The International System

Beginning in the mid-19 th century, as world trade was expanding rapidly, a global economic system began to develop. With the advent of the railroad and the opening of the trans-Atlantic telegraph wire in 1866, the first round of globalization had begun. This first round, however, came to a pause in 1914 with World War I. It revived slightly in the 1920s, and then came to a halt in 1939 with the start of World War II. As Thomas L. Friedman states in The Lexus and the Olive Tree, "The first era of globalization and global finance capitalism was broken apart by the successive hammer blows of World War I, the Russian Revolution, and the Great Depression, which combined to fracture the world physically and ideologically."

After World War II, a new structure was set up that completely changed how the international commerce and political systems operated. This structure was based on the Bretton Woods System, developed in 1944 in Bretton Woods, New Hampshire, and the General Agreement on Tariffs and Trade (GATT), established in 1947. The agreement reached at Bretton Woods established two multinational organizations, the International Monetary Fund (IMF) and the World Bank. The IMF would maintain the order of the international monetary system while the World Bank would lend money to the European Nations to help them rebuild and later lend to developing nations. The agreement set forth a fixed exchange rate scheme, in which all nations would set an exchange rate based on the dollar.

The fixed-exchange rate system continued until 1973, when it broke down amid pressure of a dollar devaluation and increasing inflation in the United States.1 Replacing the fixed system was the floating exchange rate system that continues to this day. The value of currencies would fluctuate based on the supply and demand in the market and currencies would no longer be convertible to gold. While the floating system offered many advantages, it also created new possibilities for problems. These problems became apparent with the Mexican Peso devaluation of 1994, the Asian Financial Crisis of 1997 and 1998, and the Argentinean Collapse of 2001 and 2002.

The GATT, on the other hand, was an agreement intended to increase trade by reducing tariffs and usage of quotas. If a member country felt that another country had unfair trade barriers in place, it would make a report to the Geneva, Switzerland based GATT administration, which would investigate and act to pressure the offending country into removing the barrier. Data show that the GATT was quite successful. It continued until December, 15, 1993 when President Bill Clinton signed into U.S. law the Uruguay Round of GATT, which created the World Trade Organization (WTO). It is the actions of this organization, the WTO, that lead to much of the controversy that erupted onto the streets of Seattle in 1999 and Cancun in 2003. Many questions still remain for the organization such as what will be done about agricultural subsidies, currency volatility, worker exploitation, genetically modified food, and political corruption.