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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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4 most important ims things
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
#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)
1 what is the ims1
#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
2 the ims is highly interdependent
#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
2 the ims is highly interdependent1
#2 The IMS is highly interdependent

Primary Banking Centers

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

2 the ims is highly interdependent2
#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
3 a western phenomenon europe
#3 A Western Phenomenon: Europe

History:

  • European colonization
    • Portuguese exploration
    • British domination
      • Gold Standard
  • Post-WWII-US hegemony
    • Why?
    • How?
    • What happened?
3 a western phenomenon us hegemony
#3 A Western Phenomenon: US Hegemony

Why did the US assume hegemony after WWII?

  • Democracy
  • Trade partners
  • Allies
3 a western phenomenon us hegemony1
#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 hegemony2
#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 hegemony3
#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
3 a western phenomenon us hegemony4
#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
3 a western phenomenon us hegemony5
#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
4 historical advantages of gn
#4 Historical Advantages of GN

Historical Advantages:

  • Industrial Revolution
  • Colonization & Imperialism
  • Creation of Institutions
    • Post-WWII
    • IBRD
    • ECSC
    • G-5
4 historical advantages of gn1
#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
4 historical advantages of gn2
#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
4 most important ims things1
4 Most Important IMS Things
  • What constitutes the IMS
  • High level of interdependence
  • A Western Phenomenon
  • Historical Advantages of GN