International monetary system

Source: Wikipedia, the free encyclopedia.

An international monetary system is a set of internationally agreed rules, conventions and supporting institutions that facilitate

Bretton Woods
in 1944.

Historical overview

See also: Reserve currency
Persian daric, an 8th-century English mancus, and an 18th-century Spanish real
.

Throughout history, precious metals such as

Asia Minor, from where its use spread to nearby Greek cities and later to many other places.[2]

Sometimes formal monetary systems have been imposed by regional rulers. For example, scholars have tentatively suggested that the Roman king Servius Tullius created a primitive monetary system in the early history of Rome. Tullius reigned in the sixth century BC – several centuries before Rome is believed to have developed a formal coinage system.[3]

As with bullion, early use of coinage is believed to have been generally the preserve of the elite. But by about the 4th century BC coins were widely used in Greek cities. They were generally supported by the city state authorities, who endeavoured to ensure they retained their values regardless of fluctuations in the availability of whatever base or precious metals they were made from.[2] From Greece the use of coins spread slowly westwards throughout Europe, and eastwards to India. Coins were in use in India from about 400 BC; initially they played a greater role in religion than in trade, but by the 2nd century they had become central to commercial transactions.[2] Monetary systems that were developed in India were so successful that they spread through parts of Asia well into the Middle Ages.[2]

As a variety of coins became common within a region, they were exchanged by

Jesus and the money changers. In Venice and the other Italian city states of the early Middle Ages, money changers would often have to struggle to perform calculations involving six or more currencies. This partly led to Fibonacci writing his Liber Abaci which popularised the use of Indo-Arabic numerals, which displaced the more difficult Roman numerals then in use by western merchants.[4]

When a given nation or empire has achieved regional

US dollar became the basis for the international monetary system, formalised in the Bretton Woods agreement that established the post–World War II monetary order, with fixed exchange rates of other currencies to the dollar, and convertibility of the dollar into gold. The Bretton Woods system broke down, culminating in the Nixon shock of 1971, ending convertibility; but the US dollar has remained the de facto basis of the world monetary system, though no longer de jure, with various European currencies and the Japanese yen also being prominent in foreign exchange markets. Since the formation of the euro, the euro has also gained use as a reserve currency
and a medium of transactions, though the dollar has remained the most important currency.

A dominant currency may be used directly or indirectly by other nations: for example, English kings minted the gold

dollarization
.

Until the 19th century, the global monetary system was loosely linked at best, with Europe, the Americas, India and China (among others) having largely separate economies, and hence monetary systems were regional.

polarity in international relations
. It was in the later half of the 19th century that a monetary system with close to universal global participation emerged, based on the gold standard.

History of modern global monetary orders

According to J. Lawrence Broz and Jeffry A. Frieden, the sustainability of international monetary cooperation has tended to be affected by:[5]

  1. A shared interest in currency stability
  2. Interlinkages to other important issues
  3. The presence of institutions that formalize the international monetary cooperation
  4. The number of actors involved, in particular whether one or a few powerful states are willing to take the lead in managing international monetary affairs
  5. Macroeconomic conditions (during economic downturns, states are incentivized to defect from international monetary cooperation)

The pre-WWI financial order: 1816–1919

Main article:
Gold Standard § Establishment of the international gold standard
British gold sovereign or £1 coin was the preeminent circulating gold coin during the classical gold standard
period. of 1816 to 1914

From the 1816 to the outbreak of World War I in 1914, the world benefited from a well-integrated financial order, sometimes known as the "first age of globalisation".

Scandinavian monetary union (Denmark, Norway and Sweden). In the absence of shared membership of a union, transactions were facilitated by widespread participation in the gold standard, by both independent nations and their colonies. Great Britain was at the time the world's pre-eminent financial, imperial, and industrial power, ruling more of the world and exporting more capital as a percentage of her national income than any other creditor nation has since.[8]

While capital controls comparable to the Bretton Woods system were not in place, damaging capital flows were far less common than they were to be in the post 1971 era. In fact Great Britain's capital exports helped to correct global imbalances as they tended to be counter-cyclical, rising when Britain's economy went into recession, thus compensating other states for income lost from export of goods.[9] Accordingly, this era saw mostly steady growth and a relatively low level of financial crises. In contrast to the Bretton Woods system, the pre–World War I financial order was not created at a single high level conference; rather it evolved organically in a series of discrete steps. The Gilded Age, a time of especially rapid development in North America, falls into this period.

Between the World Wars: 1919–1939

This era saw periods of worldwide economic hardship. The image is Dorothea Lange's Migrant Mother depiction of destitute pea-pickers in California, taken in March 1936.

The years between the world wars have been described as a period of "de-globalisation", as both international trade and capital flows shrank compared to the period before World War I. During World War I, countries had abandoned the gold standard. Except for the United States, they later returned to it only briefly. By the early 1930s, the prevailing order was essentially a fragmented system of floating exchange rates.[10] In this era, the experience of Great Britain and others was that the gold standard ran counter to the need to retain domestic policy autonomy. To protect their reserves of gold, countries would sometimes need to raise interest rates and generally follow a deflationary policy. The greatest need for this could arise in a downturn, just when leaders would have preferred to lower rates to encourage growth. Economist Nicholas Davenport[11] had even argued that the wish to return Britain to the gold standard "sprang from a sadistic desire by the Bankers to inflict pain on the British working class".

By the end of World War I, Great Britain was heavily indebted to the United States, allowing the US to largely displace it as the world's foremost financial power. The United States, however, was reluctant to assume Great Britain's leadership role, partly due to isolationist influences and a focus on domestic concerns. In contrast to Great Britain in the previous era, capital exports from the US were not countercyclical. They expanded rapidly with the United States' economic growth in the 1920s until 1928, but then almost completely halted as the US economy began slowing in that year. As the Great Depression intensified in 1930, financial institutions were hit hard along with trade; in 1930 alone, 1345 US banks collapsed.[12] During the 1930s, the United States raised trade barriers, refused to act as an international lender of last resort, and refused calls to cancel war debts, all of which further aggravated economic hardship for other countries. According to economist John Maynard Keynes, another factor contributing to the turbulent economic performance of this era was the insistence of French premier Clemenceau that Germany pay war reparations at too high a level, which Keynes described in his book The Economic Consequences of the Peace.

The Bretton Woods Era: 1944–1973

Main article: Bretton Woods system
Harry Dexter White (left) and John Maynard Keynes (right) at Bretton Woods

British and American policy makers began to plan the post-war international monetary system in the early 1940s. The objective was to create an order that combined the benefits of an integrated and relatively liberal international system with the freedom for governments to pursue domestic policies aimed at promoting full employment and social wellbeing.

trade deficit, which undermined confidence in the dollar. This, together with the emergence of a parallel market for gold in which the price soared above the official US mandated price, led to speculators running down the US gold reserves. Even when convertibility was restricted to nations only, some, notably France,[15] continued building up hoards of gold at the expense of the US. Eventually these pressures caused President Nixon to end all convertibility into gold on 15 August 1971. This event marked the effective end of the Bretton Woods system; attempts were made to find other mechanisms to preserve the fixed exchange rates over the next few years, but they were not successful, resulting in a system of floating exchange rates.[15]

The post Bretton Woods system: 1973–present

Main article: Washington Consensus
The New York Stock Exchange. The current era has seen huge and turbulent flows of capital between nations.

An alternative name for the post Bretton Woods system is the Washington Consensus. While the name was coined in 1989, the associated economic system came into effect years earlier: according to economic historian Lord Skidelsky the Washington Consensus is generally seen as spanning 1980–2009 (the latter half of the 1970s being a transitional period).[16] The transition away from Bretton Woods was marked by a switch from a state led to a market led system.[6] The Bretton Wood system is considered by economic historians to have broken down in the 1970s:[16] crucial events being Nixon suspending the dollar's convertibility into gold in 1971, the United States' abandonment of capital controls in 1974, and the UK's ending of capital controls in 1979 which was swiftly copied by most other major economies.

In some parts of the developing world, liberalisation brought significant benefits for large sections of the population – most prominently with

1991 crisis
.

Generally the industrial nations experienced much slower growth and higher unemployment than in the previous era, and according to economist Gordon Fletcher in retrospect the 1950s and 60s when the Bretton Woods system was operating came to be seen as a

golden age.[17]
Financial crises have been more intense and have increased in frequency by about 300% – with the damaging effects prior to 2008 being chiefly felt in the emerging economies. On the positive side, at least until 2008 investors have frequently achieved very high rates of return, with salaries and bonuses in the financial sector reaching record levels.

Calls for a "New Bretton Woods"

Competing ideas for the next international monetary system
System Reserve assets Leaders
Flexible exchange rates[18] Dollar, euro, renminbi
China
Special drawing rights standard[19] SDR
G-20, IMF
Gold standard[20] Gold, dollar US
Delhi Declaration[21][22]
 Currency basket BRICS

Leading financial journalist Martin Wolf has reported that all financial crises since 1971 have been preceded by large capital inflows into affected regions. While ever since the seventies there have been numerous calls from the global justice movement for a revamped international system to tackle the problem of unfettered capital flows, it was not until late 2008 that this idea began to receive substantial support from leading politicians. On September 26, 2008, French President Nicolas Sarkozy, then also the President of the European Union, said, "We must rethink the financial system from scratch, as at Bretton Woods."[23]

On October 13, 2008, British Prime Minister Gordon Brown said world leaders must meet to agree to a new economic system:

We must have a new Bretton Woods, building a new international financial architecture for the years ahead.[24]

However, Brown's approach was quite different from the original Bretton Woods system, emphasising the continuation of globalization and free trade as opposed to a return to fixed exchange rates.[25]

There were tensions between Brown and Sarkozy, the latter of whom argued that the "Anglo-Saxon" model of unrestrained markets had failed.[26] However European leaders were united in calling for a "Bretton Woods II" summit to redesign the world's financial architecture.[27]

Summit on Financial Markets and the World Economy
.

President Bush was agreeable to the calls, and the resulting meeting was the

2008 G-20 Washington summit. International agreement was achieved for the common adoption of Keynesian fiscal stimulus,[28] an area where the US and China were to emerge as the world's leading actors.[29] Yet there was no substantial progress towards reforming the international financial system, and nor was there at the 2009 meeting of the World Economic Forum at Davos.[30]

Despite this lack of results leaders continued to campaign for Bretton Woods II.

global financial crisis of 2008, and had suggested that the dollar may be superseded as the base currency of the Bretton Woods system.[31][32][33]

NGOs, called for the establishment of "international permanent and binding mechanisms of control over capital flows" and as of March 2009 had achieved over 550 signatories from civil society organisations.[34]

March 2009 saw Gordon Brown continuing to advocate for reform and the granting of extended powers to international financial institutions like the IMF at the April G20 summit in London,[35] and was said to have president Obama's support .[36] Also during March 2009, in a speech entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of the People's Bank of China came out in favour of Keynes's idea of a centrally managed global reserve currency. Dr Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes's bancor. Dr Zhou said that national currencies were unsuitable for use as global reserve currencies as a result of the Triffin dilemma – the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries' demand for reserve currency. Dr Zhou proposed a gradual move towards increased use of IMF special drawing rights (SDRs) as a centrally managed global reserve currency.[37][38] His proposal attracted much international attention.[39] In a November 2009 article published in Foreign Affairs magazine, economist C. Fred Bergsten argued that Dr Zhou's suggestion or a similar change to the international monetary system would be in the United States' best interests as well as the rest of the world's.[40]

Leaders meeting in April at the

Keynesianism, argued it was still too early to say whether a new international monetary system was emerging.[16]

On Jan 27, in his opening address to the 2010 World Economic Forum in Davos, President Sarkozy repeated his call for a new Bretton Woods, and was met by wild applause by a sizeable proportion of the audience.[42]

In December 2011, the Bank of England published a paper arguing for reform, saying that the current international monetary system has performed poorly compared to the Bretton Woods system. [43]

In August 2012 in an

Euro-zone crisis. He wrote that two failures to address European problems around German power had led to world wars in the 20th century and that the current crisis was also beyond the capacity of Europe, with Germany again at the center, to solve on their own. Accepting that leadership transitions were underway in both China and America, Scott called on all concerned—with Japan included with China and America—to begin organizing a global restructuring through the International Monetary Fund with possibly a Bretton Woods II conference as part of the process.[44] MarketWatch commentator Darrell Delamaide endorsed Scott's idea but concluded "unfortunately it's not likely to happen". He added first the example of the failure of Europe to address successfully the breakup of Yugoslavia without outside assistance as a reason for his endorsement. But he found U.S. presidential and Treasury Department leadership and IMF leadership dramatically lacking in the capacity to mount an initiative such as Scott proposed.[45]

See also

References

  1. ISBN 978-1-351-03464-7
    .
  2. ^
    ISBN 0-7141-0885-5
    .
  3. ISBN 1-4051-0061-3
    .
  4. ^ "The Ascent of Money , episode 1". PBS.
  5. ISSN 1094-2939
    .
  6. ^ a b Ravenhill, John (2005). Global Political Economy. Oxford University Press. pp. 7, 328.
  7. ^ Occasionally also called the golden age of capitalism in older sources, and also the first golden age of capitalism in later sources that recognise golden age that spanned approx 1951–73. A few economists such as Barry Eichengreen date the first age of globalisation as starting in the early 1860s with the laying of the first transatlantic cables between Great Britain and the USA.
  8. ISBN 9780674039087
    . Retrieved 2009-03-17.
  9. ^ Helleiner, Eirc (2005). "6". In John Ravenhill (ed.). Global Political Economy. Oxford University Press. p. 154.
  10. ^ Helleiner, Eirc (2005). "6". In John Ravenhill (ed.). Global Political Economy. Oxford University Press. p. 156.
  11. ^ Skidelsky, Robert (2003). "22". John Maynard Keynes: 1883-1946: Economist,Philosopher, Statesman. Macmillan. p. 346.
  12. ISBN 9780203930182
    . Retrieved 2009-03-17.
  13. ^ Helleiner, Eric (1996). "2: Bretton Woods and the Endorsement of Capital Controls". States and the reemergence of global finance. Cornell University Press.
  14. ^ According to Keynes: "In my view the whole management of the domestic economy depends on being free to have the appropriate rate of interest without reference to rates prevailing elsewhere in the world. Capital control is a corollary to this"
  15. ^ a b Laurence Copeland (2005). Exchange Rates and International Finance (4th ed.). Prentice Hall. pp. 10–35.
    ISBN 0-273-68306-3
    .
  16. ^ a b c
    ISBN 978-1-84614-258-1
    .
  17. ^ Fletcher, Gordon (1989). "Introduction". The Keynesian Revolution and Its Critics: Issues of Theory and Policy for the Monetary Production Economy. Palgrave MacMillan. pp. xx.
  18. ^ Mansoor Dailami (September 7, 2011). "The New Triumvirate". Foreign Policy.
  19. ^ David Bosco (September 7, 2011). "Dreaming of SDRs". Foreign Policy.
  20. ^ Jessica Naziri (September 1, 2011). "Gold standard comeback enjoys support". CNBC.
  21. ^ "Fourth BRICS Summit - Delhi Declaration". Indian Ministry of External Affairs. March 29, 2012.
  22. ^ Mitul Kotecha (April 14, 2011). "Guest post: Rupee can serve as a reserve currency too". Financial Times.
  23. ^ George Parker; Tony Barber; Daniel Dombey (October 9, 2008). "Senior figures call for new Bretton Woods ahead of Bank/Fund meetings". Archived from the original on October 14, 2008.
  24. ^ Agence France-Presse (AFP) (October 13, 2008). "World needs new Bretton Woods, says Brown". Archived from the original on October 18, 2008.
  25. ^ Gordon Brown (October 13, 2008). "PM's Speech on the Global Economy". eGov monitor. Archived from the original on September 11, 2009.
  26. ^ James Kirkup; Bruno Waterfield (2008-10-17). "Gordon Brown's Bretton Woods summit call risks spat with Nicholas Sarkozy". The Daily Telegraph. London. Retrieved 2008-11-16.
  27. ^ "European call for 'Bretton Woods II'". Financial Times. 2008-10-16. Retrieved 2009-03-17.
  28. ^ Chris Giles in London, Ralph Atkins in Frankfurt and,Krishna Guha in Washington. "The undeniable shift to Keynes". The Financial Times. Archived from the original on 2009-05-27. Retrieved 2009-01-23.{{cite news}}: CS1 maint: multiple names: authors list (link)
  29. ^ "US and China display united economic stance". Financial Times. 2009-07-29. Retrieved 2009-08-05.
  30. ^ Martin Wolf. "Why Davos Man is waiting for Obama to save him". The Financial Times. Retrieved 2008-02-12.
  31. ^ "Italy queries dollar's role in Bretton Woods reform". Reuters. 2008-10-16. Retrieved 2008-11-16.
  32. ^ Parmy Olson; Miriam Marcus (2008-10-16). "Bringing The Banking Mess To Broadway". Forbes. Archived from the original on September 6, 2020. Retrieved 2008-11-16.
  33. ^ Guy Dinmore (2008-10-08). "Giulio Tremonti: A critic demands a new Bretton Woods". Financial Times. Archived from the original on 2009-05-06. Retrieved 2008-11-16.
  34. ^ various - including Action Aid, War on Want, World Council of Churches. "Let's put finance in its place!". Choike. Retrieved 2009-03-18.{{cite web}}: CS1 maint: multiple names: authors list (link)
  35. ^ Edmund Conway (2009-01-30). "Gordon Brown warns of void left by collapse of global financial system". The Daily Telegraph. London. Retrieved 2009-03-17.
  36. ^ George Parker; Andrew Ward in Washington (2009-03-04). "Brown wins Obama's support for a shake-up of global regulation". Financial Times. Retrieved 2009-03-17.
  37. ^ Jamil Anderlini in Beijing (2009-03-23). "China calls for new reserve currency". Financial Times. Retrieved 2009-04-13.
  38. ^ Zhou Xiaochuan (2009-03-23). "Reform the International Monetary System". People's Bank of China. Archived from the original on March 27, 2009. Retrieved 2009-04-13.
  39. The Financial Times
    . Retrieved 2009-09-18.
  40. ^ C. Fred Bergsten (Nov 2009). "The Dollar and the Deficits". Foreign Affairs. Retrieved 2009-12-15.
  41. ^ "Prime Minister Gordon Brown: G20 Will Pump Trillion Dollars Into World Economy". Sky News. 2 April 2009.
  42. ^ Gillian Tett (2010-01-28). "Calls for a new Bretton Woods not so mad". Financial Times. Retrieved 2010-01-29.
  43. ^ Oliver Bush; Katie Farrant; Michelle Wright (2011-12-09). "Reform of the International Monetary and Financial System" (PDF). Bank of England. Archived from the original (PDF) on 2011-12-18. Retrieved 2011-12-15.
  44. ^ Scott, Hal S. (2012-08-15). "The Global (Not Euro-Zone) Crisis". International Herald Tribune. Retrieved 2012-08-16.
  45. ^ Delamaide, Darrell (2012-08-16). "Timid U.S., IMF leaving Europe in the lurch". MarketWatch. Retrieved 2012-08-16.

External links

Retrieved from "https://en.wikipedia.org/w/index.php?title=International_monetary_system&oldid=1217678148"