On October 15 – 17, 1994, over thirty founders and early leaders of the International Monetary Fund (IMF), the World Bank, and the General Agreement on Tariffs and Trade (GATT) gathered at Bretton Woods, New Hampshire, to examine critically the creation of these multilateral economic institutions, their adaptations over the last five decades, and their capacity to respond to current and future planetary challenges. The Bretton Woods – GATT System: Retrospect and Prospect after Fifty Years brings together over twenty of the most insightful papers produced for the Bretton Woods Revisited conference, which was convened by the Institute for Agriculture and Trade Policy.
The purpose of Bretton Woods Revisited was to foster a dialogue between the generations concerning the past, present, and future of the IMF, the World Bank, and the GATT. Our interest in these multilateral economic institutions is twofold: we believe that the best way to address global problems is through multilateral bodies, and we are concerned that a growing number of economic, environmental, and social problems are beyond the ability of the IMF, the World Bank, and the GATT to manage. We convened the Bretton Woods Revisited conference to educate ourselves and others about the history of these institutions and their capacity to respond to current and future challenges. Education about the IMF, the World Bank, and the GATT is the first step in determining how these institutions can be made more responsive to a new generation of global problems, or if they should be abandoned in favor of creating new multilateral bodies.
Few people are in a better position to analyze the IMF, the World Bank, and the GATT than the founders and early leaders of the Bretton Woods-GATT system. Not only do these individuals possess a wealth of firsthand knowledge about the history of these institutions, but also because of their five decades of experience they are in a unique position to analyze the capacity of the Bretton Woods-GATT system to meet today’s challenges. As we look toward the future, we are extraordinarily lucky to have their insights to draw upon.
This book would not have been possible without the help, encouragement, and support of a number of individuals. Ray Vernon and William Diebold encouraged me to edit the book and, each in his own way, suggested the book’s framework. Susan Aaronson promoted the book to Richard Bartel at M.E. Sharpe, Inc., who saw its historical and analytical worth. And Lessa Scherrer, Jean Carruthers, Steve Suppan, and Michelle Thorn helped with the book’s production here at the Institute.
I would also like to thank the five members of the Bretton Woods Revisited conference agenda committee for their hard and inspired work: in addition to Ray Vernon and William Diebold, Margaret Garritsen de Vries, Ray Mikesell, and Jacob Kaplan. Jamilia Suzanne is owed special thanks for her extraordinary effort coordinating conference logistics. Kate Hoff, Gigi DiGiacomo, Neil Ritchie, and Kristin Dawkins helped run the conference – on site and from Minneapolis. Rachel Breen helped raise money for the project. And Mark Ritchie, president of the Institute, had the idea to convene a conference featuring founders and early leaders of the Bretton Woods–GATT system. I would also like to thank the more than thirty founders and early leaders who participated in Bretton Woods Revisited for sharing their wisdom and experience with a new generation of globally oriented public interest leaders. It is a very great honor to have worked with them.
Finally, the Institute would like to thank the Ford, MacArthur, and C.S. Mott foundations, and the Foundation for the Progress of Humanity, for their generous support for Bretton Woods Revisited.
To all of you, thank you!
Minneapolis, May 1995
The fiftieth anniversary of the Bretton Woods-GATT system was marked more by criticism than by celebration. Of course, criticism of the Bretton Woods–GATT system is not new, but it reached a new level of intensity in 1994. During that year, the system was attacked by the right, left, and center; by government officials, academics, policy experts, and the media; by business, labor, and agricultural organizations; and by environmental, community, and consumer groups. Individuals as diverse as economist Milton Friedman, consumer advocate Ralph Nader, and former U.S. Secretary of State George P. Shultz criticized the system. Even the leaders of the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), and the General Agreement on Tariffs and Trade (GATT) – the institutions at the core of the Bretton Woods-GATT system – admitted that reforms were needed. So too did the heads of state of the world’s seven most industrialized countries, who announced that they would devote their 1995 annual Group of Seven (G–7) summit meeting to the question of reform. Not surprisingly, the concerns and reform proposals emanating from these individuals and groups were enormously varied. But most shared a common perception: that the IMF, the World Bank, and the GATT are not equipped to address a growing array of global problems that threaten the security of people and the planet. Perhaps this perception was best summed up by GATT Director General Peter Sutherland, who declared: »We have a structural deficit in the world economy, in terms both of the making of policies and of their execution.«(1)
When a consensus this broad and deep develops, there is usually something to it and with respect to the Bretton Woods–GATT system at the end of the twentieth century, there is.
Put simply, the IMF, the World Bank, and the GATT were created to address the global problems of the 1920s and 1930s, not the problems we face today. More specifically, these institutions were launched at the end of World War II to prevent the recurrence of four interrelated problems: the restrictive trade and exchange policies that followed in the wake of World War I; the worldwide economic depression of the 1930s, which was exacerbated by these policies; the rise of virulent forms of economic nationalism (including fascism), which emerged during the depression; and the consequent outbreak of World War II.
The founders of the Bretton Woods–GATT system sought to avoid these problems by creating international institutions that would promote the development of an open world economy. The primary goal of this economy was to encourage growth and international economic cooperation by allowing goods and capital to flow around the globe as freely as possible. The idea that an open world economy would lead to global growth and international cooperation was rooted in the founders’ faith in classical liberal economics – a theory that holds that open global markets promote international prosperity and peace, the former by rationalizing the international division of labor and thereby increasing global production, the latter by generating a common worldwide interest in growth.(2)
This faith in classical liberal economic theory was reinforced by the experience of the relatively open world economy of the nineteenth century, an economy that contributed to levels of global economic growth that were unprecedented up to that time, and to a century of relative peace among the world’s Great Powers.(3)
Finally, the notion that an open world economy would help overcome the problems of the 1920s and 1930s was strengthened by the emergence of the »welfare state« in the leading Allied countries: the conventional political wisdom at the end of World War II was that nation states, at least in the advanced capitalist countries, would use their power to mitigate the negative domestic consequences of open global markets, mainly through the pursuit of robust employment and social policies.(4)
The idea that an open world economy would be the best form of global economic organization for the post–World War II world found its practical expression in the three institutions at the core of the Bretton Woods-GATT system: the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), and the General Agreement on Tariffs and Trade (GATT). The IMF was designed to promote an open world economy by encouraging monetary cooperation, currency convertibility, international liquidity, and the elimination of exchange restrictions, all of which are vital to the expansion of foreign trade and investment. The World Bank was established to encourage foreign investment directly by providing guarantees to private investors, participating in private loans, and, when private capital is not available on reasonable terms, investing its own capital. The GATT was designed to promote an open world economy by providing a set of rules for international trade liberalization on a multilateral basis.
In sum, the overriding goals of the IMF, the World Bank, and the GATT were to prevent a recurrence of the nightmare of the interwar period – a period that has been called »The Age of Catastrophe.«(5)
They were designed to do so by promoting global economic growth and international economic cooperation through the creation of an open world economy, no more and no less. And while major changes have occurred in these institutions since World War II (including the reorientation of the World Bank from Western Europe to developing countries in the early postwar period; the collapse of the IMF’s fixed exchange rate system in the early 1970s; and the recent transformation of the GATT into the World Trade Organization (WTO), but these changes have done relatively little to alter the basic goals of the Bretton Woods-GATT system.
Given these goals, it is safe to say that five decades after its creation, the Bretton Woods–GATT system has achieved its primary objectives. As the twentieth century draws to a close, open global markets have emerged as the central organizing principle of the world economy. Furthermore, while global economic growth has slowed somewhat since the early 1970s, taken as a whole, the post–World War II period has recorded the highest rates of growth in history. Moreover, no major wars have erupted among the principal countries at the center of the system. And while economic nationalism has gathered some steam over the last two decades (particularly in the field of foreign trade), it bears little resemblance to the virulent strains of the 1930s. Thus, judged in terms of overcoming the problems of the interwar period, the Bretton Woods–GATT system must be deemed a success.
Yet as we look at the first fifty years of the Bretton Woods-GATT system, it is difficult not to be struck by the extent to which the institutions at its core have been unable to deal with a new generation of global problems, some of which have emerged from the successful operation of the IMF, the World Bank, and the GATT themselves. Among the most significant of these problems are:
∙ the gradual loss of governmental control over a wide range of domestic policies due to international economic integration and the concomitant intensification of global competitive presswes on national economies;
∙ the explosive growth of multinational corporations, which now account for a larger share of global production than ever before but remain unregulated at the international level;
∙ the growing environmental crisis, including pollution, global warming, ozone depletion, deforestation, desertification, and a decline in biodiversity;
∙ the increasing gap between rich and poor within and among countries; and,
∙ the globalization of currency and private capital markets, which are increasingly beyond the control of governments and central bankers.
While some of these problems are the natural outcomes of the successful operation of the Bretton Woods-GATT system, none were foreseen by the founders of the IMF, the World Bank, and the GATT. Nor were these institutions in any way designed to respond to these problems. Given this, it should come as no surprise to find the IMF, the World Bank, and the GATT the targets of broad-based attacks for their inability to cope with the problems of the post–cold war era.
While it was the task of the founders of the Bretton Woods-GATT system to figure out how to resolve the problems of the interwar period, it is the responsibility of their grandchildren to figure out how to meet the global challenges of today. Whether or not the heirs of the Bretton Woods-GATT system meet these challenges – and by what means – will profoundly shape the world of their children and grandchildren.
The essays in this volume, by founders and early leaders of the Bretton Woods-GATT system, make a major contribution to the work of the »next generation.« They do so by examining the origins of the IMF, the World Bank, and the GATT; their adaptations over the last fifty years; and how these institutions have responded to contemporary challenges. Attention to these historical and institutional matters is fundamental to any attempt to figure out where we go from here.
This book is organized into three sections. Section I examines the history surrounding the creation of the Bretton Woods-GATT system. Section II examines the adaptations of the system over the last fifty years. And Section III explores the capacity of the IMF, the World Bank, and the GATT to respond to a new generation of global problems. Each section contains essays examining the institutions at the core of the Bretton Woods-GATT system, as well as essays exploring critical issues and developments that have affected the system’s creation and evolution.
1. Cited in Financial Times, January 30, 1 995, p. 4.
2. David Ricardo, one of the founders of classical economics, explains it this way:
Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together, by one common tie of interest and intercourse, the universal society of nations, throughout the ...world.
This brief statement of the classical theory of »comparative costs« (more commonly known as »comparative advantage«) may be found in David Ricardo, The Principles of Political Economy and Taration (New York: Dutton, 1965), p. 77.
3. As Karl Polanyi demonstrates in his classic study of the nineteenth-century world economy, the material interests of the Great Powers in the maintenance of an open world economy led to a century of relative peace among them. While wars were fought on the periphery of the system, major wars among the Great Powers did not occur. See Karl Polanyi, The Great Transformation (Boston: Beacon Press, 1944; rpt., 1957).
4. A small but growing literature exists exploring the connection between the creation of the Bretton Woods – GATT system and the welfare state. See for example, G. John Ikenberry, »Creating Yesterday`s New World Order: Keynesian ›New Thinking‹ and the Anglo-American Postwar Settlement,« in Judith Goldstein and Robert O. Keohane, eds., Ideas and Foreign Policy (Ithaca: Cornell University Press, 1993); John G. Ruggie, »International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order,« in Stephen D. Krasner, ed., Internaiional Regimes (Ithaca: Cornell University Press, 1983; rpt. l 989); and E. F. Penrose, Economic Planning for the Peace (Princeton: Princeton University Press, 1953).
5. Eric Hobsbawm, The Age of Extremes: A History of the World, 1914 – 199I (New York: Pantheon Books, 1994). The first part of this book, »The Age of Catastrophe,« examines the two world wars and the Great Depression.