Transcript International Monetary System

THE INTERNATIONAL
MONETARY SYSTEM
4 MOST IMPORTANT IMS THINGS
1.
2.
3.
4.
What is the IMS
High level of interdependence
A Western Phenomenon
Historical Advantages of GN
#1 WHAT IS THE IMS
 The
means for exchanging currency or
money between countries
 Measures of monetary wealth of countries


Gross Domestic Product (GDP)
Gross National Product (GNP)
Country
GDP
GDP per capita
United States $14.5 T
China
$10.1 T
Japan
$4.3 T
$47,500
$4,700
$43,250
India
Germany
EU
$1,400
$42,500
$33,500
$4.1 T
$3 T
$15.6 T
#1 WHAT IS THE IMS
Purchasing Power Parity (PPP)
Compares buying power from market to
market
 Big Mac Index

Essentially used to track inflation
 i.e. what can be purchased with a unit of
currency
 Compares currencies

#2 THE IMS IS HIGHLY INTERDEPENDENT
In 2011, $410.6 T flowed through the
system
 That’s about $1.1 T/ per day
 60% of global capital through 4 cities

http://www.joneslanglasallesites.com/gcf/wp-content/uploads/2011/08/GlobalCapitalFlowQ4.pdf
#2 THE IMS IS HIGHLY INTERDEPENDENT
Primary Banking Centers
Rank
City
2011
2010
% change
2010-2011
1
London
$ 24.3 B
$21 B
15%
2
New York
$19.2 B
$11 B
75%
3
Paris
$ 14. B
$11.3 B
24%
4
Tokyo
$ 13.9 B
$19.1 B
-27%
http://www.joneslanglasallesites.com/gcf/wp-content/uploads/2011/08/GlobalCapitalFlowQ4.pdf
#2 THE IMS IS HIGHLY INTERDEPENDENT
Economic crisis in one country contagion
 Where it all began

Great Depression 1929
 Next


stop
Mexico, 1980
Why couldn’t Mexico declare bankruptcy?
 Followed





later by…
Mexico 'Tequila Crisis' 1994
'Asian Flu' Crisis 1997
Russian 'Ruble Crisis' 1998
Argentina 2001
Global Recession, led by US/ Europe 2008
#3 A WESTERN PHENOMENON: EUROPE
History:
 European
colonization
Portuguese exploration
 British domination


Gold Standard
 Post-WWII-US



hegemony
Why?
How?
What happened?
#3 A WESTERN PHENOMENON: US HEGEMONY
Why did the US assume hegemony after
WWII?
Democracy
 Trade partners
 Allies

#3 A WESTERN PHENOMENON: US HEGEMONY
How did the US promote economic hegemony?
US
assumed UK’s previous role
Became central banker to free world
 Established gold standard

Fixed

Rate of Exchange
Each currency is fixed to the value of a particular
currency's worth in gold
 From 1840 until a little after WWI-based on British
pound sterling
 Start of Bretton Woods system (1944), gold standard
set at US$35=1 oz. gold
#3 A WESTERN PHENOMENON: US HEGEMONY
How did the US promote economic hegemony?
 US

as central banker to free world
Gold standard
 Foreign


Aid: IGOs, Bilateral
Marshall Plan, Truman Plan, IBRD
Rebuild WE and Japan; secure Turkey & Greece
 Military
Aid
 Investment through MNCs
#3 A WESTERN PHENOMENON: US HEGEMONY
Central banker= economic burden
 Unilateral support and control of
system
 Short-term adjustments for long-term
rewards
 By 1971, US is buckling under
pressure
#3 A WESTERN PHENOMENON: US HEGEMONY
What led to a strained US economy in 1971 ?
 Vietnam
draining economy
 American civil rights movement
 Post-war economies rebuilt
 Japan and Germany very strong
 Lots of US dollars held outside of US; not in
circulation
 Large investment outflows by MNCs
 Declining exports (more external competition)
 Rising oil prices, cartel
#3 A WESTERN PHENOMENON: US HEGEMONY
Nixon responds to pressure
Delinks the dollar
System moves from fixed to floating rate of
exchange
Floating rate harder on GS
Some opt to peg to a major currency

Belize,
Venezuela, Saudi Arabia-USD
Several former African colonies-euro
•Morocco, Ivory Coast, Cameroon
Some opt to adopt a foreign currency

Ecuador,
Panama-USD
European microstates- euro
Zimbabwe—relies on rands, dollars, pounds
#4 HISTORICAL ADVANTAGES OF GN
Historical Advantages:
 Industrial
Revolution
 Colonization & Imperialism
 Creation of Institutions
Post-WWII
IBRD
ECSC
G-5

#4 HISTORICAL ADVANTAGES OF GN
Post-WWII Institutions
 International
Monetary Fund
Created at the Bretton Woods with the
Bretton Woods Agreement in 1944
 Purpose: Monetary stability

 International
Bank for Reconstruction
and Development (IBRD)
Also Bretton Woods creation
 Present-day World Bank Group (WB)
 Purpose: Reconstruction (post-WWII);
Development

#4 HISTORICAL ADVANTAGES OF GN
 European



Regional IGO of 6 countries formed 1951
Purpose: reduce tariffs for trade
Present-day European Union (EU)


Coal & Steel Community (ECSC)
Now has 27 members
Significance to IMS: led to coordinated
monetary policy with eurozone
 Group
of Five (G-5)
Formed
in 1985
Purpose: coordinate monetary policy
 Group of 20 (G-20), replaced G-5 in 2009

Purpose: include EEs for monetary policy
coordination
4 MOST IMPORTANT IMS THINGS
1.
2.
3.
4.
What constitutes the IMS
High level of interdependence
A Western Phenomenon
Historical Advantages of GN