement.

The United States

- The US has quickly become the world’s largest creditor at the time

of the Bretton Woods conference and its primary concern is how to

31

Bretton Woods 1944


protect the loans it has given, and continue the effective rebuilding

of economies after the war. The US Dollar has almost become the

main currency used in major international transactions and

protection of this dominance is also a key issue.

- The US is one of the most favourable to the complete

institutionalisation of the new economic system and seeks to

establish strong links with member states to allow whatever new

institution to function effectively following 1944.

The USSR

- The USSR, as another recipient of US help during the war, sees the

Bretton Woods conference as little concern to itself. Whilst holding

some of the largest industrial economies on earth, it’s financial

concerns are minimal whilst the war is still going

- It has also been noted that it is opposed to the dominance of any

one currency following the war and seeks a more cooperative

institution.

Europe

- As Europe has been utterly ravaged by the way, reconstruction is of

key concern. The lack of provisions for reconstruction were its

primary issue with the Keynes plan, and detailed information about

reconstruction are needed for many European nations.

- Furthermore, whilst the French plan did not get much support

during the intitial phases of investigation, it is still an important

economy in the world system and generally disfavours a strong

institution at the heart of the economic system

Latin and Central America

- Most of Latin and Central America participated in the conference

seeing a way to create an institution that could help them in their

32

Bretton Woods 1944


difficult process of growth. Many had become trapped in their

middle-income economies and the long-term provisions for any

institution is of primary concern for them.

Africa

- Decolonisation has not yet swept across the continent but its ideas

are near. The reconstruction and development of the continent is of

primary concern, especially regarding the upheaval that could

occur. The dominance of any currency is not favourable to these

nations, especially as currency flows are already difficult to

manage.

Asia

- Asia has not yet had strong financial institutions in many of its

member states, so any new economic order must help them

develop their nascent economies.

Conclusion

The Bretton Woods conference is filled with hundreds of ideas and

avenues to go down. The unions and currencies and historical mistakes

that have plagued the financial world must be reconciled in this

conference once and for all. Whilst delegates may remember their

primary concern is liberalisation of trade, and an end to damaging

competitive practises, they must also remember that the solution is

always cooperation, and that these United and Association nations must

stay so.

33

Bretton Woods 1944


Questions a Resolution should answer :

❖ How should the exchange rates of countries be regulated following

the war?

❖ How should the reconstruction of Europe and many other

devastated areas be financed and aided?

❖ What institution should help govern the financial system?

❖ Should an international currency be created to manage the funds of

said institution?

❖ What method of administration should this instate have?

Further Reading

Kurt Schuler And. “Who Was at Bretton Woods?” Centre for Financial Stability, July 1, 2014.

http://www.centerforfinancialstability.org/bw/Who_Was_at_Bretton_Woods.pdf.

• It is important to find out who exactly you are representing and

who chaired your delegation at the Bretton Woods conference

Keith Horsefield, J. “The IMF 1945-1964 Vol III: Documents,” 1981.

https://www.elibrary.imf.org/staticfiles/IMF_History/IMF_45-65_vol3.pdf.

• A list of the plans and provisions created before the Bretton Woods

http://www.centerforfinancialstability.org/bw/Who_Was_at_Bretton_Woods.pdf

http://www.centerforfinancialstability.org/bw/Who_Was_at_Bretton_Woods.pdf

34

Bretton Woods 1944


Bibliography

• Eichengreen, B. (1996). Golden Fetters: The Gold Standard and the

Great Depression, 1919-1939. Oxford, United Kingdom: Oxford

University Press.

• Feinstein, C.H. (1997). The European Economy between the Wars.

Oxford, United Kingdom: Oxford University Press.

• Friedman, M. and Schwartz A. (1963). A Monetary History oft he

United States 1867-1960. Princeton, United States: Princeton

University Press.

• Herbert, U. (2014). Geschichte Deutschlands im 20. Jahrhundert.

Munich, Germany: C.H. Beck.

• Keith Horsefield, J. “The IMF 1945-1964 Vol III: Documents,” 1981.

https://www.elibrary.imf.org/staticfiles/IMF_History/IMF_45-

65_vol3.pdf.

• Keith, Edited by. “Twenty Years of International Monetary

Cooperation VOLUME III: DOCUMENTS,” n.d.

http://imsreform.imf.org/reserve/pdf/keynesplan.pdf.

• Kershaw, I. (2016). To Hell and Back: Europe 1914-1949. London,

United Kingdom: Penguin Books.

• Kindleberger, C. P. (1973). The World in Depression, 1929-1939.

Berkeley, United States: Princeton University Press.

• Kurt Schuler And. “Who Was at Bretton Woods?” Centre for

Financial Stability, July 1, 2014.

http://www.centerforfinancialstability.org/bw/Who_Was_at_Bretton

_Woods.pdf.

• Pressler, F. (2013). Die erste Weltwirtschaftskrise, eine kleine

Geschichte der großen Depression. Munich, Germany: C.H. Beck.

https://www.elibrary.imf.org/staticfiles/IMF_History/IMF_45-65_vol3.pdf

https://www.elibrary.imf.org/staticfiles/IMF_History/IMF_45-65_vol3.pdf

http://imsreform.imf.org/reserve/pdf/keynesplan.pdf

Bretton Woods 1944 - LIMUN1).pdf4 Bretton Woods 1944 London International Model United Nations 2020...

Documents

Transcript of Bretton Woods 1944 - LIMUN1).pdf4 Bretton Woods 1944 London International Model United Nations 2020...