Word Count: 2500IntroductionThe topic chosen for analysis is the Bretton Woods System Agreement important features, the reasons for its failure and what replaced the system. The world economy has been developing since early 20th century; many variations had been done previously before and at the beginning of the 20th century. Industrialization and development of world economies were previously very competitive and based on the countries resources. Trade within a regional block and outside the regional block commenced as industrialization geared with the production of new products. Many agreements were made previously before the Bretton Woods System; one of the most known agreements which eventually collapsed was the Classical Gold Standard of 1879-1914.
This gave rise to the establishment of Bretton Woods System Agreement after the World War II. The development of Bretton Woods System Agreement had its challenges and successes as well; the reason for the success of the Bretton Woods System Agreement is pegged on its main features identified in this discussion. The reason for its eventual failure are also identified, notably economist still differ on the various causes of the Bretton Woods System Agreement but some main reasons for the failure are known and discussed in this analysis.
The post Bretton Woods System Agreement was also another new era in the world economy, how the world coped with the post Bretton Woods System Agreement is also identified, a number of fiscal policies were adapted by IMF in order to suck the effects of the dissolution of the Bretton Woods System Agreement. Thesis statement- The main features of the Bretton Woods System Agreement, the reason for its collapse and the eventuality of the post Bretton Woods System Agreement era. Key wordsBalance of Payments- means the difference between the countries exports and its imports.
A negative means a deficit and a positive means a surplus. Deficit- The negative effect as a result of the balancing of countries exports and imports. Surplus- The positive effect as a result of the difference between exports and imports. Important features of the Bretton Woods Agreement The creation of Bretton Woods System was created in 1944; the goal of the system was to control every country from pursuing selfish policies which could negatively impact on other countries, such policies includes, competitive devaluation and creation of trade blocks which were the result of the world economic crisis in 1930s (Rajan, & Subramanian, 2004).
Two countries, Britain and the US played leading role in the creation of the Bretton Woods System. The US however dominated the system because of its relatively stable and superior military and economic muscle (Hondroyiannis, Swamy & Tavlas, 2009, p. 150). The leadership was taken away from the UK which was at that time still facing challenges as a result of the war which had significantly reduced its international influence.
The contributions of Keynes were rejected by the US and its new policies became the building ground of the new International Monetary Fund (IMF). The central idea US idea was referred to as the revolving fund (Hunt, 2008, p. 44). This mandated that each country contribute certain amount “quata” to this new fund system. Roubini (2006, p. 303) asserts that countries with balance of payment challenges could borrow or purchase the currencies from the revolving funds contributed. This essentially meant that countries facing deficits would be responsible for correcting the imbalance.
The UK was expected to be among the countries with BOP deficits as a result of the war and the US surplus as a result of its strong economic muscle. There are four main features of the Bretton Woods Agreement as identified below.