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The International Monetary System

The International Monetary System. 4 Most Important IMS Things. 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

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The International Monetary System

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  1. The International Monetary System

  2. 4 Most Important IMS Things • What is the IMS • High level of interdependence • A Western Phenomenon • Historical Advantages of GN

  3. #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)

  4. #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

  5. #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 day • 60% of global capital through 4 cities

  6. #2 The IMS is highly interdependent Primary Banking Centers http://www.joneslanglasallesites.com/gcf/wp-content/uploads/2011/08/GlobalCapitalFlowQ4.pdf

  7. #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

  8. #3 A Western Phenomenon: Europe History: • European colonization • Portuguese exploration • British domination • Gold Standard • Post-WWII-US hegemony • Why? • How? • What happened?

  9. #3 A Western Phenomenon: US Hegemony Why did the US assume hegemony after WWII? • Democracy • Trade partners • Allies

  10. #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

  11. #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

  12. #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

  13. #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

  14. #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

  15. #4 Historical Advantages of GN Historical Advantages: • Industrial Revolution • Colonization & Imperialism • Creation of Institutions • Post-WWII • IBRD • ECSC • G-5

  16. #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

  17. #4 Historical Advantages of GN • European Coal & Steel Community (ECSC) • Regional IGO of 6 countries formed 1951 • Purpose: reduce tariffs for trade • Present-day European Union (EU) • 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

  18. 4 Most Important IMS Things • What constitutes the IMS • High level of interdependence • A Western Phenomenon • Historical Advantages of GN

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