International Monetary Systems

1
International Monetary Systems

• Concerns
• Internal balance full employment/price stability
• External balance sustainable CA balance
• Imbalance intertemporal trade
• Imbalance downsides CA ltlt 0.CAgtgt0
• Gold standard in theory and practice
• Humian specie flow ? automatic adjustment
• Rules of the Game ? asymmetry sterilized gold
  inflows
• Central bank lending
• Inflexible Ms ? financial crises ? business
  fluctuations
• Deflation/inflation with vagaries of gold strikes
• Docile labor the double bluff
• Full employment not a priority

2
Europe Before the War The Double Bluff

• Thus this remarkable system depended for its
  growth on a double bluff or deception. On the one
  hand the labouring classes accepted from
  ignorance or powerlessness, or were compelled,
  persuaded, or cajoled by custom, convention,
  authority, and the well-established order of
  society into accepting, a situation in which they
  could call their own very little of the cake that
  they and nature and the capitalists were
  co-operating to produce. And on the other hand
  the capitalist classes were allowed to call the
  best part of the cake theirs and were
  theoretically free to consume it, on the tacit
  underlying condition that they consumed very
  little of it in practice.

3

• WW I Capital flight ? breakdown of gold standard
• Interwar turbulence
• Legacies of WW I
• Redrawn borders ? disrupted trade patterns
• Old debts/reparations
• Labor empowered The eight hour day
• Excessive claims ? hyperinflation
• The Lenin Dictum Lenin is said to have declared
  

4
The Lenin Dictum

• Lenin is said to have declared that the best way
  to destroy the capitalist system was to debauch
  the currency. By a continuing process of
  inflation, governments can confiscate, secretly
  and unobserved, an important part of the wealth
  of their citizens. they not only confiscate,
  but they confiscate arbitrarily As the inflation
  proceeds and the real value of the currency
  fluctuates wildly from month to month, all
  permanent relations between debtors and
  creditors, which form the ultimate foundation of
  capitalism, become so utterly disordered as to be
  almost meaningless and the process of
  wealth-getting degenerates into a gamble and a
  lottery.Lenin was certainly right. There is no
  subtler, no surer means of overturning the
  existing basis of society than to debauch the
  currency. The process engages all the hidden
  forces of economic law on the side of
  destruction, and does it in a manner which not
  one man in a million is able to diagnose.

5

• Halting return to gold ? Prelude to depression
• The Economic Consequences of Mr. Churchill ?
  General Strike
• US monetary expansion help to Britain ? Roaring
  20s
• Capital flow reversal ? European downturn
• Bubble and collapse
• World in Depression UK couldnt leadUS wouldnt
  lead
• Protection beggar thy neighbor
• British leave gold US defends gold standard
• Golden fetters
• Halting recovery monetary expansion/fiscal
  measures/rearmament
• The Bretton Woods System
• pegged to gold N 1 currencies pegged to
  elastic
• IMF Intl lender of last resort
• ? support pegs/allow devaluation when
  fundamental disequilibrium
• Impossible Trilogy
• Fixed rates/Independent M-Policy/Free capital
  flowsPick two
• Problems/breakdown Speculative attacks/
  Shortage/ Glut
• Nixon Economic Program Close gold
  window/surcharge/controls

6
Achieving Internal and External Balance

• Pegged rates
• Fiscal policy effective
• Exchange rate can be changed
• Devaluation/revaluation
• Tools
• Expenditure changing fiscal policy
• Expenditure switching exchange rate setting
• Need as many tools as you have objectives
• For external balance, XX
• G up ? Y up ? CA down unless E up (devaluation)
• For internal balance, II
• E down (revaluation) ? CA down ? Y down unless
  G up