How India shaped international monetary policy at Bretton Woods
At the historic conference that spawned the IMF and the World Bank, the Indian delegation punched above its weight
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Business News/ Mint-lounge / Mint-on-sunday/ How India shaped international monetary policy at Bretton Woods
If the Indian delegation to the Bretton Woods conference of 1944 had an enduring legacy, it was the change in the treatment of “unilateral transfers" in the “balance of payments" accounting system. The balance of payments is the record of all international economic transactions. Among these, unilateral transfers are cross-border payments that do not correspond to any exchange of goods or service—essentially net receipt of remittance from emigrants or donor aid that is not backed by any exchange of goods or services or assets.
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In the current system of cross-border bookkeeping, unilateral transfers are recorded in the current account (income from trade and foreign business interests) and not the capital account (financial transactions that end up balancing the current account deficit or surplus) side of the transactions.
This can be confusing since such transfers are purely financial transactions ideally suited to the capital account. Here, I recount how a still colonized India tried to shape the international economic order—including the balance of payments accounting system—in 1944.
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The interwar years (1919-39) were a tumultuous period for the global economy. The easy flow of cross-border capital had a destabilizing effect and efforts to deal with them contributed towards causing the Great Depression of the 1930s. Therefore, any post-World War II global monetary system had to prevent a repeat of such flows.
The United Nations Monetary and Financial Conference in July 1944, better known as Bretton Woods Conference after its venue in New Hampshire, did just that. The treasury departments of both the US and the UK had been working on a plan for a post-war monetary system since at least 1942. John Maynard Keynes, the premier economist of his generation and arguably of the 20th century, had been the driving force on the British side.
The American plans were the brainchild of a Harvard-trained economist and a senior US treasury official, Harry Dexter White. Curiously, there had been rumours—dismissed at that time—about White being a Soviet spy. After his death, declassified FBI papers revealed that he was, in fact, a Soviet sympathizer who had been passing off secret information to Moscow.
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Reflecting the relative status of the two countries—the US was creditor to the world, while the UK was drowning in war-related debt—the final outcome was much closer to what White had envisaged. The International Monetary Fund (IMF), the World Bank and the global currency system that lasted until 1972 were the pillars of the new order.
Bretton Woods sought the expansion of global trade and the restoration of orderly exchange rates—both having been a casualty of trade barriers, opportunistic devaluations and volatile capital flows during the depression. To deal with volatile capital flows, the agreement at the conference obliged members to restrict the convertibility of their currencies to trade-related payments only.
Convertibility of currencies means the freedom to convert a currency into another foreign currency at the prevailing exchange rate. So, for example, an Indian exporter could convert his/her dollar earnings into rupees (since it is a trade-related transaction), but if an Indian wanted to buy an asset in America, he/she was not free to convert rupees into dollars to pay for that asset (since it is a purely financial transaction).
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The idea was to restrict speculative capital flows from one country to another that could potentially put pressure on the prevailing exchange rate.
Unilateral transfers are, however, purely financial transactions. This was a problem for India, and others such as China and Greece, for they received substantial amounts of remittances—a unilateral transfer—from emigrants. Restriction on their convertibility would have meant they could no longer send their money back home.
India and China successfully led an effort to classify such transfers as current account transactions so as to preserve their convertibility. The Soviet Union tried to scuttle the plan, as it was worried about outflow of capital disguised as remittance, but in vain. This is how the quirk of treating unilateral transfers as current account transactions in the current convention of balance of payments bookkeeping came into being.
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India had sent a five-member delegation comprising two Englishmen and three Indians, ably assisted by another Indian and an Englishman. Smaller than the ones sent by other countries—a total of more than 700 delegates represented 44 countries—what the contingent lacked in numbers, it made up in talent.
It was led by India’s then finance minister, Sir Jeremy Raisman, with then Reserve Bank of India (RBI) governor Sir Chintaman Dwarakanath Deshmukh (the first Indian to hold that post) being the second in command. The economic adviser to the government of India, Sir Theodore Gregory, came next, followed by two non-official delegates—Sir Shanmukham Chetty, a politician, and A.D. Shroff, an industrialist. Assisting them were B.K. Madan, then director of research at RBI, and Sir David Meek, the Indian trade commissioner in London.
Apart from the Philippine Commonwealth, India was the only colony represented at the conference and was noted for its active participation. India asserted its own identity and interest at the global stage—tirelessly fighting even with the Brits—despite not yet being independent.
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Standing at the threshold of independence, India was keen to cement a place on the global high table. The way to do that was to secure a reasonably large quota—the subscription paid by member states, which determines voting power and the capacity to borrow from the IMF—for India and a permanent seat on the executive board of the IMF and the World Bank.
An Indian delegate put forth the case for an Indian representation emphatically: “...India’s importance, India’s economic importance, should be recognised in international institutions of this character. It is not merely the size of India; it is not merely the population of India—and I may say that one out of every four of the people represented at this conference is an Indian—it is that on purely objective economic criteria, India feels she is an extremely important part of the world and will probably be an even more important part in the years to come..."
The nominal size of the quota was important as far as borrowing capacity in a crisis was concerned. However, India was rightly more concerned with the quota’s relative position among countries, since it determined the country’s place in the pecking order. The initially proposed quota of $300 million was found to be unsatisfactory for it was only half of what the Chinese were getting—yes, we have been at it for decades. India even tried to push for equality with a superpower like the Soviet Union, much to the chagrin of the Russian delegate.
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Keynes played a decisive role in ameliorating India’s concerns. India being still a part of the British Empire, and his own connection with India—he started his career at the India Office in London and his first book was Indian Currency and Finance— probably helped. He persuaded the Americans to raise India’s quota to $400 million, and reduce China’s to $550 million.
However, as there was no change in relative positions and India remained sixth in the hierarchy, Deshmukh urged India to walk out. At that point, the Soviet Union’s withdrawal—the IMF wanted countries to provide credible and detailed economic data and the Soviets refused—came as a boon for India, as it pushed up India’s ranking to fifth. Now, India was automatically entitled to have an executive director without going through a process of election.
India’s most immediate concern was the settlement of the pound sterling balances it had built up with the UK during the war. The UK had borrowed heavily from its colonies, mostly from India, to finance the war effort against the Axis powers. Given the destruction of the British economy during the war, the settlement of that debt was in limbo.
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Furthermore, given the magnitude of India’s balances, restrictions had been placed over the use and currency convertibility of those debts—essential foreign exchange reserves for India—to avoid a run on the pound. India wanted a decision on the convertibility of those balances.
Shroff likened India to “a man with a million-dollar bank balance... but not sufficient cash to pay his taxi fare". India pushed, but failed to find a clear resolution of that issue throughout the three weeks at Bretton Woods.
It had to be satisfied with an assurance by Keynes himself, that the issue would be settled in a fair manner at a later date. Indian concerns were more than legitimate, but given the scope of the conference, it was hardly the right place to resolve a bilateral issue of that nature. Both the countries would eventually reach a compromise a decade later.
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High on India’s agenda was also the goal to get the IMF to adopt the economic development of poor countries as one of its purposes. This was a precursor to post-Independence India’s role as the leader of the third world.
As a colonial administrator, finance minister Raisman’s role was commendable. He strongly objected to the conspicuous focus on the concerns of industrial countries—including his own home country—at the cost of underdeveloped agricultural countries.
India achieved modest success on this front. The document listing the purpose of the IMF remained largely unchanged. While India wanted a special mention for the needs of economically backward countries, the final document committed the IMF to promote trade and development for the benefit of all members. However, the purpose of the World Bank—drafted under Keynes’s supervision—was changed to lay greater emphasis on economic development.
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In a nutshell, Indian participation at Bretton Woods was a partial success. It gained a seat at the high table, at least until quotas were reset decades later when the Indian economy had fallen down the ladder. India was successful in putting poverty and development on the agenda of the World Bank, which was originally conceived as a fund to assist the rebuilding of a war-ravaged Europe—the World Bank was essentially the International Bank for Reconstruction and Development, until its expansion from 1956 onwards.
India’s strident efforts to settle the issue of pound sterling balances with the UK came a cropper, but given the terms of reference for the conference, it was a non-starter.
The role of the different personalities of the delegation was notable. The colonial administrators, especially Raisman, represented India with an unwavering focus on the country’s interests. Perhaps the only note of discord was when Deshmukh had threatened a walkout over the issue of quotas and Raisman had reacted sharply to the “unfortunate Indian tendency to non-cooperate".
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Half an hour later, he himself suggested that in case quotas remained the same, withdrawal would be the only honourable course. Accounts suggest that Raisman encouraged his Indian subordinates and allowed Deshmukh to emerge as the de facto leader of the team.
Deshmukh, who continued his illustrious career by taking over as finance minster in 1950, greatly impressed Keynes during the negotiations. Keynes singled out Deshmukh for praise, commenting on his “dignity, ability and reasonableness".
Shroff, then director of Tata Sons Ltd, was instrumental in putting forth India’s position on sterling balances. He once told the chair curtly that he had “heard and understood" the British delegate’s reply, but he did not find it “satisfactory".
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Chetty worked closely with Raisman in pushing for the inclusion development goals on the agenda and would go on to become independent India’s first finance minister.
In the first four decades since Independence, the Indian economy languished measurably behind its peers. Its influence on the global stage receded accordingly. It has recovered a lot of ground over the past two decades. That the size of the Indian economy was a decisive factor in securing a place on the IMF/World Bank executive board in 1944 only underlines why economic growth must be at the centre of the Indian diplomatic strategy.
Today, the need for a non-European/American managing director of the IMF is widely recognized. When Christine Lagarde finishes her tenure in 2021, India must aim to fight for that role—RBI governor Raghuram Rajan would be a worthy candidate—and help set the rules of the game.
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Postscript: Details of the conference presented here are largely based on three sources. The primary source is the transcripts of the Bretton Woods Conference that were discovered a few years ago. They were edited by Kurt Schuler and Andrew Rosenberg and published in 2013 as The Bretton Wood Transcripts. Secondly, the Barons of Banking by Bakhtiar K. Dadabhoy, a history of Indian banking, also gives an account of the Indian delegation’s time at the conference. Finally, The Battle of Bretton Woods is an excellent blow-by-blow history of the whole conference, focusing especially on the rivalry of John Maynard Keynes and Harry Dexter White.
Ankit Mital is an economist and a lapsed academic. He is currently writing a book on the 1991 economic crisis and liberalization.
His Twitter handle is @Molto_Vivace_88
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