Gathering towards the end of the Second World War in the New Hampshire resort town of Bretton Woods, 44 countries attended a conference aimed firstly at creating global economic rules that would promote stability and prevent another great depression, and secondly devising a strategy for rebuilding Europe once the war had ended.
With the war still raging, 730 delegates from all the 44 allied nations gathered at the Mount Washington Hotel in Bretton Woods for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944.
While most countries at the conference were engaged in a superficial exchange of views, the real negotiations took place amongst just a few. Prominent among these were the USA and the UK--represented by the world-renowned economist John Maynard Keynes.
In order to address the first aim of the conference (greater economic stability), Keynes wanted to create a mechanism called the International Clearing Union (ICU), to automatically balance governments experiencing trade and other payments deficits with those in surplus.
However, the US, a major "surplus" country at the time, dismissed Keynes' proposal, rejecting the idea that surplus (or creditor) countries were part of the problem and should therefore come under pressure to balance their payments. Instead, the US proposed the creation of an international monetary fund aimed at lending to countries in deficit--a mechanism that would essentially replace one kind of debt with another.
The US, being by far the most dominant player in the negotiations, got its way and the IMF was established. Its remit was twofold: first, to encourage financial stability by managing a system of fixed but adjustable exchange rates tied to the US dollar (backed by gold reserves) and second, to lend, on a short-term basis, to countries with balance-of-payments problems.
After failing to convince the US government over the ICU, the UK and other European negotiators concentrated on the second aspect of the meeting, the strategy for post-war European reconstruction.
On this, there were fewer political differences as the US government recognised the importance to the US economy of kick-starting growth and job creation in Europe. The result was the creation of the International Bank for Reconstruction and Development (IBRD), now more commonly known as the World Bank.
The other key decision made at the Bretton Woods conference concerned how the two international financial institutions (IFIs) would be governed. The job of determining financial contributions (with commensurate voting shares) in the IMF fell to the US secretary of state, Raymond Mikesell.
As Ariel Buira, director of the developing country "G24" secretariat in Washington DC, outlines: "The formula developed by Mikesell in 1943 had the political objective of attaining the relative quota shares that the US president and secretary of state had agreed to give the 'big four' wartime allies, with a ranking which they had decided. Thus, the US was to have the largest quota, approximately $2.9 billion, the UK including colonies an amount about half the USA quota, the USSR a quota just under that of the UK, and China somewhat less."
This was achieved through a confusing formula using various economic indicators. Mikesell later said that when he was questioned on how the distribution of quotas had been reached: "I gave a rambling 20 minute seminar on the factors taken into account in calculating the quotas, but I did not reveal the formula. I tried to make the process appear as scientific as possible, but the delegates were intelligent enough to...