i. Monetary: currency; it will establish a system of exchange and how to measure that exchange – puts value on what is traded
ii. Finance: capital movement and regulation thereof in the international system (currency markets are one part of the financial system, and have been part of the financial system since early 1970s); FDI is another important aspect – long-term (equilibriating according to Keynes, considered productive, 12 months+ and is not speculative) - and short-term (disequilibriating according to Keynes, capital flowing out of countries to other countries and will disrupt the basic mechanisms of the system, which will affect economic policy. Short term is anything less than 12 months, speculative) Part of the Asian crisis was that the maturity date on trading things was 14 days (so speculative)
iii. B of P (balance of payments): How much finance is flowing out of a country versus into a country. Deficit v. surplus countries – comprised of the current and capital account
iv. Current Account: merchandise trade, services trade (balance of trade), investment income and payments (interest US is paying on bonds), remittances (money being paid to US, US foreign aid)
v. Capital account: FDI, short-term and long-term
a. Making the Current account and capital account (45-47) convertabilt (they didn’t) so they had to finance a lot of things by using dollars – loans under the Marshall Plan – but then keeping their currency separate from the dollars.
vi. Adjustment: adjust the interest rate to make money more plentiful or less plentiful (internal); lower the standard of living (internal); raise taxes (internally) -> if this is insufficient, then a country will have to borrow from outside sources, and the problem with that is conditionality.
vii. Devaluation: State driven, applies to Bretton Woods era – when a country decreases the value of its currency
viii. Revaluation State driven, applies to Bretton Woods era – when a country increase the value of its currency
a. when a country decreases the value of its currency, it is always in relationship to other currency. The amount of domestic currency that is needed to buy other currency.
b. When US pegged their dollar to buy and oz of gold -> that is the base line for devaluation/revaluation in Bretton Woods
ix. Appreciation; market driven in post-Bretton Woods era
x. Depreciation; market driven in post Bretton Woods era
a. Appreciation and Depreciation is theoretically the market driven for the value of the currency
xi. Managed Float: When the country buys currency to change the value of a currency. Implies cooperation with other major countries to make a currency be worth a certain amount (within a range)
a. collaboration occurs beforehand,
b. if a country wants to depreciate; make it more expensive for Americans to buy foreign currencies, they would have to put more dollars in the market by: 1) selling bonds to put more dollars in the system or 2) do so by selling dollars to put more dollars into the system to depreciate the dollar
c. With the central banks, they have to keep a certain amount on reserve
xii. Dirty float: A country will engage in manipulation of the value of its currency because it serves the economic national interest. Implies it is not cooperative and is most likely done unilaterally. So it will only be the powerful countries who can do this.
a. What takes place leading up to the Depression – would be considered dirty floats
b. When countries try to protect their domestic currency from changes that take place on the international markets -> taking action to prevent that from affecting domestic actions/politics/prices would be considered sterilization
xiii. Seignorage: Holder of reserve currency/key currency -> whoever prints that currency acquires economic benefits. With the US, the dollar being dominant since 1940s, acquires benefits from being the printer of the dollar.
xiv. Exporting inflation: In late 60s- entire 70s, the US exported inflation when it started to run a trade deficit. Basically the US runs a deficit in its balance of payments and it is supposed to adjust. And if it adjust internally, austerity packages are politically internally. So the US wants to adjust doing minimal changes to domestic policies. So it will depreciate/devaluate its currency – making exports cheaper and imports more expensive. Also for people that are holding dollars/central banks that are holding dollars, are holding US debt. So US can influence countries to accept their devaluation/deflation decision to adjust the value of its currency. So the dollars are worth less in other countries now.
a. Why does Nixon want to go off the gold standard? To give more flexibility in devaluating currency and letting others pay for it.
b. What did Bush administration do? The value of the dollar dropped during his first term/second term and did it intentionally.
II. Evolution of Monetary System: How the currency will be traded/set
i. Gold Standard (1870-1914)
a. Value of currency is pegged to gold
b. On demand, all countries who embrace the gold standard have to exchange gold-currency and currency-gold
c. Advantages: stable international monetary system, stable value for currencies, enhanced trading and investment prospects
d. Disadvantages: Theoretically, limited flexibility and autonomy (purpose of government = stable monetary policy influenced by internal market)
e. This is the first era of globalization
f. Central banks had to hold reserves in gold
ii. Gold Exchange (1914-1944)
a. Main difference from Gold Standard is that central banks can hold reserves in other currencies (and a little silver) as well as holding it in gold.
b. otherwise, the principles are the asme as the gold standard
iii. Bretton Woods (1945-1973)
a. Dollar is pegged to gold ($35/oz) and all other currencies are pegged to dollar
b. State driven
c. IMF -> exchange rates had to be agreed upon by IMF to make sure that currencies stayed within a certain range
d. Keynes wanted to make IMF lender of last resort, but US didn’t want it to be that, but it became that way.
e. Purpose of IMF -> to address balance of payments problems: 1) deficits (called repurchases) and 2) for currency stability
f. To the extent IMF has power and influence, it tends to have the most, because recipients of the loans have to deal with conditionality. When the loans the IMF gives are more than its subscription (pays into IMF), then conditionality starts to apply.
g. When US goes off gold standard in 71 the IMF decreases in prominence, and it doesn’t return to prominence until 82 with the Mexican Debt Crisis
iv. Post Bretton Woods (1973 – present)
a. Movement to floating or market driven exchange rates
b. Point of Helliner book: tendency to explain this transition due to technological/business developments – but Helliner says no -> it’s a political change.
c. In financial perspective – removal of capital controls
III. Politics of Finance
i. Capital Controls
a. Outlaw capital coming in
b. Put a tax on investment coming into country/deposit before you can invest
c. Say no short-term investing
d. removing currency from currency markets
e. any type of quantitative restriction/tax on money coming in – is a capital control
f. Tobin tax -> an idea that was proposed, tax on currency market (largest investors/investment houses) and then use the money that came in from the tax to help countries with short term balance of payment problems (1977). But in 1979 Volker becomes chairman of the Fed, and no way would he accept that. But idea came back in during Asian crisis and currently in development discussions. NGOs think that could come in almost $300 billion a year, and that money could be used to help with development problems; but then who controls/distributes that money?
g. For the most part US doesn’t use capital controls after WWII; but in 1963 the Interest Equalizaiton Tax was introduced which was about 10% tax on foreigners who invested in US, in 1964 this is extended to foreign held bank accounts and foreigners who take loans from US banks (this was considered fairly light capital controls) -> Johnson imposed some strict capital controls (limited amount of capital that MNCs can export) but for a very short time -> MNCs avoided this by using Eurocurrency markets
h. Germany limits amount of money coming into country; Mexico limits amount of capital that can flee the country. In debt crisis in Mexcio 1982, more $ leaves the country through capital flight of the elite than Mexico owes internationally.
i. Reparation of capital flight: If the American banks forced the Mexican elite to take out their money and deposit it in Mexican banks, then mexico would have enough money to pay off its loans. This is the same situation for Africa today – African leaders have more money in foreign accounts than the whole continent owes in loans and they aren’t forced to repatriate this money.
ii. Bretton Woods Era (44-73)
a. Keynes and White (discussion in chapter 2 of the competing systems)
i. Keynes: equilibriating (countries with a capital surplus would export it to areas with a deficit); short-term speculative flows were seen as doing nothing beneficial but long term investment would be a sign that capital is being exported; Fixed exchange system; central system idea; who should control industry? Products should be made where they are going to be consumed/domestically – to the extent possible all goods should be produced domestically. If you have FDI in that type of situation, there are going to be performance requirements; symmetry would be ensured by a charge on the creditors and that balance would be held with a clearing bank
b. Coalitions (late 20s and 30s)
i. what is the changing dynamic of the coalitions during this period? During gold exchange standard the dominant coalition is the banking community, particularly NY banking community – opposed to regulation. But with FDR, the Keynsians replaced the bankers as the dominant coalition (in US – labor, industrialists (more influential than labor) – the shift to manufacturing in international economy, academics/intellectuals). This coalition becomes significant for US tolerating capital controls.
ii. What are some of the more important agencies in US that were staffed with Keynsian economists – Treasury (Morgenthau) Commerce department (stacked with industrialists) Fed Reserve (people who like Keynsianism) -> Frieden makes this point in his book; FDR campaigns on liberal economics, but after he gets into office the coalition serves his political interest and there is the shift to Keynsianism
iii. Post Bretton Woods Era (73-present)
i. Eurocurrency markets helped lead to demolition of Bretton Woods.
ii. Origins: Bolshevik revolution and the concern of USSR that US will seize assets; so they put money into off-shore account in London. So by the 1960s businesses could use those accounts to trade without regulation; London allowed this because they wanted to be back on top as an elite power in international politics by allowing unregulated financial markets to be an elite – at least in finance. Also had the money from the OPEC countries with the oil crisis
b. Coalitions: shift to neoliberal coalitions and away from capital controls
i. Shift in coalitions that takes place – the Keynsian collation falls apart and the industrialists don’t support the regulation, and go form an alliance with the bankers. The bankers and industrialists pressure Johnson to allow participation in the Euromarket, and move away from capital controls.
ii. Friedman, taught at Chicago, has a student in George Schultz – who advises Nixon (sec Treas) and Reagan (Sec State) -> and he’s part of the neoliberal coalition. Kissinger is going to be the architect of a lot of Nixon’s policies, but he didn’t really care about economic policy (he was a realist, didn’t care about low-politics of economics). So it gave people like Schultz more influence in economic policy. Persuaded Nixon to go off the gold standard.
iii. US moves to liberalization in 1970s through Reagan.
iv. Britain has balance of payment problems in 1976, when labor was in power, and had to go to IMF, so they gave up capital controls and liberalized then with their balance of payment countries.
v. 1981-1983: France moves towards easing capital controls (Mitteron elected president from socialist); finance minister was Jacque Delores, became first president of EU. Delores says that if France wants to remain/attempt to be competitive, France has to lift capital controls.
vi. mid 1980s -> Germany; Japan (relax capital controls), Italy, Australia, New Zealand (we didn’t really know what it meant, we just did it: competitive pressure), Netherlands
i. In favor of a floating exchange rate/market driven exchange rate: What arguments did neoliberals make to go off the gold standard? Its more expensive to have a fixed system, introduces market distortions and inefficiencies – moving to floating exchange rate gives more policy autonomy – from neoliberal perspective: floating exchange rates are not the problem because if there is a problem with exchange rates that means there is a deeper problem in the economy, like the setting of prices. Any type of instability in the financial system is a symptom rather than a cause of the problem (cause = problematic domestic institutions or policy).
ii. For a fixed exchange rate/against a floating exchange rate: less stability, encourages speculation, relegates domestic issues to a subordinate position to a country’s international standing.
iii. Has this move to the floating exchange rates been advantageous or disadvantageous for US policy? By making the move to floating exchange rates it kept its seignorage position; may have led to some of these financial crises (helped exacerbate the conditions for crises) – in 1940s the Franklin bank failed which was small bank that made a bunch of international loans; 1982 Mexican Crisis, 1987 stock market crash. What can we include since peso crisis of 1994? East Asia crisis of 1997.
iv. Trade and Finance: Helliener says there are 5 important things to remember
a. Collective action dynamics – cooperation; in Bretton Woods the dynamics of finance made it easier for cooperation whereas in trade there was more disagreement
b. Central bankers are a nascent transnational epistemic community: they have similar beliefs, internalize the same norms and values -> central bankers in BW supported capital controls then lifting capital controls.
c. The different coalitions involved in both play different parts
d. Low domestic visibility of financial liberalization; trade is much more high profile.
e. the technical nature of finance people tend to zone out a little bit.
f. it’s difficult to maintain both liberal trade and liberal finance
What commission is meeting last week and this week? Greenspan is going to have to testify before a Special Commission to Investigate the Causes of the Most Recent Financial Crisis -> He’s right 70% of the time and wrong 30% of the time and said that he had limited influence (which is questionable) and his comments support the neoliberal logic – there’s nothing wrong with the system, there are problems with the fundamentals that are in the system that are causing the problems with the exchange rate.
Focus on how Helliner uses the change in policy and the support for HST he uses with Japan, US and Britain. Helliner says that changes are the result of political decisions.
i. Eichengreen: HST and the international monetary system
For the most part, HST doesn’t explain the changes in the international monetary system – international cooperation does.
He breaks it down into the formation/creation, operation, and decline of each system and the role of hegemon in each system.
HST can only be applied to issues of liquidity during interwar period; adjustment doesn’t work for any of the periods, lender of last resort HST works only for post-WWII era.
ii. Cohen: The Unholy Trinity
Trinity: fixed exchange rate, capital mobility, policy autonomy -> You can only have two of the three or else you run into HUGE balance of payment problems. It is impossible for states to achieve all three, you have to make exchanges of which ones. What are the options available to a state who might want to maintain this? They could form a monetary union with other states, and achieve all three. Or if countries are willing to submit to an external authority (like Sorros who wanted to create an international facility to monitor capital controls)
iii. Frieden: Exchange rate politics
Important because it provides a framework around which to look at groups that mobilize around exchange rate issues. And the fact that he is addressing the domestic issues at all.
iv. Goodman and Pauly: Obsolescence of capital controls
Are capital controls obsolete? And if so, why? For the most part, yes, but not completely. For Goodman and Pauly it would be hard because there is no coalition to support them and it invites evasion or regulation and integrated markets make it too easy to get around. The changes are systemic and so it is going to be difficult to completely reverse that.
Can you put together a coalition to engage in capital controls? Who would replace the industrialists?
v. Frieden : Book – Global Capitalism
Discussion of economic s and politics leading up to the collapse of the Gold Exchange and Gold Standard Systems/Bretton Woods – very good – globalizers victorious chapter too.
Function of an international monetary system: allows adjustment, liquidity (facilitate transactions and access to capital), to have a lender of last resort. So a state usually, but not always a hegemon, has to be willing to provide the financing for the system. Last function – confidence – the people participating in the system will think it works.