In the hot days of July 1944, while World War II was still raging, about 250 economists, lawyers and politicians from 44 nations gathered in the small village of Bretton Woods, N.H., to thrash out a blueprint for the world's money system.
In three weeks of meetings -- held in the unair-conditioned Mount Washington Hotel -- they produced an agreement that established the International Monetary Fund and the World Bank and set up a system of fixed exchange rates that lasted for almost 30 years, before it was formally abandoned in March 1973.
Despite delays caused by the Russians, who wanted to refer all questions back to Moscow for decision and did not in the end become members of the new IMF and World Bank, the participants at Bretton Woods wrapped up their work swiftly, taking only two or three days longer than scheduled, according to Edward M. Bernstein of the Brookings Institution, who was head of the U.S. technical staff. Delegates were helped by the advance work already done in more than a year of tough negotiations, mainly between the United States and Britain. Besides, they were under great pressure to hurry, since the hotel was booked to guests in late July, Bernstein remembers.
In contrast to today's international economic meetings, where journalists can outnumber participants, only about 50 or 60 news reporters ventured to the New Hampshire mountains for the Bretton Woods conference. They were given a daily background briefing by U.S. officials; a radio program announced the successful completion of the conference.
It took almost two years before the agreement was ratified by all the individual governments and the inaugural meeting of the IMF and World Bank boards of governors was held. But the outline determined at, "Bretton Woods" endured, and the term is used today as shorthand for the days of fixed exchange rates and more stable world finances that followed their implementation.
Those days have been recalled with increasing nostalgia and regret in the past year as the world economy and financial system has suffered through its biggest crisis since the 1930s. "When distress strikes, people often seek solace through an idealization of the past and a strong desire to reconstruct it," Citibank chief economists Leif H. Olsen said last week, describing as "rather careless reminiscences" many of the nostalgic references now made to the fixed exchange rate regime.
There does seem to be confusion over what people mean by a new "Bretton Woods." Six months ago, Treasury Secretary Donald T. Regan casually told reporters that the world monetary system needed an overhaul, but he emphasized that "we are not ready for another Bretton Woods."
Earlier this month, French President Francois Mitterand lectured ministers from the 24 major industrialized nations on the need for a new monetary system, calling specifically for a "new Bretton Woods." Now senior administration officials say President Reagan is prepared after all to endorse a study of a new Bretton Woods-style conference, if this comes up at the economic summit in Williamsburg next weekend.
French and American views on what a new monetary conference might produce probably differ widely. France is a strong supporter of stable, or fixed exchange rates, backed by government intervention in currency markets to determine the value of each currency in relation to others.
The United States, by contrast, has intervened only very rarely in currency markets since President Reagan took office. Treasury Secretary Regan has declared repeatedly that he is opposed to more frequent intervention and to any attempts to impose government-determined exchange rates.
It is possible, therefore, that Reagan's new willingness to consider a new monetary conference is a way of stalling demands from the French and others for fundamental reforms in the world financial and economic system, rather than a first step on the path towards them.
But the repeated calls for a new Bretton Woods do reflect a genuine and widespread dissatisfaction with the way the world money system now works.
Wildly fluctuating currency values, record high interest rates, world recession and, most recently, the collapse of confidence in international bank lending, were certainly not what was envisaged by those who set up the present currency arrangements in 1973. One of them, former West German chancellor Helmut Schmidt, wrote recently, "the present "world monetary system" does not deserve the name. At best, it is an unstable constellation."
Even Regan has said that swift and sharp currency movements are damaging the world economy. "We should work towards a system that comes up with more stability . . . we want to come up with a concerted effort to define the problem and then after the problem, the solution," he said last December.
These are two distinct aspects to the problems that have encouraged talk of another Bretton Woods. The first concerns exchange rates. Since the breakdown of the original Bretton Woods agreement, the dollar and other currencies have been floating; that is, they have been determined largely by market forces, rather than being fixed by government policy.
There is now a widespread view among experts that floating rates hurt world trade and economic growth by introducing tremendous uncertainty into business decisions. Although research has not turned up a link between volatile currencies and greater inefficiency, many people still believe that one exists.
The second, rather different, set of problems that make people yearn for the old days of Bretton Woods stem from the world banking crisis of the past eight months. Regan first broached the need for international moentary reform after he visited Brazil, one of the world's two biggest debtors, last year. Apparently struck by the effect on borrowing nations of the debt crisis, and by the likely difficulties of achieving the export growth that all must aim for, Regan called for a more systematized approach to helping nations through financial crisis, and for a wider look at the connections between trade and finance.
"We are meeting each crisis as it occurs or each set of difficulties but with no overall symmetry or system of how to handle these problems," he warned, adding, "How can the industrialized world import less and export more and the developing countries import less and export more and the less-developed countries import less and export more? How can the world do this simultaneously and still maintain any kind of international trading system?"
Under the Bretton Woods agreement, not only were currency values fixed, but balance of payments deficits were generally smaller than now and there was almost no commercial bank financing for the balance of payments. The huge volume of international capital that now dominates exchange markets, and the vast network of international bank loans to Third World nations such as Mexico and Brazil, did not exist.
Member nations running deficits on trade and other payments would first use their reserves of gold and foreign currency to cover the gap and then, if the deficits persisted, generally were forced to borrow from the IMF and to adjust their domestic economic policies so as to narrow their payments gap and hold their currency in line.
The changes since then, particularly the explosion of international bank lending and the growth in worldwide money transactions, rule out a return to the past, most experts say. During the 1970s, the genie was let out of the bottle, Regan remarked recently.
It probably could not be pushed back in again -- so that governments could once more control international capital markets, and guide the flow of finance from lending to borrowing nations -- without making the markets that lubricate the world's present trade and financial system freeze up.
As the opening chapter of the IMF's official history points out, the fund and the World Bank may never have been set up if it had not been for World War II. The war gave the designers of Bretton Woods a crucial advantage, by disrupting the existing system of world trade and finance and giving them time and opportunity to dream up a new one.
When the agreement was being designed in the early 1940s, memories of the Great Depression dominated economic thinking. The architects of the agreement -- principally John Maynard Keynes in Britain and Harry Dexter White in the United States -- were anxious to avoid a repetition of the so-called beggar-thy-neighbor policies of the previous decade. Using trade restrictions, export subsidies and competitive devaluations to make their own goods chaper compared with those produced overseas, nations tried to solve their domestic unemployment in the 1930s by exporting more and importing less. Instead they precipitated a spiral of declining trade and employment worldwide.
The currency arrangements enshrined in the Bretton Woods agreement were intended to stop countries from using currency devaluations as a means of boosting exports and restraining imports, unless they were in severe balance of payments deficit. Member countries were also discouraged from putting on currency restrictions, and the IMF, set up to oversee the new monetary rules, was to promote consultation and collaboration on all international money problems.
Each nation joining the IMF established a "par" value for its currency, with the gold price as the yardstick by which par values were measured. Members pledged to hold their currencies within 1 percent of their par values, unless the IMF found them to be in "fundamental disequillibrium" on the balance of payments.
The United States played the central role in the system, as it was the only nation that actually used gold freely to settle its bills. Other nations were then left to intervene in foreign exchange markets to make sure that their currencies stayed in line with the parity value against the dollar.
The central role for the United States was both a strength and a weakness of the Bretton Woods system. It made it simpler, as the United States in effect played central banker to the world. When the United States ran a balance of payments deficit, it exported dollars overseas by spending more on purchases of foreign goods, together with investment overseas, than foreigners spent here.
If the foreigners used the dollars they acquired to add directly to their official reserves of foreign currency and gold, then the United States had added to the total reserves, or international money, in the system. It was only when foreign nations converted their dollars into gold that the U.S. official reserves declined to match an increase in the reserves of others.
The weakness of the system was that when the United States no longer dominated world trading and financial transactions so completely, it became unable to carry the weight of securing the monetary system.
Other nations started to worry about having too many dollars rather than too few. They preferred to swap their dollars for gold rather than hold them as reserves. Increasingly successful exporters in Europe and Japan ate into the traditional U.S. trade advantage, while huge outflows of capital from the United States into overseas investments began in the late 1950s and continued in the 1960s, as Americans bought up companies around the world.
Accelerating inflation here during the Vietnam buildup made dollars even less attractive, while fast-growing overseas investment and expanding world trade increased the weight of private, as opposed to government, transactions in currency markets.
Moreover, there was no easy provision under the Bretton Woods system for nations to change their exchange rates, but differing domestic economic policies, leading to variations in trade performance and divergent rates of inflation, made currency adjustments inevitable in the end.
During the latter part of the 1960s, the United States became uneasy abut selling off its gold and others became less and less happy about holding dollars. Meanwhile, strains developed between European currencies, as successive governments became unwilling or unable to mold domestic policies to conform to the pressures of currency markets. The Bretton Woods system was beginning to crack.
As critics of the current Bretton Woods nostalgia like to point out, it did not last as long, nor was it as smooth to operate, as it may seem on looking back.
For one thing, in the immediate postwar period before the United States began to move into deficit, there was an acute shortage of dollars that the Bretton Woods agreement could not deal with on its own. As war-torn foreign nations wanted to buy more from the United States that they could earn selling here, the United States quickly built up an export surplus and Europe's reserves of gold and dollars shrank alarmingly as countries tried to maintain their currencies at their par values.
The Marshall Aid plan, entitled the European Recovery Program, put into effect between 1948 and 1952, enabled the European nations to build up their economies, providing U.S. grants and loans to supplement what they could earn for themselves.
After it stopped, other nations were still helped to limit their imports from the United States as they were allowed to delay for years the implementation of one key provision of Bretton Woods: full currency convertibility.
It was not until the late 1950s for Euroep, and 1964 for Japan, that these countries promised to buy their own currencies for dollars or another currency -- at par value -- whenever another government wanted to sell what it had earned through trade.
Before convertibility, for example, if an American company wanted to sell goods in France, it would either have to accept French francs and be unable to convert these into dollars, or to arrange to be paid in dollars. European and Japanese governments then could limit the amount of dollars that they allowed their residents to buy and spend on imports.
During the 1950s, most economists expected the dollar shortage to remain as a strain on the system. In fact, the opposite turned out to be true. As early as 1960, there was talk of a dollar devaluation in terms of gold to increase the competitiveness of U.S. exports and reduce the overall balance of payments deficit, caused by a net outflow of capital being invested overseas.
During the decade of the 1960s, the United States introduced restrictions on the flow of money out of the country and tried periodically to boost its trade position, while European nations first fought and then gave in to tremendous speculative pressure that forced devaluations in Britain and France and revaluations in Germany.
For a time after the revaluing of the German mark in late 1969, pressure against the dollar subsided -- but not for long. During 1971, it began again with a vengeance, U.S. gold reserves ran down, and on May 5, 1971, the West German central bank had to buy an astonishing $1 billion in the first hour of currency trading in order to stop the mark from rising outside its official trading margin against the dollar.
In response, West Germany and the Netherlands untied their exchange rates and began to float, allowing the market to determine their currencies' values. Japan announced a program to reduce its balance of payments surplus.
The United States insisted that the dollar's gold value would not change, but, by August 1971, was forced to reverse policy. President Nixon announced that the Treasury would no longer freely buy and sell gold, thus throwing away the yardstick for the fixed rate system.
In December 1971, the 10 major industrialized nations agreed on a new set of values for their currencies measured against each other. For more than a year after that, the United States and others struggled to hang on to stability while searching for a new money system. But, in the spring of 1973, first Japan, and then West European nations, finally set their currencies decisively afloat from the dollar.
The first oil price shock at the end of that year turned the world's trade and payments system upside down, and helped dash hopes of a quick return to stable currencies and organized world payments. The IMF's study group, officially titled the "Committee on Reform of the International Monetary System and Related Issues," decided in January 1974 that monetary reform would have to be "evolutionary."
Since then, of course, the world has changed dramatically. "Fixed exchange rates are impossible to maintain in today's world," Brookings economist Robert Solomon said recently. Schemes for transferring some Third World debts from commercial banks to governments or international institutions have been described as "crackpot" and "absolutely ridiculous" by some of those who would have to approve them.
But there is still room for reform and for increased cooperation. The key is likely to be whether the United States and other major nations are willing to forfeit some independence in domestic policy-making in order to stabilize exchange rates and systematize the treatment of foreign debt crises.
As Federal Reserve Governor Henry Wallich pointed out recently, "Growing world interdependence is not yet matched by growing ability or willingness to cooperate in dealing with the results of interdependence."