Evolution of the International Monetary and Finance System

Old Economic Order

100

By 1914, the currencies of most independent countries were pegged (or linked) to what?

The gold standard

200

List the features and assumptions of the Theory of the Adjustment Process under the gold standard (including the price-specie flow mechanism).

- Gold standard is a a self-regulating international monetary order - External imbalances would be corrected automatically by domestic wage and price adjustments - Gold exports should depress domestic wages and prices in such a way that the country's international competitive position - Assumed that most domestic money was gold coins

300

What are some of the features of the integrated financial and monetary order before the First World War?

- Most independent countries and colonized regions were linked to the gold standard (fixed exchange-rate regime) - Large cross-border flows of capital (short term capital movements and long term capital exports) - Monetary unions between some countries particularly in Europe in which currencies of member countries would circulate throughout each others' territories

400

Explain the reasoning of those who view changing domestic conditions as the primary reason for the evolution of the international financial and monetary system from the pre-1914 period to the interwar years.

The change in the international system is the result of the change in the distribution of power within states as the political order was transformed in many of them. The electoral franchise widened, the power of labor grew, and there was increasing support for interventionist economic policies. This changed the focus of many countries causing them to slowly abandon the "rules of the game."

500

Why was abandoning the gold standard attractive to some countries during the Great Depression and what insulated countries from speculative cross-border financial movements during that time?

- Quicker, less painful method for adjusting the country's wages and prices compared to foreign countries - Way to boost exports and curtail imports - Insulate the country for deflationary pressures emanating from the U.S. at the time - Allowed national exchange rate to fluctuate, which provided governments with great national policy autonomy to pursue expansionary monetary policies to address pressing domestic economic means - Capital controls reinforced the policy autonomy and insulated countries from speculative cross-border financial movements

Bretton Woods

100

What is the guiding principle/theory that influenced the Bretton Woods conference, specifically Keynes and White?

Embedded Liberalism (embedded liberal economic order)

200

What were the two financial institutions that resulted from the Bretton Woods Conference and what was each specifically designed to do?

1. The International Monetary Fund (IMF), which was to provide short-term loans to help countries finance their temporary balance of payments deficits. 2. The International Bank for Reconstruction and Development (World Bank), which was designed to provide long-term loans for reconstruction and development after the war.

300

In order to create a new international financial and monetary system, the architects at the Bretton Woods conference had to make consider its compatibility with what new development?

The trend of DOMESTIC POLICY AUTONOMY that was becoming increasingly significant following WWI.

400

List and explain the three impacts of financial globalization that did not attract as much attention as others at Bretton Woods.

1. The DISTRIBUTIVE IMPACT WITHIN COUNTRIES. Neo-Marxists make the point that financial globalization has given risen to an internationally mobile capitalist class, and has eroded the labor class. This new class maintains structural power, which has led to the internationalization of the state. 2. GENDERED IMPLICATIONS of financial globalization. The costs of globalization have often impacted women far more than men. Cuts in major areas of government spending typically affects women more. Even global financial markets are overwhelmingly made up of male traders. 3. The ENVIRONMENTAL IMPLICATIONS of global financial markets. Speculative and volatile international financial flows reward instant economic results and short-term thinking, which complicated the kind of long-term thinking needed to promote environmental values.

500

What concept do we further understand through the acts of Bretton Woods? (think Adam Smith)

Trade makes everyone better off. (comparative advantage)

Globalization of Financial Markets

100

When did the process of financial globalization begin (what decades)?

1960s

200

What is one explanation given for why financial globalization has eroded national autonomy, especially for poorer countries?

- Gives investors a powerful exit option to exercise against governments that stray too far from their preferences (Golden Straight-jacket) - Because poorer countries' economies are so small compared to the enormous size of global financial flows, they are especially vulnerable to the discipline of global financial markets - Wealthy citizens in poorer countries take advantage of the new global markets to park their assets in safer Northern financial markets; this flight capital is typically equal to or more than the country's external debts and if it repatriated, there would be no debt crisis

300

What are the factors at play in the impossible trinity open macroeconomics?

Monetary policy autonomy, cross-border capital mobility, and stable exchange rates.

400

What are two reasons given for the rapid financial globalization that began in the 1960s and accelerated into the 1970s?

1. The growth of global telecommunication networks during this period, which enabled money to be moved around the world much more easily than ever before. 2. Political choices by governments to support the emergence of a more liberal environment for cross-border financial flows (ex. the full dismantling of capital controls by many governments during the 1970s)

500

There is much debate in IPE over how financial globalization has affected national autonomy of governments specifically in the global south. What are the three counter-arguments given by analysts who believe that this impact of globalization has been exaggerated?

1. Southern countries faced with international financial crises are NOT ALWAYS DISCIPLINED by international bankers. 2. The policy autonomy of many countries is boosted by FLOWS OF REMITTANCES from rich to poor countries 3. The increasing significance of SOVEREIGN WEALTH FUNDS has given countries that control the largest funds a significant role in shaping the behavior of global markets.

Collapse of the Gold Standard and the Future of the Dollar

100

When did the gold standard collapse and who predicted it by highlighting its inherent instability?

August of 1971 Robert Triffin

200

Explain the Triffin Dilemma.

In a system where the dollar was the central reserve currency, the international liquidity (total gold, foreign exchange reserves, and Special Drawing Rights held by all countries) could be expanded only when the U.S. provided the world with more dollars by running a balance of payments deficit. By doing so, however, it risked undermining confidence in the dollar's convertibility to gold.

300

What is the primary reason for the dollar's enduring role in the global monetary system even after it ceased to be convertible to gold?

It is the fact that U.S. financial markets, particularly short-term markets, have remained among the most liquid, large, and deep in the world making the holding and use of U.S. dollars particularly attractive to both private actors and foreign governments.

400

What are three reasons the euro's challenge to the dollar has proven to be less significant than expected?

1. European financial markets are not yet fully integrated and no central equivalent exists to the uniquely liquid and deep U.S. Treasury bill market, which helps sustain the dollar's global role. 2. European governments have also shown little interest in actively cultivating the euro's international role beyond their immediate neighbors. 3. The euro's international use has been held back by uncertainties regarding the governance structure and the broader political credibility of the entire system.

500

What are Special Drawing Rights (SDRs) and what are the features of the proposal to strengthen the role of SDRs in the world economy?

Special Drawing Rights are an international reserve asset created by the IMF and distributed to member countries. The proposal by Zhou Xiaochuan (governor of the Chinese central bank) to increase the role of SDRs involves the issuing of SDR-denominated bonds, the establishment of a settlement system between the SDR and other currencies, and the creation of a fund at the IMF where governments can swap their existing reserve currencies for SDRs. It also involves valuing SDRs based on a wider basket of currencies (more than the current four).

Adjustable Pegs to Floating Exchange Rates

100

What caused the adjustable peg exchange rate regime of Bretton Woods to be replaced?

It was changed because of the heightened capital mobility and by consideration of a new system, a system of floating exchange rates.

200

Who were the the three leading economic powers in the late 1900s?

United States, West Germany, and Japan

300

How did government intervene in foreign exchange markets using the 'mercantilist' approach?

Governments would purchase foreign exchange (usually dollars) in order to keep the value of their currency low.

400

What were the two things that the G20 primarily focused on at their summits?

1. They focused primarily on international regulator issues designed to minimize future crises. 2. Being 'the premier forum for our international economic cooperation' and committing to a 'Framework for Strong, Sustainable and Balanced Growth'

500

What did supporters of the European Currency Unit (ECU) hope the ACU could do?

Supporters hoped that the ACU could reduce the influence of the dollar and bolster monetary co-operation by acting a unit of account for public and private actors in the region.