The Bretton Woods blueprint for exchange-rate stability, hard convertibility, and international cooperation through the International Monetary Fund proved untenable from the start. In 1947, buoyed by an enormous stabilization loan given by the United States after the cessation of lendlease, Great Britain attempted to make sterling convertible into gold and dollars, as stipulated by the Bretton Woods agreement. This first real test of the agreement proved a dismal failure. There was an immediate run on the pound, and within months Britain used the entire proceeds of the loan. Current account convertibility of sterling was suspended, and no other major currency would attempt anything approaching hard convertibility until the end of 1958. The failed attempt to make sterling fully convertible was a major reason the United States decided to circumvent both the IMF and World Bank to provide direct aid to Great Britain and western Europe through the Marshall Plan. The sterling crisis also persuaded the Truman and Eisenhower administrations to accept widespread trade discrimination and monetary controls aimed at the dollar and dollar goods, in clear violation of the terms of the IMF's rules and regulations. Some of the monetary restrictions were lifted in 1958, but much of the trade discrimination against American goods continued for decades.
The pretense of IMF-monitored exchange-rate stability was abandoned in 1949, when Great Britain undertook a massive devaluation of sterling in order to make its exports more competitive and to write down wartime debts. Great Britain did not seek the approval of the IMF or any of its major non-Commonwealth trading partners. It did secretly consult with a small, high-level group of Truman administration officials led by Secretary of State Dean Acheson. The 1949 devaluation outraged officials from the IMF and the international community and threatened to undo the tentative movement toward European economic integration and the dismantling of worldwide trade and currency controls. The lesson learned by other nations was that there was no punishment for a unilateral devaluation if national interests warranted it. If one of the countries that helped design the IMF and the Bretton Woods system flouted its rules, how could other nations be expected to tow the line? The IMF was powerless to stop any transgression against its charter.
Perhaps the most shocking fact was that the International Monetary Fund, which was supposed to be both the source of liquidity for temporary payments imbalances and the enforcer of Keynes and White's international monetary rules, was almost entirely excluded from Great Britain's decision (which was made in close consultation with the Truman administration). In actuality, the IMF was emasculated in the 1940s and 1950s, with little authority or voice in international economics. Desperately needed liquidity was supplied to the world by direct American aid, through programs like the Marshall Plan, Point Four, and the Military Assistance Program. In fact, signatories of the Marshall Plan were strictly forbidden from using the IMF to correct payments imbalances. The Marshall Plan actually created a separate monetary system for western Europe, the European Payments Union, which had its own rules that flouted both the spirit and the letter of IMF regulations. The EPU allowed only extremely limited intra-European convertibility and permitted discrimination against dollar transactions. It was only much later that the IMF became a player in world monetary relations, a period that began when the United States used the IMF as a vehicle to make an enormous loan for Great Britain after the Suez crisis in 1956–1957.
"Disequilibrium" characterized the postwar IMF monetary system throughout the so-called Bretton Woods period. During the early postwar period, there were large payments imbalances between the devastated economies of western Europe and the United States. Large European deficits were to be expected, but they were made worse by the fact that currency par values were often established in an arbitrary manner. Although the IMF was supposed to approve initial par values and any subsequent changes, in actuality each country could pretty much establish whatever rate it wished. If exchange rates had "floated" on foreign exchange markets after the war, they might have found a sustainable rate that would have closed the payments gap with the United States more quickly and efficiently. But after rates were set, changes came in dramatic and disruptive devaluations, the direction of which was always known in advance. Extensive trade and capital controls that discriminated against dollar goods were established instead. In order to fill the large payments gap, the United States provided enormous amounts of aid (in fact, initially Marshall Plan disbursements by the United States were determined by the payments deficit of individual European countries). The adjustment process during the postwar period was not automatic but had to be managed by governmental policy and controls. This made the Bretton Woods period different from the gold standard and the free exchange-rate period in one important respect: because the adjustment process could only be accomplished by government intervention and policy, the system was highly politicized.
Comment about this article, ask questions, or add new information about this topic: