April 24, 2006 | posted by Michael Baxter in Uncategorized |

When the Bretton Woods agreement of fixed exchange rates was launched after the second World War, it was hailed as representing the end of the era of economic cycles.
But later, and despite the efforts of two of Britain’s greatest, Keynes and Churchill, it was seen by many as the instrument by which the final nail was banged into the coffin for UK’s economic dominance, ceding absolute power to the US.
The architects of the agreement were Henry Dexter of the US and Keynes (pictured). Today, John Maynard Keynes stands above the discipline of economics like a titan, in a similar way that Darwin stands above the idea of evolution.
At the time of of Bretton Woods, Keynes, like all the other world economists, had a nasty taste in his mouth. He was remembering the bad old days of the 1920s in the UK, the 1930s in the US, and the economic turmoil in Germany between the wars, when economic depression and mass unemployment had created a political scene ripe for revolution.
The gold standard was held up to blame by many. The system by which currencies were linked to the value of gold, and backed by the gold sitting in vaults was then considered to have had a catastrophic effect on the global economy.
A new system of cooperation was envisaged, and at Bretton Woods was launched.
And the twin pillars on which the supposed new era of economic stability was built were the IMF and World Bank.
In fact the economics institutions that were created were not entirely to Keynes’ way of thinking. His ideas were bolder and more far-reaching. He wanted to create a global reserve currency and set up a model in which countries with big trade surpluses bought more goods from the countries with large deficits.
The US distrusted the idea, especially as Keynes was British and Britain was near bankrupt, and his idea would have preserved much of Britain’s might.

Yet ironically 60 years on, the very idea Keynes came up with to help the UK would apply to the US today, as it now suffers from a massive trade deficit, in this case with China.
In the early days, the IMF was there to police the system of fixed exchanges. And in 1945, there were 4.03 dollars to the pound. This was reduced to 2.8 in 1948, and 2.4 in 1967, when Harold Wilson famously said this will have no affect on the “pound in your pocket.”
But with the collapse of Bretton Woods in 1971 and the move to floating exchanges, it became more like an old fashioned bank manager, with the power to make chancellors from powerful but struggling economies, such as the UK in the mid ‘70s, sweat as they hopefully and pleadingly held out the begging bowl.
Now the IMF is to change again. This time it is to let the likes of China and India into its club.
Gordon Brown is behind the idea. Yesterday he said: “We resolve to make the IMF more fit for purpose in a global economy and more able to address challenges that are quite different from those of 1945, when the IMF was created.” He added: “Specifically, we agree the IMF must focus more on crisis prevention as well as crisis resolution.”
From his lofty position astride his soap box, Mr Brown added: “This is not simply the IMF accepting responsibility for multilateral surveillance. This is about individual economies of the world … accepting that we have responsibilities to each other and that they have to be addressed.”
IMF Managing Director, Rodrigo Rato said: “I have spoken several times about the need for increases in voting power for some countries, including a number of emerging market economies, to ensure they have a role in the fund’s decision-making process that accords with their increased importance in the world economy#133;This is an institution based on the representation of countries based on their economic weight in the world economy. The world economy is not a frozen thing, it changes over time.”
Some are hailing the change in the way the IMF will operate as the most significant development since 1945. Just remember that the 1945 agreement was later considered to hasten the economic hegemony of the US and the loss of British status. Today’s economic problems, and in particular the massive US trade deficit with China, are in some ways similar to the economic balance between the UK and US 60 years ago.
A new look IMF could later come to symbolise the end of the US as the world’s dominant economic power.

Sources
For a fascinating 2 minute video news reel type broadcast on the formation of Bretton woods click here pbs
The Bretton Woods System Wikipedia
The Road to Bretton Woods:
Winston Churchill and Imperial Finance Winston Churchill.com