THE INTERNATIONAL MONETARY SYSTEM

4 MOST IMPORTANT IMS THINGS

1. What is the IMS2. High level of interdependence3. A Western Phenomenon4. Historical Advantages of GN

#1 WHAT IS THE IMS The means for exchanging currency or

money between countries  Measures of monetary wealth of

countriesGross Domestic Product (GDP)Gross National Product (GNP)Country GDP GDP per capita

United States $14.5 T $47,500

China $10.1 T $4,700

Japan $4.3 T $43,250

India $4.1 T $1,400

Germany $3 T $42,500

EU $15.6 T $33,500

#1 WHAT IS THE IMS

Purchasing Power Parity (PPP)

Compares buying power from market to market

Big Mac IndexEssentially 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 http://www.joneslanglasallesites.com/gcf/wp-content/uploads/2011/08/GlobalCapitalFlowQ4.pdf

That’s about $1.1 T/ per day60% of global capital through 4

cities

#2 THE IMS IS HIGHLY INTERDEPENDENT

http://www.joneslanglasallesites.com/gcf/wp-content/uploads/2011/08/GlobalCapitalFlowQ4.pdf

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%

Primary Banking Centers

#2 THE IMS IS HIGHLY INTERDEPENDENT

Economic crisis in one country contagion Where it all began

Great Depression 1929Next stop

Mexico, 1980Why couldn’t Mexico declare bankruptcy?

Followed later by…Mexico 'Tequila Crisis' 1994'Asian Flu' Crisis 1997Russian 'Ruble Crisis' 1998 Argentina 2001Global Recession, led by US/ Europe 2008

#3 A WESTERN PHENOMENON: EUROPE

History:European colonization

Portuguese explorationBritish domination

Gold StandardPost-WWII-US hegemony

Why?How?What happened?

#3 A WESTERN PHENOMENON: US HEGEMONY

Why did the US assume hegemony after WWII?Democracy Trade partnersAllies

#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 burdenUnilateral support and control of

systemShort-term adjustments for

long-term rewardsBy 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

circulationLarge investment outflows by MNCsDeclining exports (more external

competition)Rising oil prices, cartel

#3 A WESTERN PHENOMENON: US HEGEMONY

Nixon responds to pressureDelinks the dollarSystem 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-USDSeveral former African colonies-euro

•Morocco, Ivory Coast, CameroonSome opt to adopt a foreign currency

Ecuador, Panama-USDEuropean microstates- euroZimbabwe—relies on rands, dollars, pounds

#4 HISTORICAL ADVANTAGES OF GN

Historical Advantages:Industrial Revolution Colonization & Imperialism Creation of Institutions

Post-WWIIIBRDECSCG-5

#4 HISTORICAL ADVANTAGES OF GN

Post-WWII InstitutionsInternational 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 GNEuropean Coal & Steel Community

(ECSC)Regional IGO of 6 countries formed 1951Purpose: reduce tariffs for tradePresent-day European Union (EU)

Now has 27 membersSignificance to IMS: led to coordinated

monetary policy with eurozone

Group of Five (G-5)Formed in 1985Purpose: 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. What constitutes the IMS2. High level of interdependence3. A Western Phenomenon4. Historical Advantages of GN