CHAPTER 2

"Prosperity Has No Fixed Limits"

The Bretton Woods conference was the first successful systematic attempt to produce a legal and institutional framework for the world economic system. It represented both an attempt to learn the lessons of the Great Depression and a part of the preparation for peace. The conference was preceded by negotiations involving initially the United States and the United Kingdom and then the other members of the United Nations (the wartime coalition against the Axis powers). The fundamental insight that made it possible to agree on an outcome was that destructive disputes over trade could be overcome by an agreement on monetary matters. In this the conference broke through the paralysis that had afflicted in- terwar attempts at international cooperation. The World Monetary and Economic Conference held in London in 1933 was generally seen as the last, and lost, opportunity to arrive at a settlement.1 It had treated the trade and monetary issues separately. Even at the preparatory stage, work on the agenda of the London conference had been divided between two subcommit- tees. The Monetary Subcommittee dealt with financial issues and with cur- rency stabilization, and the Economic Subcommittee with trade. The out- come of this division of labor was predictable and would have been comic if the results had not been so tragic. The monetary discussion arrived at the conclusion that a prerequisite for stabilization was the dismantling of barriers to trade. "Freer trade was a prerequisite of a return to normal economic conditions and a return to the gold standard." On the other hand, the trade debates produced agreement that nothing could be done without an overhaul of the international financial system, since "for ten years the world has been attempting to adjust the balance of payments by lending and borrowing instead of buying and selling."2 This was patently a perfect recipe for a

27 IT CAN'T BE OURS !IT'S CO T GOLDEN HAIR! 2 "Prosperity Has No Fixed Limits" 29 deadlock, in which trade and currency experts thought that the other side should be the one to take the first move. Immediately, John Maynard Keynes drew the conclusion that such a large gathering could scarcely be expected to succeed and that a workable plan could only be realized at the insistence of "a single power or like-minded group of powers."3 The fundamental cause of the shift between 1932 and 1933, on the one hand, and the wartime discussions, on the other, lay in the unflinching commitment of the world's most powerful state and economy to the principle of multilateral negotiations to reduce tariff levels and eliminate as far as possible trade quotas. The uncompromising attitude of the United States brought the inescapable conclusion even to opponents and skeptics that trade liberalization could not be the subject of discussion or bargaining. How fortunate for the world that there were no trade negotiations! After the conclusion of the Second World War, when countries started haggling about the exemptions they desired from a proposed International Trade Organiza- tion, the U.S. Congress revolted, and the proposed institution collapsed. Bretton Woods had already succeeded because of the wartime consensus that trade should not be debated, and thus that an initial conference should deal with currency stabilization. The new international economic order required rules for its management, rules that would prevent the recurrence of the disorder and conflict of the 1930s. In trade policy, there should be a simple rule of nondiscrimination. Since countries often used devaluations in the 1930s as a way of carrying out trade retaliation, the equivalent rule in monetary policy was a commitment to maintain a fixed exchange rate (in what became Article IV of the IMF's Articles of Agreement), combined with a requirement to liberalize foreign exchange transactions. Fixed rates offered themselves as the easiest and most attractive way of formulating a rule to prevent countries using currency policy in the course of potential trade wars. The Bretton Woods agreements involved a recognition of the equality of all currencies. There would be no special reserve currencies. Each country was to maintain the parity of its currency by intervening in the currencies of other countries. It would be helped in this by a Fund, which would keep reserves, and which could be drawn upon in case of temporary need for balance of payments support. The fundamental limitation on national monetary sovereignty involved in Bretton Woods was the obligation to maintain par values, in other words, to maintain a fixed exchange rate regime. They could only be changed in the case of a "fundamental disequilibrium" in the balance of payments, which would be the subject of a decision by the rules-enforcing authority. (The term was never defined. Its definition became even harder 30 INTERNATIONAL MONETARY COOPERATION with the resumption of substantial capital flows, since these may permit surpluses or deficits on the current account to be maintained for very long periods of time.) The complicated provisions of the agreements would ensure that this commitment brought no injurious domestic economic effects. It was in theory a very different sort of system to that which did in fact emerge after 1945 (as will be explained in Chapters 3 and 4). Instead of a multiple currency system, one or perhaps two key currencies (the dollar and the British sterling) came to assume the leading role in international monetary affairs, with other currencies holding their reserves largely in those currencies. For a long time, it might well have appeared that Bretton Woods was more of an unrealized idea than an international "system." But it did in fact create the conditions under which a system could begin to operate. In order to be able to satisfy the political requirements of the time, the proposed settlement had to include not just a sustainable economic vision but also appropriate concessions to the powerful interests involved in the negotiation. The United States had a profound conviction of the merits of trade liberalization and an abhorrence of the bilateral trade and manipulated exchange rates that had been operated by National Socialist Germany. The United Kingdom, on the other hand, wanted to find a mechanism to protect itself against the immediate impact of the trade liberalization required by the United States. The goal of the monetary mechanism for likely debtor countries (such as Britain) would be to prevent the buildup of large surpluses by others and to include penalties or deterrents for likely long- term creditors. The surplus countries should take a part of the adjustment: otherwise the world would find itself repeating the deflationary experience of the 1920s. The result of the coincidence of these two initially contrary impulses led to the adoption of a fixed rate system, on the basis of some of the stabilization plans of the 1930s, notabl the Tripartite Pact of 1936, arrangements that had in fact not been very successful in returning world economic stability and prosperity. In making the new settlement, the peacemakers had to wrestle with the perpetual and fundamental problem of international policy coordination: how to reconcile the desire for interna- tional stability with the defense of national economic interests and an insistence, strengthened by the experience of depression, that national goals (such as near full employment) should not be sacrificed on the altar of an international system. Those who participated in Bretton Woods saw that no international order could be stable if it provoked hostility and resentment in nation-states. 2 "Prosperity Has No Fixed Limits" 31

Can it be said that the coordination problem was solved at Bretton Woods? Hardly. At most, a mechanism was established that created some of the conditions in which the problem could be addressed.

Lessons of the Past

The experience of the 1930s' depression had produced two separate and apparently contradictory responses: in domestic politics, concern with poli- cies that might produce full employment (which some believed that they might obtain at the expense of other countries); but, in the international sphere, a renewed interest in international cooperation. In economic thought, a major consequence of the depression was the formulation of a theory showing how economies could reach equilibrium at levels of production well below that of full employment. The practical consequence of such theory was a call for government action to create higher levels of consumption and investment, and thus stimulate demand and employment. This in brief was the theory and the demand associated with the work of John Maynard Keynes in the 1930s and most eloquently laid out in his 1936 book, The General Theory of Employment, Interest and Money. There were parallel and even earlier recastings of economic theory along similar lines in other countries, in the work of Knut Wicksell and his disciples in Sweden, in that of Michat Kalecki in Poland, or that of Alvin Hansen in the United States, but the general change in outlook is usually described as the Keynesian revolution. The implementation of this program required a political reorientation and, in particular, a greater involvement of the state in economic life. Probably the most successful and lasting combination of a democratic version of new politics and new economics was in the Scandinavian countries. Expansionary budgetary policies, combined with income redistribution and growth orientation, were supported by coalitions representing farmers' and workers' interests. Elsewhere, the assertion of the state's role was not associ- ated with the extension of democratic rule. In other varieties of government activism in the 1930s, the state formulated the direction that should be taken by business. The most dramatic Latin American recovery from depression occurred as a result of an industrialization and import substitution drive in Brazil promoted by President Getulio Vargas and heralded as the product of his authoritarian "new state." In the deteriorat- ing international climate of the 1930s, however, military spending proved 32 INTERNATIONAL MONETARY COOPERATION to be the most obvious and attractive form of government stimulation to the economy. Both Germany and Japan, in particular, adopted what commen- tators subsequently termed "military-style Keynesianism." The increasingly tense international political atmosphere of the 1930s spilt over into considerations of domestic policy. Trade policy aimed at extracting advantages at the expense of neighbors. Currency policy could establish advantageous exchange rates that would promote exports. Devalua- tions would "beggar thy neighbor." Everything that states did in the interna- tional economy aimed at the maximization of their own wealth and power— at the expense of everyone else. The country that excelled in trade and currency manipulation of the international system for its own ends was National Socialist Germany. The 1930s were gripped by a fundamentally mercantilist and populist vision. The world economy was seen as a zero sum game in which a gain in one place corresponded to a loss somewhere else. Among the large states, only the United States provided an exception to this mercantilist vision. Through the 1934 Reciprocal Trade Agreements Act it attempted, with only small success, to steer the world in a different and better direction. In dealing with the problems of the world of the depression, the New Economics had at first largely avoided international issues. Its advocates believed that one of the features of the old classical doctrines had been the subordination of domestic objectives to the cause of an international system, which in the end had benefited only a limited number of financiers.Keyne s himself appeared through much of the 1930s to be rather less of an interna- tionalist than he had been in the 1920s, or was to become once more in the 1940s. When he welcomed Roosevelt's abandonment of the goal of a stable dollar he seemed euphoric. In the General Theory itself, there is virtually no examination of the international economy, with the exception of a few passages arguing that capital movements abroad had frequently been either harmful or wasteful. By the late 1930s, a powerful conviction had grown that the fundamental destabilization of the past decade had stemmed from volatile and irresponsible flows of capital ("hot money") and that a viable international system could only function if such flows were curtailed. As the international political situation deteriorated and as the countries of the world fought the Second World War, the initial neglect of international economics in the theory of the New Economics appeared less and less justifiable. In the first place, international economic cooperation was inti- mately connected in wartime discussions with the creation of a new order of peace. Second, the realities of wartime diplomacy between the Western allies became more and more concerned with financial issues. Questions of 2 "Prosperity Has No Fixed Limits" 33 postwar policy entered the bargaining process between the Allies and became a part of the game of power politics. A new internationalism looked at the global responsibilities of the world's most powerful economy. Already in 1934, the U.S. Ambassador in Germany had written to Secretary of State Cordell Hull, in order to point out the lesson that the Depression held for international politics. "The tariff policy of 1923-1930, the dangerous loans of 1923-1928, and the refusal of the Senate, 1921, to live up to the expectations of the election of 1920 are, therefore, the basic causes of Hitler and Mussolini, of British and French autarkies."4 Keynes, too, later began to draw internationalist conclusions from the terrible experience of the depression and its political repercussions. How could domestic priorities be reconciled with peace and broad interna- tional objectives? There were three alternative possibilities: (1) States might come to see their self-interest as lying in international harmony. The experience of the 1930s however did not seem encouraging. (2) An international juridical framework might be established for eco- nomic issues to arbitrate in cases where national and international objectives clashed. (3) An entirely automatic mechanism might point states in the direction of peace and prosperity without a complex and lengthy bureaucratic or juridical process. Discussions of the postwar order swung between acceptance of the second and third of these choices and ended by taking elements of both. Automatism was attractive because it was apolitical, but it might not always fit in with widely perceived needs. An element of discretion was needed, which might best be provided through the creation of an institution with legal powers established by treaty. The resulting compromise is the foundation of the Bretton Woods achievement.

Preparing for Peace: The Challenge

All could agree that the problem had been inadequately tackled after the First World War, that an opportunity had been lost, and that the seeds of subsequent conflict had been sown. Already weeks after the outbreak of war in 1939, Keynes was sending memoranda to President Roosevelt that included suggestions on how the postwar reconstruction of Europe might be handled better than after 1918. A vision of a postwar future more attractive than 34 INTERNATIONAL MONETARY COOPERATION the world of depression might also help to hold societies together through their wartime ordeal. In addition, soon it became necessary to respond to a concrete challenge of the enemy. After the fall of France in June 1940, the German Economics Minister, Walther Funk, in a series of widely broadcast and publicized speeches, developed a systematic concept for a "New Order" in Europe, which became a major part of Nazi wartime propaganda. The economic "New Order" was conceived as an alternative both to the bilateralism and blocked and clearing accounts of the 1930s and to the economic liberalism of the old gold standard. Countries should be in charge of their own curren- cies. "On no account will we tolerate a currency policy which makes us dependent upon gold, for we cannot bind ourselves to a medium whose value we cannot fix ourselves."5 According to Funk's scheme, European currencies would be freely convertible at fixed exchange rates within Europe, and only transactions to the outside would be managed. In effect, European currencies would be anchored around the Reichsmark. Trade barriers would be reduced, and production could be planned for the future. "By concluding long-term trade agreements with European countries it is intended that the European economic systems shall adapt themselves to the German market by a system of production planned far into the future."6 Keynes was asked by the British government to prepare a counterscheme. He rejected very decisively the idea that a return to the internationalism of the 1920s might be attractive as a pattern for postwar relations. It would not be enough, he said, to offer "good old 1920-1921 [the postwar slump] or 1930-1933 [the Great Depression], i.e., gold standard or international exchange laissez-faire aggravated by heavy tariffs, unemployment, etc., etc." In his proposals, Keynes spoke of "the craving for social and personal security" after the war.7 But there were as yet few details on how an international economy might be managed to promote such security. The U.S. answer involved trade liberalization; and the course of the war meant that the United Kingdom had to take more and more notice of this view. From September 1939, but especially after the fall of France, it was clear that Britain could not survive without an Atlantic help line—without substantial assistance from the United States. But officially, the United States was committed to neutrality. Winning U.S. support was a slow and cumbersome process requiring substantial British concessions. In August 1940, the United States offered Britain old destroyers from the last war in exchange for a lease of British naval bases in the western hemisphere. This measure did not go far enough to meet the pressing British predicament in 2 "Prosperity Has No Fixed Limits" 35 the winter of 1940-41- Strengthened by his victory in the election of Novem- ber 1940, President Roosevelt offered to supply goods to Britain with repay- ment terms to be arranged only after the end of the war. The bill authorizing this process was highly controversial in the United States, and some of Roosevelt's critics argued that Britain was maneuvering the United States into paying for a war fought only in British interests. Partly in order to meet these criticisms and partly as a consequence of Secretary of State Cordell Hull's diagnosis of the ills of the 1930s, the United States insisted on the insertion into the Lend-Lease Agreement of a clause providing for British commercial concessions after the end of fighting. That this was a quid pro quo was made explicit in the usual description of the provision demanded by the United States: "the consideration." The original State Department draft for Article VII of the Lend-Lease Agreement laid down that the aid offered by the United States should not "burden commerce between the two countries but . . . promote mutually advantageous economic relations between them and the betterment of world-wide economic relations; they shall provide against discrimination in either the United States of America or the United Kingdom against the importation of any product originating in the other country."8 The protectionist carapace around the British Empire and British imperialism would need to be cracked. Many in Britain, including Keynes, were frightened by the potential effects on their country. They thought that a restoration of free trade might endanger any domestic experi- ment in welfare economics. The same sort of Hullian free trading language appeared elsewhere, in the Atlantic Charter, drawn up in shipboard meetings on the ocean at the first visit of British Prime Minister Winston Churchill to President Roosevelt. Clause Four committed both governments "to further the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world."9 The proposals developed by Keynes during t o weeks in the late summer of 1941 for the solution of the postwar currency problem stemmed from a concern to find some overarching frame for an international order in which Article VII ("the consideration") would not be such a threat to British interests. Keynes's proposals started, naturally enough, from an analysis of Britain's certain postwar predicament. Demand for imports would rise with the end of wartime austerity, while Britain's future capacity to export would be cut because of the wartime conversion of industries to military manufac- ture, the difficulty of reconversion, and by the running down of Britain's capital stock. The loss of shipping meant that there would be an additional 36 INTERNATIONAL MONETARY COOPERATION

British loss of invisible earnings. European countries would face similar strain after years of autarkic economics and then armed conflict. In the 1920s, Keynes believed, the United States had avoided its responsibility for European reconstruction by leaving what should have been a task for public policy to private business initiatives. The purpose of any new international proposal should be to ensure that countries that had built up a powerful creditor position should fully face up to their responsibilities. "The object. . . must be to require the chief initiative from the creditor countries, whilst maintaining enough discipline in the debtor countries to prevent them from exploiting the new ease allowed them in living profligately beyond their means."10 Keynes's scheme proposed an international bank, which he called the Clearing Union, with a new unit of account that would be the basis for the issue of a new international currency. The proposed currency's name, bancor, indicates the way in which the new money was conceived as an artificially created replacement for gold, which should gradually be expelled from the civilized conduct of international economics. Gold might be sold by central banks to the new international bank for bancor, but would not be bought. The object of the Union's activities would be to avoid balance of payments imbalances through the creation of a body of rules and practices relating to the overdrafts on the bank accumulated by debtors and the positive balances acquired by creditors. The quotas for each country in the Union were to be fixed as half of the average of imports and exports over the past five years. These quotas determined the limits up to which debtors could borrow (at interest rates that rose with the quantity of their debts). Creditors had to transfer to the Union surpluses above their quota, and pay charges to the Union if their balances rose above a quarter of their quota. The Keynes scheme created a nearly perfect symmetry: it was to be as unpleasant and as costly to hold credit balances as to be a debtor. The result would be the impossibility of policies such as those followed by the United States and France in the late 1920s: the rules of the Clearing Union would drive such creditor states to expand. Behind these proposals lay very clear lessons from the Great Depression, at least as interpreted by the critics of the interwar policies of the United States and France. The chief British financialnegotiato r in wartime Washing- ton, Sir Frederick Phillips, wrote about the new scheme: "Should a severe world depression threaten at some date subsequent to the conclusion of the war success in coping with it will, we think, largely turn on the adoption of a general expansionist policy. The efforts of individual countries to meet the evil may prove futile, as they have in the past, unless given the strong support of a common international currency policy."11 2 "Prosperity Has No Fixed Limits" 37

In subsequent drafts of his proposal, Keynes wrestled with "the most difficult question," "to determine . . . how much to decide by rule and how much to leave to discretion."12 An abstract and impersonal operation would give the most scope for the operation of markets, and also for the preservation of national sovereignty. The most extreme version of a rule-bound system, however, the gold standard, had led to deflation and depression. Successive British drafts, tossed forward and backward between Keynes and the British Treasury and the Bank of England, gradually increased the discretionary element in what had originally been a neat and simple automatic principle of operation. Monetary authorities preferred (often they still do) "to operate by vague requests backed by vague sanctions, rather than by publishing definite rules."13 By the fourth draft, the balance had shifted toward discretion. The Governing Board of the International Bank might set conditions under which countries would be allowed to increase their debit balances, including the surrender of their gold reserve, the control of capital transactions, and a devaluation of the currency. But even with the introduction of consultations about policy in the place of rules of conduct, there still existed a symmetry between the constraints on debtors and creditors. If a credit balance exceeded half the quota, the country would be required to "discuss with the Governing Board (but still retain the ultimate decision in its own hands)" an expansion of domestic credit and demand, an exchange rate revaluation, an increase in wages, tariff reductions, or international loans for the development of backward countries. The scheme depended on a worldwide agreement on the control of capital movements, which was presented as a "permanent feature" of the postwar system. The Union would work closely not only with an agency dedicated to stabilizing prices (in order "to control the Trade Cycle"), but also with a supernational peacekeeping agency ("charged with the duty of preserving the peace and maintaining international order"). The British draft concluded that the proposal was "capable of arousing enthusiasm because it makes a beginning at the future economic ordering of the world between nations and the 'winning of the peace,' and might help to create the conditions and the atmosphere in which much else would be made easier."14 A new consensus on the causes of the Great Depression had shifted the emphasis away from the favorite villains of the 1930s literature—the uneven distribution of gold and the sterilizing policies of the Bank of France and the Federal Reserve System, or the allegedly excessive monetary inflation of the 1920s, or structural weaknesses in major industrial centers. Rather, the new view looked at the transmission process of depression and came to the conclusion that the large short-term capital flows of the 1920s and 1930s 38 INTERNATIONAL MONETARY COOPERATION had led to disaster. These movements had made it impossible for states to pursue stable monetary policies; they threatened exchange rate stability and had made fiscal stabilization highly hazardous. This approach to the interwar economy oriented toward the diagnosis of capital movements as the fundamental ill had been developed by League of Nations economists in the 1930s. The most influential academic statement was Ragnar Nurkse's International Currency Experience (1944)."I n the absence of international reserves large enough to meet such speculative and often self-perpetuating capital movements many countries had resort to exchange control and to other less insidious means of correcting the balance of pay- ments." From this historical experience, Nurkse drew the conclusion that greater international cooperation was needed: "But if, owing to anticipated exchange adjustments, political unrest or similar causes, closer control of hot money movements is inevitable, then some of its difficulties and dangers might be overcome by international understanding." As a consequence, when he wrote about plans for an international bank or monetary fund, Nurkse added: "If, in addition to trade and other normal transactions, such a fund had to cover all kinds of capital flight, it might have to be endowed with enormous resources. In fact, no fund of any practicable size might be sufficient to offset mass movements of nervous flight capital."15 The restoration of a multilateral financial system thus depended in the view of almost every analyst on control of capital movements for an unlimited time. This approach appealed to Keynes, who had repeatedly asserted his skepticism about the benefits of both capital exports and capital imports. Keynes fully shared the belief that capital flight had been the major interna- tional interwar problem: "There is no country which can, in future, safely allow the flight of funds for political reasons or to evade domestic taxation or in anticipation of the owner turning refugee. Equally, there is no country that can safely receive fugitive funds, which constitute an unwanted import of capital, yet cannot safely be used for fixed investment."16 It is true that Keynes added that the new controls, which might become a "permanent feature of the post-war system," should not bring an end to the "era of international investment": but it would need states and international agreements to define (in accordance with national priorities) what was desir- able investment and what was unwanted capital movement. The British economist Sir Hubert Henderson noted: "It has been generally agreed in the United Kingdom that we must retain the right to regulate capital movements, effectively and indefinitely."17 Many Americans also shared this view. In the United States, the feeling that the capital exports of the 1920s had been misused was a commonplace for the New Deal. Harry Dexter White, 2 "Prosperity Has No Fixed Limits" 39

Assistant to the U.S. Treasury Secretary, and the other major architect of what would be the Bretton Woods agreements, fully concurred with Keynes that: "The theoretical bases for the belief still so widely held, that interference with trade and with capital and gold movements etc., are harmful, are hangovers from a Nineteenth Century economic creed, which held that international economic adjustments, if left alone, would work themselves out toward an 'equilibrium' with a minimum of harm to world trade and prosperity. . . . The task before us is not to prohibit instruments of control but to develop those measures of control, those policies of administering such control, as will be the most effective in obtaining the objectives of World-Wide sustained prosperity."18 White's immediate superior, Treasury Secretary Henry Morgenthau, made the target of these controls much more explicit. The new institutions of the international order would be "instrumen- talities of sovereign governments and not of private financial interests." The task that the statesmen should set themselves was to "drive . . . the usurious money lenders from the temple of international finance."19 The final British proposal was published in April 1943 under the title "Proposals for an International Clearing Union" and preserved all of the most distinctive features of Keynes's approach: the international currency bancor, the quota based on trade in the prewar period, the control of capital movements, and the possibility of the Governing Board of the Union requir- ing an alteration in exchange rates.

The Evolution of Supra^Nationalism

Harry Dexter White had been an enthusiastic exponent of the new eco- nomics as part of the dirigiste approach associa ed with Roosevelt's New Deal. But he had begun the transition to the new economics of internation- alism already before Keynes. Before the war, he had worked on plans for an All-American Bank. In late 1941, while Keynes was preparing the Clearing Union, White was making adjustments to his old plans in order to create a new international mechanism. He launched his proposal in January 1942 at the Rio de Janeiro Pan-American meeting of the Secretaries for Foreign Affairs. The first full version of the plan dates from March 1942 and had the title: "Suggested Plan for a United and Associated Nations Stabilization Fund and a Bank for Reconstruction and Development of the United and Associated Nations." 40 INTERNATIONAL MONETARY COOPERATION

White initially saw the Bank as by far the more important of the two institutions. As he originally formulated it, the Bank would act as a uniquely powerful combination of a world central bank, issuing notes that would be accepted in place of gold, and an ordinary commercial bank. The capital (a suggested $10 billion) would be half paid in; but, in practice, would provide no limitation on the activity of the bank. If its notes were really to take the place of gold, the bank could indulge in an almost limitless expansion of credit. Since there would be relatively little private credit available in the impoverished postwar world, the bank's task would be to generate its own flows at relatively low levels of interest (White envisaged 3 percent). The bank would in this way function as a sort of central planning agency for the whole world, providing capital for relief and reconstruction, raising standards of living throughout the world, financing international trade, eliminating possible financial crises, and stabilizing the prices of basic commodities.20 There was, in short, something rather Utopian about White's sketch for the bank. Relative to these very ambitious responsibilities, the Fund would play only a quite minor and modest role in making the transition to a peacetime economy and in liberalizing payments. In this regard, it would have to address the much smaller, but politically highly charged issue of blocked accounts. These had developed not only in continental Europe, where satellite coun- tries ran up clearing balances against Germany, which they often found it hard to unfreeze. Sterling balances also presented a pressing and controversial international issue. Latin American countries, as well as countries within the British imperial system, had accumulated large credit balances whose liquidation would cause major difficulties for Britain. (By December 1946, the foreign blocked balances in Britain would amount to $14 billion (£3,480 million).21 "The unblocking of these sterling funds is highly to be desired. Probably, no single action would do more to stimulate world trade, prevent pressure on numerous exchanges, and reduce the probability of widespread depreciation of currencies."22 In practice, the survival of sterling balances became one of the most enduring difficulties in the postwar period, causing continual international strains from the 1940s until as late as the mid-1970s. During the wartime negotiations, fear of U.S. pressure over sterling balances provided the chief motivation for British insistence that the proposed Stabili- zation Fund should confine its attention to "current transactions" and not to capital positions (which would require it to be given jurisdiction over such issues as sterling balances). The United States, on the other hand, intended to endow the Stabilization Fund with powers sufficient to tackle those obstacles that in the past had 2 "Prosperity Has No Fixed Limits" 41 stood in the way of world economic cooperation. The Fund would have to be given extensive powers to control matters that had previously been re- garded as belonging to national sovereignties. "It is vital to the success of any international stabilization fund designed to play a really useful role that there be a suspension of certain economic elements of national sovereignty in favor of international collaboration. ... If no government is prepared to sacrifice for the sake of a larger though possibly a less obvious good what it regards as an advantage when that advantage is obtained at the expense of some friendly power, then the world will revert to the barbaric international economic relationships of the 'twenties and 'thirties." The rules that the new institution would impose included the abandonment, not later than one year after joining the Fund, of any restrictions and controls on foreign exchange transactions that had not been approved by the Fund. Member countries would not be allowed to alter exchange rates without the approval of the Fund. They could not accept investments and deposits from another country except with that country's consent (the participants in the debates on reform all had vivid memories of the large sums involved in capital flight in the 1930s). Members would commit themselves to reduce trade barriers. Countries would not impose any monetary or banking or price measure that might "bring about sooner or later a serious disequilibrium in the balance of payments, if four-fifths of the member voters of the Fund submitted to the country in question their disapproval of the adoption of the measure."23 This, it was apparent, would mean an activist Fund, debating, consulting, warning, advising, and behaving very differently to the inherently automatic Credit Union of Keynes's plans. In order to work effectively, the Stabilization Fund would need a trained and expert technical staff that would constantly supervise all international transactions in order to be able to advise the voters on the Fund's Governing Body. "The condition and movements of the international accounts of the member countries would be to the Fund's research staff, what the thermometer, stethoscope, x-ray, and microscope, etc., are to the diagnostician."24 In July 1942, a version of the White proposal was sent to Britain, and a long process of bringing together not just two plans, but two differing philoso- phies of management began. Keynes initially complained about what he felt as the excessively discretionary American vision of the Fund's operation. The Americans, he said, "thought of the Fund as an active, benevolent institution which would study the advisability of every transaction and O.K. it or not as a faithful schoolmistress."25 Keynes later changed the metaphor and produced a phrase taken up by many subsequent critics of the Fund he helped to design. In the United States, he said in January 1944, it was 42 INTERNATIONAL MONETARY COOPERATION wrongly believed the Fund "should have wide discretionary and policing powers and should exercise something of the same measure of grandmotherly influence and control over the central banks of member countries, that these banks in turn are accustomed to exercise over the other banks within their own countries."26 On the American side, the major policy concern was to reduce the virtually unlimited U.S. liability to meet deficits envisaged by the British plans. Keynes, according to the U.S. government experts, had provided "no method by which the United States could resist such a tidal wave of bancor." In addition, they believed that in an institution created on Keynes's lines, debtor countries would continually be able to outvote creditors. Both faults required remedying if the proposals were to be acceptable to the United States.27 It is not a simple exercise to produce a framework of rules, and at the same time an institution to enforce them, that might be capable of commanding a general consensus. Participants always experience a powerful temptation to bend the rules in the direction of powerful national interests. To be sure, the achievement of a durable agreement owed much to the exceptional intellectual ability of the participants—not just of Keynes or of White, but also of their principal assistants: in Britain, Dennis Robertson, James Meade, and Redvers Opie and, in the United States, Edward Bernstein, Emilio G. Collado, and Frank Coe in the Treasury and Leo Pasvolsky and Dean Acheson in the State Department. The task of the British and American negotiators was made much easier because of the essentially bilateral character of the major part of the process. The representation of other fundamentally diver- gent points of view at an early stage would have led to impossible complica- tions: consider, for instance, how the presence of a Walther Funk or an Andrei Yanuarievich Vyshinsky might have affected the design of future international institutions. U.S. Treasury Secretary Henry Morgenthau com- mented at the time on the progress of negotiations with the British: "My experience with them since I have been here is that they have put up a good case and we tried to put up a good case, but after we have a ... chance to rub the edges off they have been fair."28 The U.S. Treasury in fact had wanted to treat discussions about the new international financial order in as multilateral a way as possible, so as not to appear to be involved in a particularly close discussion of the British vision. But this inclination to negotiate globally was undermined, almost certainly fortunately for the outcome of the conference, by the dictates of politics in the wartime coalition. The U.S. State Department firmly opposed 2 "Prosperity Has No Fixed Limits" 43

"the calling of a conference of United Nations until very close agreement with the British Empire can be reached."29 Already before the publication of the Keynes and White plans, the Free French government had been associated with an alternative scheme, drawn up by Andre Istel, former financial adviser to the Reynaud ministry, and Herve Alphand, the former French financial attache in Washington. In 1939, they had negotiated an agreement on financial cooperation between Free France and the British government, which they saw as a potential basis for postwar European cooperation. Their new scheme constituted a modest and apparently workable proposal that could easily be implemented even before the end of the military conflict.30 It involved no international clearing union, no contributions by members, and no issue of new currencies. It could be adaptable to systems of exchange control. Long-term capital flows would be facilitated by international and national investment trusts. A monetary accord would be reached on the basis of the 1936 Tripartite Pact: parities would be fixed, and no change would be possible without preliminary consul- tations or agreements. The scheme would be managed through national equalization accounts, with agreed limits on the amount of exchange that could be acquired, and protection against currency losses through guarantees and the deposit of collateral, presumably gold. (France had been badly hit in 1931 by capital losses on its reserve assets following the devaluation of sterling.) It was a system halfway between a gold bullion standard and the interwar gold exchange standard, and its proponents advertised it as such: "the suggested system may be considered as a first step toward a general return to an international gold standard." But unlike in previous monetary regimes, there would be a central agency to supervise the rules: the Monetary Stabilization Office (called in some English-language accounts the Interna- tional Clearing Office) would "serve both as a barometer of economic condi- tions and as a counselor on economic affairs."31 This appeal for a restoration of a modified gol standard, however, never became an official French view. In occupied France, resistance memoranda generally criticized the gold standard, demanded a planned (and often social- ist) postwar order, and argued that at the first signs of a postwar crisis, European countries should be allowed to detach themselves from an overpow- erful and overwhelming U.S. economy. Wartime controls would need to be kept in place. "Only these restrictions will allow us to avoid the excessive growth of our liabilities to other Allied Powers."32 A detailed commentary on the Bretton Woods agreements prepared in 1945 for the French Finance Ministry went some way toward this position by calling for a replacement 44 INTERNATIONAL MONETARY COOPERATION of the gold standard by a merchandise standard. It also set out details of the support that France might receive from the new institutions.33 The Canadian government also evolved a detailed plan, conceived unlike the Istel-Alphand proposals not as an alternative to the Keynes and White plans but as an attempted reconciliation of differences. From the summer of 1942, Canada had been involved in discussions with the United Kingdom about the postwar monetary order. Its government attempted to secure an open postwar economy, and to break the deadlock between the rival U.S. and British conceptions, by presenting a version of its own.34 A plan prepared by Louis Rasminsky (then head of the Research and Statistical Section of the Foreign Exchange Control Board) was presented to the United States and the United Kingdom in June 1942. The Canadians wished to modify the British plan by basing the new system on a multiplicity of currencies rather than on an artificial unit such as Keynes's bancor. By making withdrawal from the Fund easier, they hoped to show that membership was not incompatible with the maintenance of national sovereignty (the Canadian plan stated that "the organization should be international and not supernational"). In addition, they proposed to limit the open-ended liability of the creditor countries envisaged in the Keynes plan, but the plan retained the principle of penalizing countries with large surplus positions. They could be the subject of recommendations by the international institution relating to monetary and fiscal policies, exchange rates, commercial policy, and investment. The "International Exchange Union" would borrow additional supplies of the scarce currency; and its Governing Body would have the duty to re-examine the exchange rate and suggest appropriate policy. Rasminsky proposed to extend the U.S. plan by increasing the size of the Fund from $5 billion: at the outset he favored $10 billion, but in the published version he accepted $8 billion (which was close to the eventual size of the Fund). Initially, the Canadian financial attache in Washington, who had proposed the notion of a separate Canadian plan, had envisaged that it "would resemble the British rather than the American" while "differing from the British on as many points as seemed reasonably possible." In the final outcome, with a multiple currency Fund, Rasminsky wrote to Keynes that "I think it would be accurate to say that while we have adopted the American form, our purposes have been to propose an institution with adequate resources to modify the rigidities of the American plan, to achieve a truly multilateral monetary organization and to make the operative sections workable."3' The Soviet Union also followed the course of the discussion with acute interest, and up to the last days of 1945 appeared to be seeking an active 2 "Prosperity Has No Fixed Limits" 45 role in the postwar international economic order. Even in the enemy camp, in Nazi Germany, the evolution of the Keynes and White plans were followed with close interest as an indication of the probable future shape of peacetime economics. In 1943, a delegation of German bankers led by the Vice-Presi- dent of the central bank visited the Economic Adviser of the Bank for International Settlements (BIS), Per Jacobsson, in order to collect details on the Anglo-American currency plans, and a few weeks later Jacobsson even went to Berlin to give a briefing on the postwar international monetary order.36 The Anglo-American plans developed so successfully in large measure because of the bilateral character of the negotiations. In addition, Keynes's and White's efforts were supported by the external imposition of a time frame for the negotiations. By late 1942, as coded drafts moved backward and forward across the Atlantic the participants in the debates began to realize that at some time in the not very distant future the war would be won: and that at that moment the plans needed to be ready for implementa- tion. White was afraid that delays in getting a British agreement for his scheme would prevent discussion by the United Nations (that is, the wartime coalition) before the conclusion of an armistice. Most important, producing an agreement was possible because of the wide extent of agreement in the initial bargaining positions.37 Keynes wrote of his proposals that they "lay no claim to originality. They are an attempt to reduce to practical shape certain general ideas belonging to the contemporary climate of economic opinion, which have been given publicity in recent months by writers of several different nationalities. It is difficult to see how any plan can be successful which does not use these general ideas, which are born of the spirit of the age."38

Bilateral Agreement

The most important negotiating breakthrough came on December 16, 1942, when a new U.S. draft contained for the first time a "scarce currency clause," reflecting a U.S. willingness as a creditor country to take on a substantial part of the burden of adjustment. The British economist Roy Harrod wrote of his response to the American inclusion of this clause: "I was transfixed. This, then, was the big thing. . . . Now [the Americans] had come forward and offered a solution of their own, gratuitously. This was certainly a great event. For it was the first time that they had said in a 46 INTERNATIONAL MONETARY COOPERATION document, unofficial, it was true, and non-committal, but still in a considered Treasury document, that they would come in and accept their full share of responsibility when there was a fundamental disequilibrium of trade."39 Har- rod also told Keynes: "The Americans have happily played a card which according to the rules of the game we could not play."40 The next U.S. revisions adopted the Keynes idea of a new unit of account, and labeled it unitas. They altered the original term for measurements of a country's position in the Fund from "subscriptions" to "quotas," which was at least linguistically more compatible with the Keynes idea of a new interna- tional creation of units of value. But unitas, in practice, was no more than a unit and would not be created by fiat as Keynes imagined in the case of his bancor. They also pared down the original suggestions for a separate Bank and a commodity stabilization program. In the final weeks before the Bretton Woods conference, unitas was removed from U.S. drafts, even though the British negotiators had been anxious to retain this reminder of the Keynesian bancor. The American negotiators began to think about the postwar world in terms of a world economy oriented around the dollar. President Roosevelt did not want to publish the American plan, since "these things are too early. We haven't begun to win the war." On April 6, 1943, Treasury Secretary Henry Morgenthau told the Senate Committee on Finance that "no specific plan has as yet been considered by this government, but preliminary suggestions of our technical experts have been formulated and have been made available for exploratory study of experts of other interested governments."41 But on the next day, April 7, the two countries' proposals were published in London; and a new and more active phase of reconciliation of the two programs began with a greater measure of public visibility. The essential elements of the eventual package were stitched together before the international conference held in Bretton Woods in the summer of 1944, and the result presented on April 22, 1944, as a "Joint Statement by Experts on the Establishment of an International Monetary Fund," and published simultaneously in Washington and London. The initial size of the Fund was set, as a result of a direct compromise between U.S. and U.K. ideas, at $8.5 billion rather than the $5 billion suggested in the U.S. draft of April 1943. Britain agreed to the idea of a Fund financed through contributions of gold and currencies, but these were to be termed "quotas," and there was no monetization of unitas and the term was dropped. The Fund would have, as in the U.S. drafts, the power to determine exchange parities in consultation with member countries. In the United States, suspicion on the part of the commercial banks of a powerful new rival led to a dramatic diminution of the role and functions 2 "Prosperity Has No Fixed Limits" 47 of the Bank compared with White's earliest concept. By the time the Ameri- can plan was published, in November 1943, as a "Preliminary Outline of a Proposal for a United Nations Bank for Reconstruction and Development," the proposal that it should issue its own notes had been dropped. Some of the original tasks, such as relief and rehabilitation in war-affected areas, were now entrusted to other UN agencies. The U.K. negotiators had originally been much less interested in the Bank than in the Fund, but as they saw themselves beaten on Fund issues, they took up the Bank proposals with a new vigor. The British and other Allied delegations traveling to the preliminary monetary conference on board the Queen Mary produced a proposal, generally known as the "Boat Draft," which paid more attention to the Bank. At Bretton Woods itself, Keynes acted as Chairman of Commission II, which was concerned with the Bank, and became more and more impressed with its significance for the economic management of the postwar world and was convinced that it might perform some of the tasks of his original Clearing Union. From the beginning, the relationship of the Fund and the Bank was thus in part competitive, as well as in part mutually complementary and support- ive. As more responsibilities were given to one, the other grew smaller. In particular, the distinction between short-term balance of payments support and a longer-term flow of credit, which remained the crucial separation in the history of the relations of Fund and Bank, had from the outset a note of ambiguity. Long-term credit could in some circumstances be used as an alternative to balance of payments support. At the same time, the existence of the "twins" made it easier for one side in the political negotiations between the United States and the United Kingdom to accept compromises in the design of one, in the belief that they might be compensated by concessions over the other. At the preliminary drafting conference in Atlantic City (June 15-28, 1944) as well as at the conference in Bretton Woods, New Hampshire, the most important debates concerned relatively subordinate and secondary matters: the issue of a transition period between the end of hostilities and the realization of convertibility, and the siting of the headquarters of the Fund and the Bank. At Atlantic City, Keynes argued insistently that it might well be impossible for Britain to abandon exchange controls only three years after the end of the war. Over exchange rates, he pleaded for greater flexibil- ity.42 In general, the British as well as other delegations tried to preserve the principle of national sovereignty in regard to the setting of exchange rates, and indeed as a general policy concern. But these were fundamentally second- ary issues: the basic consensus was already in place. 48 INTERNATIONAL MONETARY COOPERATION

The 45 national delegations arrived at Bretton Woods on July 1, 1944, after an overnight train journey, from the hotter and stickier climate of summertime Washington or Atlantic City to the clearer air of a wooded mountain resort. It is interesting that the name Bretton Woods continues to be so widely used and recognized as a shorthand for the agreements produced. There was doubtless something symbolic in the progression of international economic conferences from a Geological Museum (in London in 1933) to a contemplative wooded retreat in Bretton Woods in 1944- The conference began detailed work on July 3, and concluded on July 22, a few days later than had originally been envisaged.

Universal Institutions

Until Atlantic City, the process of negotiation had been fundamentally bilateral, supplemented through some mediation on the part of other states between an American and a British plan. At the drafting conference, some new suggestions modified the previous basis for agreement. India drew up two amendments, one concerning the desirability of a greater utilization of the resources of economically underdeveloped countries. The second called for a quick solution of the sterling balance issue: the settlement of "abnormal indebtedness arising out of the War."43 White consistently believed that any just international order would involve a prompt liquidation of sterling balances. Australia and France suggested more generous possibilities for draw- ing on Fund resources. In the interests of securing agreement with the Soviet Union, additional concessions to national sovereignty in the exchange rate issue were made. What eventually became Article IV, Section 5(e) of the Fund Articles of Agreement allowed that the power of the Fund to control exchange rates should not apply to exchange rates that had no effect on international transactions. The desire to conciliate the Soviet Union helped to make the United States more flexible on the general issue of sovereignty. As the U.S. Treasury told the head of the pre-Bretton Woods Soviet delega- tion, Professor Smirnov, who had asked why the word "Fund" was used rather than Keynes's term "Clearing Union": "because in this country 'union' suggests a greater surrender of sovereignty on questions of international monetary policy than does the word 'fund.' "44 The most obviously controversial issue at Bretton Woods concerned the calculation of members' quotas, and correspondingly of votes in the new institutions.45 Quotas were the subscription to the Fund and the Bank—as it 2 "Prosperity Has No Fixed Limits" 49 were the shareholding in the new institutions—and since these were financial institutions, they would represent the basis for voting decisions. They would reflect fundamentally the economic size of the member country and its role in the international economy. The basic formula had been prepared already in April 1943 in the U.S. Treasury (on the basis of a scheme devised by Raymond Mikesell) and took into account prewar data on national income, foreign exchange reserves, and international trade. It also included some provision for the variability, as well as the value of exports (since countries with severe fluctuations would require a larger share in the newly created international reserves). Quotas involved more, however, than just a reflection of economic data; they seemed to give an indication of the way in which global power would be distributed in the postwar world. In part because of the prestige considerations involved, their calculation has always remained a thorny, controversial issue. The initial suggestion by White had included a calculation giving the United States 61 percent of the total quotas; he later told Mikesell to prepare a scheme that would give the United States just under 30 percent. Throughout the course of the conference, the quota formula was not circulated, at the request of White. According to Mikesell, the whole issue was treated with a "lack of candor"; although it is also true that greater openness at this stage might well have produced greater dissension.46 For the Soviet Union, there was a question of obtaining recognition as a new superpower. In the Soviet view, quotas should represent a tribute to military, as well as merely economic prowess. When the chairman of the Soviet delegation M.S. Stepanov presented the demand to raise the Soviet quota from $800 million to $1,200 million, he complained that the previous formula "was based upon past economic data such as foreign trade and . . . the calculations for the quotas should be based on future prospects rather than past statistics."47 In the case of China, U.S. pressure to increase the quota also reflected a wish for the new world, the hope of establishing between Japan and the Soviet Union a powerful and independent country on the political base provided by the Chinese Nationalist Party. The U.S. insistence that the Chinese quota should be significantly larger than that of France was unsurprisingly treated by the French delegation as a "deliberate insult."48 A further controversy was ignited by the demand of the Norwegian delega- tion, supported by the U.S. Treasury representatives, perhaps even egged on by White,49 that in the light of the wartime collaboration of the BIS with the authorities of Nazi Germany, the dissolution of the BIS should precede the creation of a new international economic system. The BIS, for instance, had agreed to the transfer of Czech gold to Germany after the (illegal) invasion of Czechoslovakia. Eventually, British hesitancy watered down the 50 INTERNATIONAL MONETARY COOPERATION resolution, so that Commission Ill's recommendation merely demanded the "liquidation of the Bank for International Settlements at the earliest possible moment."50 One of the most difficult issues was solved by an apparent sleight of hand. The earlier U.S. drafts had included a proposal for a new international unit of account, rather than any existing national currency. In private, however, Harry Dexter White had always been insistent on the importance of the U.S. dollar, which he said in early 1943 "will probably become the cornerstone of the postwar structure of stable currencies." In the meeting of the conference's Commission I on July 13, the relatively trivial issue was raised as to the date on which countries should make their payments of gold or convertible currencies. The British delegate Dennis Robertson then suggested the phrase "net official holdings of gold and U.S. dollars," rather than "gold and gold- convertible currency" (in practice, there were not many gold-convertible currencies at this date, and the new phrase merely seemed more realistic and less mystifying).51 White immediately responded by referring the discussion to a special commission, which then agreed on a formula which in one crucial regard put the dollar at the center of the new international financial order. Article IV, Section l(a) of the Articles of Agreement stated: "The par value of the currency of each member shall be expressed in terms of gold as a common denominator or in terms of the United States dollar of the weight and fineness in effect on July 1, 1944." Otherwise, the Bretton Woods agreement reproduced the essence of the Anglo-American compromise. The Fund had a purpose, defined in the first of the Articles of Agreement:

(i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. (ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. (iii) To promote exchange rate stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. (iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. (v) To give confidence to members by making the Fund's resources available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. 2 "Prosperity Has No Fixed Limits" 51

(vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. The Articles reflected the previously worked out principles of a quota- based, rule-enforcing institution. Twenty-five percent of the Fund quotas were to be paid in gold, and the balance in the own currency of the members. Par values were to be fixed at the beginning of the Fund's operation, and spot exchange transactions at rates more than 1 percent away from the par value were not permitted. Members were not to propose a change except to "correct a fundamental disequilibrium" (Article IV, Section 5(a)). If such changes were larger than 10 percent, the Fund could raise an objection to the measure. Article VI, Section 1 provided that "a member may not make net use of the Fund's resources to meet a large or sustained outflow of capital." Under Article VII, the final outcome of the U.S. initiative over the "scarce currency clause," the Fund, if it determined that a currency was becoming scarce, would "inform members and may issue a report setting forth the causes of the scarcity and containing recommendations designed to bring it to an end." Section 3 allowed members to impose temporary exchange restrictions on dealings in the scarce currency. Article VIII required the avoidance of restrictions on current payments and of discriminatory currency transactions, although under Article XIV there were provisions for a transi- tional postwar period. Three years after the Fund began operations, it was required to issue a report on restrictions, and after five years it would consult with members continuing to apply restrictions. The regular consultations under Article XIV in practice became a major part of the Fund's activity in the 1950s and were later initiated in addition for members that had accepted the convertibility obligations of Article VIII. Article XII established principles for the operation of the Fund. Its powers rested in a Board of Governors, with Executive Directors appointed with responsibility for "the conduct of the general operations of the Fund." Each country would appoint a governor and an alternate for the Fund and the Bank. The practical oversight of the Fund, however, would be in the hands of the Executive Board. The five largest members in terms of quotas would each appoint an Executive Director. At the time of Bretton Woods, these were the United States, the United Kingdom, the Soviet Union, China, and France. The structure thus resembled quite precisely the United Nations Security Council, with its five permanent members. Other members of the IMF would be grouped in constituencies to elect Executive Directors. A Managing Director, who was not to be a governor or an executive director, would be a nonvoting participant in the Board of Governors and would act as the Chairman of the Executive Board. Unlike the United Nations, there 52 INTERNATIONAL MONETARY COOPERATION was no specific obligation to reflect the membership in the national composi- tion of the institution's staff. Article XIII solved the location issue by requiring the principal office of the Fund to be in the territory of the member with the largest quota. The rule-based approach was a response to the memories of the Great Depression; and the agreements included other liberal lessons drawn from the experience of the 1930s. There should be adequate but guided international investment, since the failure of the U.S. private market after 1928-29 had been a major cause of depression. Such investment would in the first instance be the responsibility of the international Bank: especially in the very ambi- tious plan as formulated originally by White. Other nations passionately shared the view that major credit operations would be needed to restore the international economy. The U.K. experts responded to White's plans with the statement that "it is very fully recognized that loans from creditor countries to debtor countries in the early post-war period are essential to avoid widespread economic chaos and much needless human suffering; that without them no international monetary plan can have a fair start."52 By the time of Atlantic City and Bretton Woods, Keynes had become a major enthusiast for the Bank. The Bank would coordinate private invest- ment, as well as making its own transfers, in order "to see that international lending is a more wisely conceived plan than it was after the last war, and is not the ill-conceived racket that it was on that occasion."53 Keynes wrote to the British Chancellor of the Exchequer that the Bank held out an opportunity to make some of the losses and limitations the Clearing Union had suffered on its way to becoming the International Monetary Fund. It should become the vehicle of up to $2 billion U.S. loans, and would be essential to the rebuilding of Europe's economy, as well as for development financing outside Europe. "The Bank for Reconstruction," he concluded, using a significantly abbreviated version of its full title (International Bank for Reconstruction and Development), "deserves more lime-light than it has yet received."54 The version eventually adopted, with a Bank endowed with a $10 billion capital with 20 percent paid up, resembled closely Keynes's reworking of the original White plan. Certainly the most important ingredient of the Hullian vision of liberaliza- tion was the one that received least limelight at Bretton Woods: trade and the threat of protectionism. It had entered into Article VII of the Anglo- American Lend-Lease Agreement, of course, and into all discussions of convertibility, since exchange controls had been one of the most common of the 1930s devices for managing trade. But there was no specific institutional embodiment of the broad trading principles sketched out in Article I of the 2 "Prosperity Has No Fixed Limits" 53

Fund's Articles of Agreement. Only in December 1945, well after the end of the war, did the U.S. government launch an initiative for an International Trade Organization (ITO). By then it was too late. The wartime pressure for results had passed; U.S. trading partners demanded exemptions, and Congress felt alienated by their ingratitude. The proposed third Bretton Woods institution could not be realized in the form initially envisaged. What survived of the ITO initiative and the Havana Charter (March 1948) was the General Agreement on Tariffs and Trade (GATT), which had already been agreed by 23 countries in complex bilateral negotiations (123 in all) by October 1947.55 The fundamental GATT principles of avoiding quantitative trade restrictions (quotas) and extending the most-favored-nation (MFN) principle of multilaterality in trade relations provided an invaluable frame- work for bargaining. Initially, in the long negotiations at Geneva, this bar- gaining had taken primarily the form of bilateral deals, but these would subsequently be extended through the application of MFN treatment.

Success at Bretton Woods

Bretton Woods succeeded, at least in part, because it avoided the direct discussion of trade and the plans for ITO and transferred the debate to the monetary level, where agreement could conceivably be reached. But it still appeared to many as a miracle that the conference could reach any conclusion before its scheduled end on July 19, 1944 (in fact, it was extended for another three days). Was not the fundamental task of reconciling internationalism with national interest too great a mission? The Bretton Woods conference wove consensus, harmony, and agreement, as if under a magician's spell. Perhaps the spell had been created by the mundane realities of the immense busyness when 730 delegates from 45 nations as well as representatives of international organizations met in cordial cacophony (the International Labor Office, the United Nations Relief and Rehabilitation Administration, the Economic Section of the League of Na- tions, and the United Nations International Commission on Food and Agri- culture were all there). The participants met almost around the clock in overcrowded and acoustically unsuitable hotel rooms. Gradually exhaustion set in. Keynes wrote: "We have all of us worked every minute of our waking hours practically without intermission for what is now four weeks. ... At one moment Harry White told me that at last even he was all in, not having 54 INTERNATIONAL MONETARY COOPERATION been in bed for more than five hours a night for four consecutive weeks."56 On July 19, 1944, Keynes collapsed with a mild heart attack. The spell was also woven on the imaginative intellectual loom of the dominant British figure, the chairman of Commission II of the conference, Lord Keynes. The British economist Lionel Robbins thought that already in Atlantic City the hosts had "sat entranced as the God-like visitor sang and the golden light played round. When it was all over there was very little discussion."57 Some commentators, perhaps more cynical, perhaps more suspicious of the new American power, thought that the new consensus came as a result of force majeure and bureaucratic manipulation managed by the other "father" of Bretton Woods, Harry Dexter White. White's assist- ants as rapporteurs at the conference in practice ran the committees on which they sat.58 The need for speedy deliberation in addition created its own magic: the conference occurred just after the Normandy landings opened up the second front in Europe and the end of the European war came closer in sight. At the same time, the U.S. authorities looked for a satisfying outcome before the Presidential elections in November. Morgenthau told a strategy meeting preparing for Bretton Woods quite candidly that, "we felt that it was good for the world, good for the nation, and good for the Democratic Party, for us to move."59 White was equally insistent that the meetings had to take place before the American party political conventions of the summer.60 Finally, the diplomatic necessity of avoiding excessive specificity generated some near-magic illusions. Often Keynes felt distressed by the predominance of lawyers on the American side of the negotiating table. He expressed his bewilderment at "this lawyer-ridden country." He observed that "lawyers seem to be paid to discover ways of making it impossible to do what may prove sensible in future circumstances." "This plan," he once said, "seems principally designed to make a paradise for the lawyers." He derided the language used in the American drafts as "Cherokee," which he wished to contrast with the "Christian English" of his own felicitous writing.61 But there was a distinct point—which Keynes appeared to miss—to the tight legal language of the Bretton Woods agreements. Of course it frequently served to make points clear and unambiguous. But it also very usefully hid some important principles that could only be elucidated by examining the connections between the Articles. The most potentially controversial issue of all, the timing of the transition to a convertible exchange regime, was never dealt with explicitly at Bretton Woods. The text of the treaty was, as those charged with its implementation candidly recognized, "deliberately ambiguous," as the result of "voluntary misunderstandings" on the part of 2 "Prosperity Has No Fixed Limits" 55 the drafters. The U.S. National Advisory Council on International Monetary and Financial Problems (NAC), the institution that supervised and coordi- nated American external economic policy, later concluded "the obscurity of the language is deliberate."62 The American economist John H. Williams, a severe critic of Bretton Woods, commented on "the fundamental fact that national attitudes are very far apart, so much so that in efforts to get their plan adopted the experts have to engage in what comes dangerously close to double talk."63 The most striking example of the conference's use of legal complexity to mask an important point concerns the timing of the transition to convertible currencies. In this case, after the conference, a debate developed about the relation of parts of the Articles of Agreement to other parts, and the conse- quences for interpreting their meaning. The controversial issue of the speed of convertibility had frequently threatened to hold up Anglo-American accord before Bretton Woods. Britain believed originally quite confidently that Arti- cle XIV (on the transitional period) provided sufficient protection against the rapid imposition of a convertibility obligation as envisaged in Article VII of the Lend-Lease treaty. In the course of the preliminary negotiations, the British bargainers had added to the convertibility provisions of the Fund Article VIII safeguards that they believed would prevent a rapid liquidation of Indian or Argentine sterling balances.64 Article VIII, Section 4 on the convertibility of foreign-held balances laid down (under part (fc>)(v)) that the obligation did not apply "when the member requested to make the purchase is for any reason not entitled to buy currencies of other members of the Fund for its own currency." In other words, India was not to use any obligations under the Fund agreement to obtain dollars for its sterling balances. The British delegation became aware of the difficulties of interpreting the Fund Articles only after Dennis Robertson raised the question in a paper of July 31, 1944 (just after the close of the conference) with the title: "A Note on the International Monetary Fund (An Essay n Rabbinics)." Article VIII, Section 2(a) laid down that "no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions." Robertson believed that this imposed on members the "main and over-riding obligation" to restore convertibility, even if the country concerned were ineligible to use the Fund's resources and could not in consequence be obliged to accept convertibility as a precondition for Fund support. As the party in a chronic deficit position, as the result of the wartime alterations in industrial production and trade, and as the subject of the claims established by the holders of sterling balances, Britain would be almost hope- lessly damaged by such an interpretation of the Articles of Agreement. 56 INTERNATIONAL MONETARY COOPERATION

By September 1944, Keynes had come to advocate a British rejection of the treaty if Robertson's interpretation should prove correct.65 In fact, Argen- tina and India both sharply reduced their sterling balances in the early postwar years, but through bilateral agreements with the United Kingdom and not through the IMF; although India used Fund drawings to meet a demand for dollars that could not be satisfied by the conversion of sterling. On a second issue that had been the source of controversy between 1941 and 1944, automaticity versus the discretionary operation of the Fund, the Articles also contained a discreetly placed but quite definitive solution. One of the most important U.S. principles in the final days before the Bretton Woods conference met was to ensure that the new Fund had as much control as possible over the use of its resources.66 The U.S. NAC later argued that the combination of Article XX, Section 4(i) (the postponement by the Fund of exchange transactions if they were to be used contrary to the purposes of the Agreement laid down in Article I) and Article V, Section 5 (on the ineligibility to use Fund resources) provided a nearly cast-iron basis for Fund rulings on the circumstances in which the Fund's resources might be used. They constituted, according to the NAC, a "substantial defeat of the concept of automaticity." "Together they may be considered to have established reasonably adequate safeguards over the use of the Fund's resources."67

The great success of Bretton Woods derived fundamentally from the passion- ate and sincere belief of all participants that the postwar economic order should represent a new beginning. This vision was expounded most elo- quently at the inaugural session by the man appointed as Permanent President of the Conference, U.S. Treasury Secretary Henry Morgenthau. I hope that this Conference will focus its attention upon two elementary economic axioms. The first of these is this: that prosperity has no fixed limits. It is not a finite substance to be diminished by division. On the contrary, the more of it that other nations enjoy, the more each nation will have for itself. . . . The second axiom is a corollary of the first. Prosperity, like peace, is indivisible. We cannot afford to have it scattered here or there among the fortunate or to enjoy it at the expense of others. Poverty, wherever it exists, is menacing to us all and undermines the well-being of each of us. It can no more be localized than war, but spreads and saps the economic strength of all the more-favored areas of the earth. . . . We know now that economic conflict must develop when nations endeavor separately to deal with economic ills which are international in scope. To deal with the problems of international exchange and of international investment is beyond the capacity of any one country, or of any two or three countries. These are multilateral problems, to 2 "Prosperity Has No Fixed Limits" 57

be solved only by multilateral cooperation. They are fixed and permanent problems, not merely transitional considerations of the post-war reconstruction. They are problems not limited in importance to foreign-exchange traders and bankers but are vital factors in the flow of raw materials and finished goods, in the maintenance of high levels of production and consumption, in the establishment of a satisfactory standard of living for all the people of all the countries on this earth.68 The Bretton Woods meeting was the first conference to establish a perma- nent international institutional and legal framework for ensuring cooperation between states, requiring commitments by states to limit their sovereignty for the sake of cooperation and to observe specified rules in economic inter- course. In this it went far beyond any previous attempt: the 1922 Genoa conference that had examined conditions for the restoration of an interna- tional currency standard or the 1929 negotiations that had produced inade- quately prepared and conceptualized recommendations not just for a repara- tions plan but for an international bank (the BIS).69 Reaching such a level of agreement was an achievement both unprecedented and also unlikely to be repeated. When the economic statesmen of the world met in 1973-74 at the Committee of Twenty or in 1986 at the Group of Twenty-Four and envisaged themselves as engaged in the creation of "a new Bretton Woods," it was inevitable that they should be rapidly disappointed and disillusioned. Only at the end of a war that had required an all-out mobilization of resources, and only in the context of a fundamental consensus about overall economic objectives, could such an international project of supemational cooperation be accomplished. On some of the major and contentious issues—the convertibility of sterling balances and the future of European currencies—the success of Bretton Woods derived, as well as from the overwhelmingly appealing vision, from the creation of a body of international law pregnant with interpretative ambiguity. These ambiguities of course required resolution before the system could function as its founders envisaged, or indeed function at all. But the basis for activity had already been created by the new legislation. Bretton Woods also represented an assertion of optimism—a belief that there was a future and a promise. The new institutions—the International Monetary Fund, the International Bank for Reconstruction and Develop- ment, and the International Trade Organization—could only function if there were to be a substantial growth of world trade and prosperity. If the process could begin, the new institutions might help in securing the continuation of development. Without prosperity, however, the new institu- tions would be as helpless and as vulnerable as the Bank for International Settlements of the 1930s.