Bretton Woods Forty Years Later

June 22, 1984

Report Outline
Current Monetary Ills
Exchange Rate System
Proposals for Reform
Special Focus

Current Monetary Ills

U.S. Banking Crisis and Fed Rescue Effort

An elite group of economists recently descended on the Washington Hotel in the small New Hampshire village of Bretton Woods to attend a conference on the international monetary system. Sponsored by the Federal Reserve Bank of Boston, the meeting celebrated the 40th anniversary of the landmark conference that produced the International Monetary Fund, the World Bank and the Bretton Woods system of fixed exchange rates that was to govern international finance for the next quarter century.

By returning to Bretton Woods, the participants may have hoped to receive some inspiration to help them solve the serious problems facing the international monetary system today. While recovery from the deepest recession since World War II is under way in the United States and several other industrialized countries, the developing nations are mired in debt. Rising U.S. interest rates threaten to push many of them into default against the world's largest banks, most of which are American. The system of floating exchange rates in place since the Bretton Woods system fell apart 13 years ago is also under strain, adding another measure of instability to the international monetary system.

The system's vulnerability to sudden crises was evident last month when the eighth largest U.S. bank, Continental Illinois National Bank and Trust Co., nearly went bankrupt after foreign depositors, accounting for 40 percent of the bank's operating funds, suddenly began to withdraw their deposits. Although Continental's officers denied them, all it took to bring the bank to the brink of collapse were rumors that it was in trouble as a result of bad loans made in the 1970s to oil-drilling companies. A $4.5 billion loan offer by the nation's 16 largest banks was not enough to halt the run. Only when the Federal Reserve System put together a $7.5-billion emergency rescue package and the Federal Deposit Insurance Corp. agreed to insure all the bank's deposits was Continental able to survive, its backing so badly shaken some observers predicted its evenutal merger with a larger bank.

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