The Roman Empire evolved from centuries of hard labour and intellectual economic co-ordination such as their road networks of which the remains that has still survived in Europe and Asia to this present day is no comparison to the development of the Bretton Woods agreement of 1944.
Although, the old Bretton Woods agreement had a short life, which lasted from 1944 to 1971, the period of 1945 to 1970 can certainly be termed the 'Pax American' with regard to the management of the international economy. The period as mentioned above with regard to the Bretton Woods agreement is termed 'Pax American' because America was the main driving force behind the management of the international economy. Now, the questions we should be asking are how was America able to lead the international economy and was it successful?
Following the experience of disharmony during the 1930s let to the establishment of the Bretton Woods system after a NU's Conference that took place during July of 1944 at Bretton Woods, New Hampshire, USA. The objective of the conference was 'to discuss alternative proposals relating to post-war international payments problems put forward by the US, Canadian and UK governments. The agreement resulting from the conference led to the establishment of the International Monetary Fund and the International Bank for Reconstruction and Development', (Bannock, 1998). Although in his definition, Bannock (1998) mentions the establishment of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), also called the World Bank. Bannock (1998) failed to mention the establishment of the International Trade Organisation (ITO) later scraped, and the General Agreement on Tariff and Trade (GATT) was developed in its place.
After the Great World Wide Depression of the 1930s and the collapse of the gold exchange standard, which operated since the 1870s. Although, temporarily abandoned during the First World War, we can be certain that it would not be adopted in the near future. By abandoning the gold exchange standard and failing to adopt appropriate methods led to 'the collapse of the multilateral trade and payments system' (Kenwood, 1992), and further pushed nations to the brink of all out war. The Great Depression let to contractionary monetary behaviour by the most developed nations and their governments failed to recognise the early symptoms in order to reduce the deflationary pressures, which affected international capital and labour mobility.
Is it not also ironic that the developed nations call for free trade when there is a global stability, but when these nations experience any form of economic instability they call for the erection of massive trade barriers in the form of tariffs and quotas in order to protect their domestic industries? Well, that was exactly what happened during the 1930s, especially with the case of America.
As a result of the economic disasters of the 1930s and the failure of the inter-war international gold exchange standard, the delegates at the Bretton Woods Conference recognised that a successful replacement had to be established through international co-operation. During the conference Britain and America dominated the discussions and a stable monetary and payments system was seen as the necessary path for a successful multilateral trade regime. But this plan reflected the approach forwarded by the American delegates, submitted by Harry D White of the US Treasury, rather than the plan drawn by John M Keynes, who headed the British delegates.
However, the outcome of the negotiations provided successful framework for international financial system and capital mobility. The delegates devised a payments system and exchange rate mechanism based on fixed but flexible exchange rates system where all nations' currencies were pegged to the US dollar, which in tern was linked to gold. This was because the US dollar was valued at $35.00 per ounce of gold.
The dollar was convertible into gold on demand, therefore the dollar became a substitute for gold: the dollar was 'as good as gold' (McConnell, 1987). The exchange rate of those currencies would move 1 per cent above or below the par value and within the band of fluctuation, the nations' exchange rates were determined by market forces and each nation's government would intervene using monetary and fiscal policies to keep their exchange rate within the 1 per cent band.
During the interwar years, nations practised on devaluing their currencies in the hope that it would stimulate domestic employment and the export market, but there was no adequate international control or co-ordination. As a result, any one could practise currency devaluation in hope of gaining international competitiveness and at the end no one benefited from devaluation, because these 'beggar-thy-neighbour policies inevitably provoked foreign retaliation and often left all countries worse off', (Krugman, 1991).
Therefore, delegates at the Bretton Woods Conference agreed to establish the IMF in order to provide overall exchange rate stability, whereby disruptive currency devaluation could be avoided. As well as eliminating competitive currency devaluation, the IMF embarked on 'a multilateral system of payments based on a world-wide convertibility of currencies was to be achieved through the elimination of exchange controls' (Kenwood, 1992), where there were no restrictions on the conversion of one nation's currency into another for current account purposes.
The IMF's Article of Agreement was also to empower member nations to pursue domestic policies aimed at achieving full employment and balance of payment surplus through the application of monetary and fiscal policies. However, in the case of any members suffering from payments difficulties and related exchange rate problems were allowed to borrow short-term loans from the Fund to finance their economic activities.
This money had to be repaid by surrendering 'domestic currency to the Fund equal in value to the foreign currencies drawn', (Kenwood, 1992). As the system evolved, a number of conventions were established concerning the operation of the Fund. If borrowing began to exceed a nation's original quota, increasingly serious conditions would be imposed on any further borrowing and would be enforced by the Fund's officials. This made the IMF a highly complex system and some would argue for it to be made more decentralised.
The second institution that was set up at the UN's Conference in Bretton Woods during 1944 was the International Bank for Reconstruction and Development (IBRD), otherwise know as the World Bank. Although the Bank was set up during 1944, it did not commence operation until 1947.
The Bank was responsible for providing long-term finance and 'investment for productive purposes' (Ashworth, 1962), such as post-war reconstruction and development to member nations, so that they could rebuild their economic infrastructure such as roads, irrigation and energy intensive industries, etc., but finance was only available if the Bank's officers felt that the finance would strengthen the economy of that country.
This Bank was hardly used by the European and the North American countries, because the western countries received help from the US through the Marshall Plan, which was also known as the European Development Programme (EDP). This EDP helped the western nations to develop their economy. However, the effort of the World Bank in helping to 'finance post-war reconstruction, the Bank was later to help extend aid to the developing nations', (Kenwood, 1992).