T HE I NTERNATIONAL M ONETARY S YSTEM

4 M OST I MPORTANT IMS T HINGS 1. What is the IMS 2. High level of interdependence 3. A Western Phenomenon 4. Historical Advantages of GN

#1 W HAT 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) CountryGDPGDP 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 W HAT 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 T HE 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

#2 T HE IMS IS HIGHLY INTERDEPENDENT RankCity % change London$ 24.3 B$21 B15% 2New York$19.2 B$11 B75% 3Paris$ 14. B$11.3 B24% 4Tokyo$ 13.9 B$19.1 B-27% Primary Banking Centers

#2 T HE 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 W ESTERN P HENOMENON : E UROPE History: European colonization Portuguese exploration British domination Gold Standard Post-WWII-US hegemony Why? How? What happened?

#3 A W ESTERN P HENOMENON : US H EGEMONY Why did the US assume hegemony after WWII? Democracy Trade partners Allies

#3 A W ESTERN P HENOMENON : US H EGEMONY 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 W ESTERN P HENOMENON : US H EGEMONY 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 W ESTERN P HENOMENON : US H EGEMONY 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 W ESTERN P HENOMENON : US H EGEMONY 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 W ESTERN P HENOMENON : US H EGEMONY Nixon responds to pressure Delinks the dollar System moves from fixed to floating rate of exchangefixed 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 H ISTORICAL A DVANTAGES OF GN Historical Advantages: Industrial Revolution Colonization & Imperialism Creation of Institutions Post-WWII IBRD ECSC G-5

#4 H ISTORICAL A DVANTAGES OF GN Post-WWII Institutions International Monetary Fund Created at the Bretton Woods with the Bretton Woods Agreement in 1944Bretton Woods Bretton Woods Agreement Purpose: Monetary stability International Bank for Reconstruction and Development (IBRD) Also Bretton Woods creation Present-day World Bank Group (WB)World Bank Group Purpose: Reconstruction (post-WWII); Development

#4 H ISTORICAL A DVANTAGES OF GN European Coal & Steel Community (ECSC) Regional IGO of 6 countries formed 1951 Purpose: reduce tariffs for trade Present-day European Union (EU) European Union 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 Group of 20 Purpose: include EEs for monetary policy coordination

4 M OST I MPORTANT IMS T HINGS 1. What constitutes the IMS 2. High level of interdependence 3. A Western Phenomenon 4. Historical Advantages of GN