Question

How important were domestic political institutions in shaping the outcomes of the Bretton Woods argument? answer in depth.

Answer 1

The Bretton Woods institutions were founded in 1944. The World Bank would function as a development tool and the IMF would operate as a mechanism to prevent a new economic recession similar to that of the 1930s. As their main objective was to maintain global economic stability, they would work directed towards a dual role. The most important one was the diagnosis of creeping crises and their prevention, while the other was the direct and effective intervention in crises, when these could not be prevented. Over the years, the objectives of the institutions changed and their operation does not correspond to the formation of modern reality. In recent years, a debate has commenced regarding the effectiveness of the institutions and their role. The disharmony between the stated objectives and the practical implementation of programs has led to contradictions and inconsistent policies. This paper will examine the problems and challenges faced by the Bretton Woods institutions in the contemporary globalized world.

The Bretton Woods conference represented both an attempt to learn the lessons of the Great Depression (in the mind of the Democratic Party, i.e. of the New Deal), and a part of the preparation for peace and the post-war order. 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 it broke through the paralysis that had afflicted inter-war attempts at international cooperation. The World Monetary and Economic Conference held in London 1933 was generally seen as the last, and lost, opportunity to arrive at a settlement (see Clavin, 1991, pp. 489–527). 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 sub-committees. The Monetary Sub-committee dealt with financial issues and with currency stabilization, and the Economic Sub-committee with trade. The result of this division of labour 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’.4 This was patently a perfect recipe for a deadlock, in which trade and currency experts thought that the other side should be the one to take the first move. The fundamental cause of the intellectual 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. This was a specifically Democratic (especially southern Democratic) vision: its major champion was Secretary of State Cordell Hull. Hull had been a Congressman and then Senator .

The measure appeared in Washington as a sledgehammer to break the carapace of British Imperial Preference. The same language was used in Clause Four of the Atlantic Charter, drawn up in shipboard meetings on the ocean at the first visit of Winston Churchill to Roosevelt. The governments committed themselves ‘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’. Hull’s strategy for limiting protectionist impulses rested on two pillars. First, following what had become a standard political science interpretation of the origins of the Smoot–Hawley tariff and the disasters of depression-era trade policy, there was a need to limit congressional or parliamentary politics. The political scientist Elmer Schattschneider had shown how the tariff had changed its nature in the course of congressional debate, as individual parliamentarians added on measures to protect particular interests associated with their locality. The logic of this argument is analogous to the collective action mechanism suggested by Mancur Olson: an accumulation of small interests will lead to a sub-optimal outcome, as each small interest will see major gains in a protectionist measure, and the collectivity is happy to accept this, as the overall cost of each measure is relatively trivial. Olson’s suggestion is that only an over-arching articulation of a general interest can solve the collective action problem: in terms of concrete politics, this meant the strengthening of the executive and the presidency at the expense of the legislature. This was exactly the course Hull followed, with legislation (the Reciprocal Trade Agreements Act of 1934) that allowed the president to conclude bilateral trade treaties