441 again

debtors vs creditors

- people who owe debts (mortgages) - prefer depreiciation of interest rate - want to pay the least as possible on what they owe - people who give out credit - goal: earning more income by lending - prefer appreciation of interest rate since it gives them more money

open econ

-Free trade and gold standard at the same time -Markets are open, and goods and capital can flow in and out -Foreign competition comes and overflows the market (Bad harvest in Britain = unemployment) -Govts on gold standard unable to use monetary policy (open capital flows and fixed exR)

medium of exchange

- intl economy needs a medium of exchange - permits exchanges to go smoothly - market based system usually provided by govts (currency) - providing medium of ex: very attractive commodity (precious metals, gold & silver), national money widely desired, money issued by an intl organization

MBS

(MBSs) are simply shares of a home loan sold to investors. They work like this: A bank lends a borrower the money to buy a house and collects monthly payments on the loan. This loan and a number of others -- perhaps hundreds -- are sold to a larger bank that packages the loans together into a mortgage-backed security. The larger bank then issues shares of this security, called tranches (French for "slices"), to investors who buy them and ultimately collect the dividends in the form of the monthly mortgage payments. These tranches can be further repackaged and sold again as other securities, called collateralized debt obligations (CDOs). Home loans in 2008 were so divided and spread across the financial spectrum, it was entirely possible a given homeowner could unwittingly own shares in his or her own mortgage. but what happens with insured contrcacts on mortgage securities when bubble bursts. Europeans had bought some of these securities, so spreads there, broader int crisis started here.

tripartite agreement

- An international monetary agreement entered into by the United States, France, and Great Britain in September 1936 to stabilize their nations' currencies both at home and in the international exchange markets - Aims to stop the predatory devaluations - Not about fixed exchange rates, but coordinating to keep currencies stable - It displays US leadership in the world

bank notes act 1833

- Bank of England notes made legal tender - B of E exempted from usury laws - Allowed B of E to raise inR as high as they want - Enhancing confidence in the currency - Goal: create demand for B of E money everywhere in the country - Country banks also need to deposit with B of E notes - B of E now has leverage over all other banks in the domestic system

bank charter act of 1844

- New round of negotiations between govt and BofE -Prohibited new banks of issuing new paper money -Capped amount existing banks coulld issue -Commited BofE to purchase gold

legal tender

- Only thing that the govt will be taking as payment - Reference with Bank Notes Act of 1833 -Creates demand for BofE money -Country banks laso need deposits with BofE notes

nth currency problems

- System based on reserve currency (USD) - Where all other currencies are pegged to the USD - Because of that system, when US tried to devalue its currency vs gold, it didnt change its value vis-à-vis other currencies since they are pegged to USD not gold - US trying to break away from Bretton Woods system since needs to be managing the USD at intl level, but can't break away because of the Nth currency problem

crawling peg

- between a pegged currency and a floating one. - permits a more gradual appreciation or depreciation of a pegged currency : better in situation of hyperinflation than fully pegged exchange rate

ICU

-International Clearing Union -Was one of the institutions proposed at the Bretton Woods conference in 1944 -Aimed to become the regulation of currency exchange, which the IMF came to do -Would have been a global bank using its own unit of account called the 'bancor' -Nations would be incentivised to keep account close to zero as a percentage of funds would go to the Clearing Union's reserve fund -Encourages nations with surpluses to buy other nations' exports -Nations importing more than they export would have their currency depreciated against the bancor

Keynes Plan

-Keynes. Bisexual legend. Sounds like they want the same thing as White. British is no logner a creditor though, London important still, but surpassed by the United States. Problem of Brit persepctive, big balance of payments deficit. Never got out of WWI debt. Problems resurfacing. THinking like a debtor. International Clearing Union (ICU). Notion: practices developed by priv. banks before central banks around. Several priv. banks around, each has many customers, each does lots of business, in theory, Clearing Union sits between 2 and cancels out what is owed. Intl money backed by ICU. Just unit of Account ICU would use. How INTL transactions took place. Could manage how govs managed dom. money supplies. Would lend money to countries with deficits and tax countries who ran surpluses. Tax disincentives for countries running surplus. Attractive for Britain, able to borrow from ICU. US though doesn't want intl medium of exchange (USD is now), and tax surplus country, more like just tax the US. Disincentive to US primarily. Ikenberry: -Keynes proposes Int. clearing union: would have authority to create and manage an int. currency (25-30 billion USD worth) that would be used to manage intercountry balances. It sought to put pressure on surplus and deficit nations to balance, tax on excess reserves and such. conceptualized bancor, supranational currency. This newly created supranational currency would then be used in international trade as a unit of account within a multilateral clearing system—the International Clearing Union—which would also have to be founded.

populists

-Midwesterners bandon GOP to form the People's Party -Complain about tariff protection that complex good producers in the North are receiving -Wants to focus on monetary policy -Try to gather support from South and workers in North -Shows US divisions over monetary policy (finds its roots from Civil War) -Subtreasury plan not useful to midwesterners since their production is perishable

subtreasury plan

-Southerners want Subtreasury Plan -US govt to set up offices in the South -Find its roots in Civil War where North won thus South banking system is worthless (different currencies) -Farmers could take out loans in exchange for collateral (their production) -Doesnt work for midwesterners since their produciton is perishable

bancor

-The result of the Keynes Plan -Ultimately failed in favour of IMF -Would have created a supranational currency to be used as the international trade unit to account for multilateral clearing - the ICU -Would not be international currency but a unit of accounting between different nations and currencies to track assets and liabilities -Individuals would not be able to hold or trade in bancors

White Plan

-White Plan. Harry Dexter White, key features that emphasize what the treasury likes, Keynesian intervention. Treasury WANTS to intervene domestically. White maybe a spy for Soviet Union IMF. Sit in central position, help countries in BoP deficits. Want fixed ERs, don't like predatory devaluations. Each state puts some gold/currency in, and IMF uses it to lend to other countries who have bOp deficits. Conditions on the loan, expected to get out of the deficit. Give advice on how to change economic conditions to improve competitiveness, etc. Thinks it will be short term lending, just a few months. IMF promotes Keynesian everywhere. Low interest rates everywhere, inflation everywhere. Bad for banks, capital being constantly devalued. Supports Keynesian intervention at home. Why didn't Keynes like this? -Not a symmetrical arrangement. -Surplus countries won't need to talk to IMF, don't need help, don't want to be told not to run a surplus. EichengreeN: Whites' desire to have countries floating on own bottom and minimal US commitment. Resources could be transferred from surplus to deficit in limited amounts through IMF. IMF lacked until later the power to create int. reserves. Countries were left ot accumulate foreign ex to smooth trade fluctuations. US was basically only country not exercising capital controls so other currencies slow to taking int. role, thus CBs looking for foreign ex had few choices. ○ US wanted stability and avoidance of inflation to drive investment, Britain wanted monetary policy autonomy, everyone fixing to USD which is fixed to gold. Other countries could devalue relative to dollar US could only raise USD price of gold. Problem for US if trying to use ER to adjust BoPay. ○ US running constant surplus post WWII and Europe consuming off US aid, then their exporting capacity accelerates after reconstruction effort.

bureaucratic politics

1920s desire: fix ER and open capital flows. 1929: add domestic monetary policy autonomy -but 29 NY crash occurs in Nov., clashes with other goals. Trilemma first appears as bureaucratic politics: central bank defends gold standard, ministry of finance deals with fiscal problems (i.e. war debts, then unemployment). -continually paying interest, borrowing money, worried about interest. -unemployment, expanded suffrage, political voice that demands help. all have a say, all want different things, these conflicting policies make everything less effective. early 1920s, bank of england raises interest rates to restore confidence (its now devalued), 25 it attains pre war rate against the dollar, but at the cost of economic growth, triggers strikes. higher interest paid on government debt as well, suffrage expanded so gov. expenditure rises, bureucratic politics heat up. wants to regain foreign markets that have been taken over by the US or Japan, need to get back in, but exporters are hurt over the IR, high unemployment.

Single European Act

1986, capital controls removed amongst members. trying to keep fixed Ers, so pressures for countries to have similar monetary policy. Germany is the leader as mark is a key currency that others are tying to. When struggling, Germany assists with side deals/concessions to help fixing. Gets trade benefit,

cros default swaps

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default (by the debtor) or other credit event.[1] That is, the seller of the CDS insures the buyer against some reference asset defaulting. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, may expect to receive a payoff if the asset defaults. Let Lehman Brothers fail, then AIG had to pay off others who had bought cross default swaps. AIG too big to fail. Issue of deregulation, diff exposur e of firms, need to understand who they had contracts with and what kind...if AIG failed, rest of finan system at risk, gotta step in at some point

debt/equity swap

A debt/equity swap works the opposite way. Debt is exchanged for a predetermined amount of stock. like seizing assets. accept some payment in form of capital assets like undeveloped land, factories, equipment, etc. not great. gotta be healthy to absorb the losses.

LIBOR

After US policy changes (monetarism), intl interest goes up and US econ slows down, prime rates go up nearly 20%, as does LIBOR. Increases the cost of borrowing internationally. Inflation goes down, now deving countries need to pay back more than they borrowed since currencies are lower. while world econ is slowing down. lol. mid 1970s, prime at 5-7%. 2008: ○ LIBOR: london interbank offer rate § Prime rate, rate banks offer loans to each other in london § Tends to be base rate in intl contracts § More or less interest for debtor to pay...supposed to be set by banks... § Was actually being manipulated by big banks § Criminal aspects not just risk-taking

crime of 73

Author: Flandreau The Crime of 1873 was the notable omission of the standard silver dollar from the coinage law passed on February 12, 1873, and signed by President Ulysses S. Grant. This crime paved the way for the United States' adoption of the gold standard and was highly controversial, especially for those no longer able to turn their silver into legal tender. It shrunk the money supply and made it more difficult for people (especially farmers) to live Before, citizens owning silver could go to the mint to get it changed into coins. After 1873, there's a price to that. The act also eliminated the silver dollar (a bunch of coins). It was a decision which favoured the bankers on Wall Street and the British govt

embedded liberalism

BW, GATT era. Ruggie: Rules implement embedded liberalism -capture idea that they are doing something slightly contradictory. Undoing lots of damage of 1930s and intl level, create prewar intl economy with open economies and GS, lib principles at intl level BUT they dont want to let the markets run everything. Embed markets in some socially preferred outcomes. Keynesian intervention, markets have produced adverse consequences in the past. Market system but with much more intervention from gov to deliver desired outcome. Liberalism at intl level, but not domestic. - At the origin of M-F framework - Characteiristics: open trade, open intl investment flows, features of gold standard, principal of liberalism at intl level - Embedded: trying to embed markets into socially perferred outcomes (Keynesian intervention) - Author: Reggie trying to resolve mf

Gold Standard

Background: Structural realism concerns itself with the distribution of power within the anarchic international system, with states being the most important actors who value security and state capacity above all else. Bordo states that gold was an ideal monetary standard because it was a standard of value and ideal medium of exchange, meaning it permited exchanges to go smoothly and seeing that it was an attractive commodity and desired and recognized for its value across the world, gold was ideal. Bordo then states that the essence of the gold standard was a fixed mint price of national currency in terms of gold, for example, during the Bretton Woods era, one ounce of gold was equal to 35 USD. States would hold gold reserves and back their currency with their gold supply, which was determined by their money holding and earning habits, and a change to their money supply via arbitrage, trade, investment, etc., *capital flows* would balance out through Hume's Price Specie Flow Mechanism. Before Britain popularized the gold standard, states were either on silver standards, gold standards, or bimetallic systems. We can begin the story of the gold standard in Britain in 1816 when the Bank of England formally decided to back its notes with gold reserves. In 1816, Britain was ripe with assets and capital from industrial revolution practices and its usury laws, mandating low interest rates. The Bank of England historically had helped the government with its balance of payment issues, i.e. it had helped the government pay its debts, so the Bank of England came into some special privileges later. In 1816, The Napoleonic Wars had just ended, which had meant some trouble for Britain's country banks, which had proliferated during the Industrial revolution due to the low interest rate we spoke of earlier. Britain's country banks were intermediary, arbitrary banks that were not looked over by the government. Their credibility was questionable at best. Following the Napoloenic wars, citizens panicked and withdrew much of their money from these banks, causing many to fail and causing confidence in the sterling pound to depreciate. To counteract this confidence issues, the Bank of England in 1816 backs its notes with gold in order to create confidence in the pound and encourage foreigners to hold pounds. The country banks were still an issue, however, so the Bank Notes Act of 1833 further strengthened Bank of England's position and enabled it to defend the pound's value more effectively by making their notes legal tender, meaning it was the only currency the government would take, and any other person could request to be paid in Bank of England Notes. This act also made the Bank of England exempt from Usury laws, which enabled it to raise and lower interest rates as it wished, meaning the Bank of England can now promote appreciation of the pound, which would become useful. The Bank Charter Act of 1844 then prohibited new banks of issue and capped the amount of existing country banks could issue. This limited country banks' systems without causing widespread closings. With trade and monetary activity, the banks became smaller and smaller. Here, the Bank of England also committed to purchase gold, making currency and gold interchangeable, so anyone could request gold or the pound when withdrawing money. These practices created extreme confidence in Britain's pound, causing it to become a key currency, which according to Strange, occurs when a currency's investment holds, it is the most desirable currency in the international market, goods can be purchased internationally with it, and others are willing to accept it internationally. With Britain's investment practices during the industrial revolution and imperialist policies, states were often in large sums of debt to Britain, and now that Usury laws were removed, Britain could raise the interest rate or bank rate to pay its debts and resolve its balance of surplus issues. This ability to delay or deflect balance of payments issues, according to Cohen, is indicative of monetary power, autonomy, and influence. Because of Britain's great success with the gold standard, according to Flandreau, other states were inclined to move to the Gold Standard as well, such as France, Germany, and the United States. According to Frieden, Britain, as the hegemon and leader of international transactions, wanted to do transactions with states whose currencies were as stable and confident as Britain's pound. In combination to this, Flandreau mentions the desire to avoid transaction costs of shipping physical species, the instability of silver, and the stable fixed nature of such, so states began moving toward the Gold Standard once they were able to surmount switching costs. Flandreau states: Before then, most countries were on bimetallic or silver systems. France and Germany were both on bimetallic systems, and as trade increased in Europe, there was a desire to reduce transaction costs and ease trade. France's switch would be costly, costing over 1 billion Francs so it postponed its transition for technical reasons. Germany, too, was on a bimetallic system, and, following the Franco Prussian war, was endowed with enough gold to be able to afford the switching costs to a gold system. Predicting Germany's transition, however, as soon as France ceased its debt payments to Germany, France drastically dropped the price of silver, as Germany was going to sell its silver to France. This would avoid more pressure on France's system following the war. Germany then had to wait until silver was at a better price to sell its silver stocks. This was bad news for the both of them, as they then both had devalued silver coinage floating around in their markets that they could not sell. As silver prices continued to drop, Germany, France, and most other countries eventually made the transition to gold. Frieden: By 1880, all major countries were on the gold standard, and it lasted until WWI. This was the golden age of growth and trade. Britain's commitment to gold and confidence in its pound as a key currency reassured everyone of it's stability and credibility, even though there was a massive overhang. We can further chalk this up to Britain's power in the era, even if credibility was questioned, states would have a hard time knocking Britain off the top. Britain's choice to market the pound as a key currency via the gold standard was great for the distribution of British power. Britain shapes rules via power, others want ability to borrow from British banks, need to prove credibility. Leverage that states uses. Other states also seeing competitive pressures and must enhance trade and defense, so must have GS in order to do business with Britain. Other countries were constrained, countries in debt and trading with Britain do not have own CBs, influence how they make payments back, at mercy of Britain, banks benefit (Master currency! Strange) Britain benefits from all states dependent upon it who need to use higher transaction costs, shipping, etc to ship gold to Britain. For ANLIB, emphasize domestic politics. Creditors in England, richest 6-10% of men are who vote in the House of Commons, and the tradeable sectors are expanding rapidly in England. These sectors, including the Bank of England, will desire stability of exchange rates for it fosters more profit. Trade expanding in Europe 1841, 1846. Urban businessmen able to vote in 1832. Some states share similar preferences, who's having the voice in the era of flourishment of trade? Obviously those with money. Germany: Frieden states that Germany Rye farming interests wanted to remain on silver for depreciated currency and more money from rye exports and higher price of imported grain. When Germany began selling silver, a debate raged over shift and protectionism. Bismark conducted protectionist policy after making deals with Junkers to stop selling gold, which did not undermine the switch, but stopped the real appreciation of the mark. Perhaps emphasize the fact that France was in debt briefly and how that affected domestic policy, but mention instead the US example: Regional interests in the United States following the Civil War. The south (former confederacy) now held worthless money, and the North fostered a healthy banking system. In the NorthEast, they wielded the financial power, and the northern states want to make more money while the south wants capital and liquidity. North produces complex goods while the south and west produce commodity goods. Tariffs allow discrete treatment, republicans unite protectionists with creditors. Sherman Silver Purchase act, MW farmers don't like tariffs, so against onopoly act. SSPA - US Gov would by certain silver and make coins. Expand money supply to counteract deflation. Populist use monetary policy to find support. South wants subtreasury plan. Deflation, in debt, hard to pay back for MW, S wants debt. No money to borrow. MW doesn't like Subtreasury plan, nor does NE. Populists and dems then side together for monetary policy, republicans defend gold. Constructivism: Shift from mercantilism to liberalism, Adam Smith, Hume, Ricardo. Disproving Mercantilism, more market based system. Competing ideas on markets, money. Banking vs Currency Schools. Peel, Graham for free trade. Emphasize emulation effect, see Britain be rich/powerful, desire for that as well. Adoption of classical liberal ideology.

epistemic community

Bretton woods Held in 1944 at hotel in New Hampshire. Dominated by US and Britain, but 44 countries represented. War still going on, end in sight. France not completely lib. from Nazis, so dependent on US and Britain. Negotiations between all of these countries. Input from elsewhere, but key features reflect US and Britain. Evidence of epistemic community. -group of people gathered who are experts, have training. Trained economists, associated with ministry of finance, or central banks. Know how things work, the lingo, etc. Closed circle in some sense. Ikenberry brings up: -2. a community of policy specialists and economists within and outside these institutions formed and presented ideas about monetary order and the org. of post-war world economy cut through these divisions. They identified a number of normative and technical positions that were later embraced by both sides. Articulated that postwar order should be multilateral order, with monetary and trade practices subject to int. agreement, and that overall system would work to secure keynesian econ. Policy and social welfare goals. -3. The UK and US policy specialists came to form loose transnational and transgov alliance during wartime negotiations. Was important in altering sequence of Anglo-American negotiations. -4. their ideas were important for defining a middle ground between old political divisions, providing a new possibilities for coalition building. The ideas had political virtues, provided middle ground between old alternatives of laissez-faire and interventionism. They created the environment for larger political coalitions within and between these countries. American policy experts: -based during FDR in treasury dept. under Morgenthau, 1930s assembled int. experts to deal with ER stabilization. Early efforts include tripartite agreement. 1941 began forming inter-allied stabilization fund, which would provide basis for postwar int. monetary arrangements. British policy experts: -group overshadowed by John Maynard Keynes -many believed that 1925 return to gold led to misery and the 1931 drop was associated with recovery. -social welfare and econ management must dictate postwar int. econ plans. -British and US experts discussed in negotiations that took place between 1942 and Bretton-Woods. Also communicated in informal settings facilitated by the econ and financial group. Outside ideas of more conservative or traditional nature were distrusted among FDR admin and these groups. Banking community was disliked by Morgenthau and many members of the int. econ expert community being assembled. Largely keynesian based, specialists shared a common understanding and ideas. From trade stalemate to monetary agreement: -discussions began summer 1941 when Keynes arrived in Washington to discuss lend-lease. Disagreement centered on Article 7 which set framework for postwar settlement of mutual aid obligations. It said in meeting these obligations no obstructions to commerce should be laid down and efforts to open trade and elimination of barriers be made. Keynes argued countries would need these types of measure to resolve payments imbalances and other issues. Keynes and others started reconsidering position, moving towards idea of open system with insts. Setup to protect from depression and to deal with payments imbalances. -Keynes proposes Int. clearing union: would have authority to create and manage an int. currency (25-30 billion USD worth) that would be used to manage intercountry balances. It sought to put pressure on surplus and deficit nations to balance, tax on excess reserves and such. -US counterpart developed similar idea, these laid out framework for negotiations that followed out from 1943 to BW.

country banks

Britain was rich in capital in the late 1700s due to industrial era, had large assets, was accumulating capital, IR was cheap, so the number of banks was expanding rapidly since people have a lot of money and need somewhere to put it. Bank of England dominated London finance and the government dealt with the Bank of England, however, there were intermediary banks, the country banks, who were largely unregulated. They issued paper money backed by credibility of the bank, which could be largely arbitrary. After the Napoleonic war, many of these banks failed after panics broke out and people began withdrawing their money. They slowly got overshadowed by the Bank of England who began backing its notes with gold in 1816, holding more confidence in their notes, discounting bills of exchange, The Bank Notes Act of '33 which named BoE notes legal tender, and Bank Charter Act of '44, which prohibited new banks of issue. These country banks marked an important era in the transformation of the BoE and how the pound become a key currency. possibility hurt trade by devaluing confidence in pound.

interwar period

During World War I, most states that had transitioned onto the gold standard during the late 19th century went off the gold standard in order to retain some domestic monetary policy autonomy to fund the war effort and counteract for domestic and international shocks. Following WWI, Britain, previously the world's benign hegemon, had a new contender: the United States. The United States rose as a superpower during or arguably just before World War I, and now, for Britain, it was a race back onto the gold standard to continue domination over international economic transactions and the benefits brought with being a key currency. Britain desired to fix the exchange rate, open capital flows again, and return to earlier pre-war parities. Britain achieved return to pre-war parities in 1925, but at the cost of domestic policy and social safety nets. To achieve prewar parity, Britain raises its interest rates in the 1920s to restore confidence in the pound and prevent shifts to the dollar, even though the pound is overvalued. Now, according to Eichengreen, the prices of commodities were higher, and gold stock, due to being devalued and mining practices, the gold stock was not increasing enough to meet the new conditions Britain set forth. Britain could either deflate to bring down prices again and raise the real value of gold and stimulate increased gold production in the long run at the cost of economic growth, or continue with the practice of supplementing gold with foreign exchanges. Eichengreen: During this time, the sterling and USD held reserve currency status and made up 97% of foreign exchange reserves until the USD overtook the pound in the 1920s. The fact that two reserve currencies created instability as CB held half their reserves in each would shift to the other at first sight of trouble, disrupting the international equilibrium. Then, came the sterling crisis. Eichengreen details the sterling crisis with characteristics of unprecedented unemployment, rampant speculative attacks, and the collapse of the gold system. The UK underwent 5 years retrenchment to reverse the effects of war time inflation and reduce prices to lower levels like those in the US, permitting prewar ER against the US dollar was restored. In turn, the Sterling appreciated faster than wages and prices declined. Because of the monetary stringency and high real interest rates, large scale demobilization. Then, a series of negative shocks occurred which prevented unemployment from falling afterward. The Gov was unable to engage in countercyclical stabilization due to the constraints posed on it by its fixed exchange rates. The labor market rigidities may have also been caused by overly generous unemployment insurance scheme that raised reservation wage, reduced intensity of search, and boosted equilibrium unemployment. Eichengreen: Deflation led to a rise in the real costs of labor, and the authorities were too slow to adjust unemployent benefits and the fall of prices led to a real increase in these benefits. The fixed ER transferred negative external disturbances into unemployment rates rising, which fed back into foreign market. In 1931, the outflows of gold from the UK went to France and the UK. Then, the german bank failed, and the crisis spread to London and the sterling dropped drastically against the Franc and USD, gold outflow accerlated more, nearly 50 million pounds worth over the next two weeks. US was willing to lend to England but only if they made budgetary cuts, which the labour party resisted. So, instead of increasing IR rate again, they let gold go, with bank of england fearing the impact of necessary measures on unemployment. France's trilemma: Suffrage was already expanded, not as many issues with this. Key challenges were about debt and the inability to increase tax revenues. The government must continue to borrow while keeping the interest rate low but trying to prove credibility. They need econoic power, to borrow oney and to pay off debt for their own security. So, they let the franc float in the early 1920s and recognize the ER is no longer accurate, so they drive the value down. When they return to gold, they devalue as well, which is advantageous and produces a Balance of Payment surplus unlike the pound with gold reserves expanding. When the NY stock market boomed in the 1920s, Europe needed capital, which they got fro the US, the only people who could lend. Americans put this money into the stock market, which created a bubble and liquidity issues. It burst in 1929. The Banks lended too much money to people who invested in the stock market who couldn't pay the bank back. They all then sold their stocks and prices plunge resulting in a crash. Banks lose their money too and can't sell the stock. Credit is now stringent = credit crunch. Businesses now face liquidity squeeze, i.e. how easy can they turn their assets into money, and the US enacts the Smooth Hawley tariffs which everyone retaliates against. The collapse of trade has a profound impact, meaning no one can pay their balance of payments because everyone is in a deficit, so international lending collapses resulting in a global liquidity shortage. Now the pursuit of gold and hard currency intensifies. Doubts arise over who will defend their ER commitments (who will stay on gold? People begin speculating). Britains reserves are questioned, and its willingness to make policy trade offs. They're still paying off war debts and funding social welfare. France is cashing in pounds for gold and pushes Britain off the pound in September 1931. Odell: London Conference idea arises in 1932 to discuss German reparations payments. US could've taken an international leadership role to restabilize the international monetary syste, but it didn't. It exemplified exploitative or competitive strategy. It sought to grab as big of a piece of pie as possible without looking to joint action to expand the pie. Making secret deals, threatening negative sanctions, staking out commitments, and demands, etc. US trying to isolate self after gold crash and wwi, Roosevelt has conflicting views from chief debt advisors, pearl harbor puts US back into being involved in foreign affairs. Britain then floats its exchange rate and held foreign exchange to pay debts. It has USD, so it buys and sells pounds on the ER markets. They push the pound's value down and intervene in exchange rate markets, i.e. predatory devaluations in order to stimulate their economy. Others learn and race to make their own predatory devaluations, resulting in the Tripartite agreement in 1936 between Britain, France, and the US. Before, though, US kills London Econ Conference in 1933 by devaluing its own dollar, a coordinated response to devaluation. Realists believe that because power was less concentrated, competition between the US and UK led to currency blocs and destabilization of the international market. Analytical Liberals believe in the trilemmas and how those were resolved differently in each country, depending on domestic political system reflecting clashing preferences. Constructivists: States evolving in what their responsibilities are. Managing macro economies, old model doesn't work. What will replace it.

eurodollar market

Emerges 1970s, Soviet union approaches priv. banks in London and asks them to hold USD for them to get because they need USD to purchase but dont want leverage moving thru US. Unregulated dollars, easy place to secure capital. Deving countries attracted and begin borrowing large amounts of money from eurodollar market, most to fund ISI programs since their economies were struggling. They thought it would help them get out of intl capital controls but theyre vulnerable because conditions are changing and banks and borrowers are not used to the new system (end of BW). Risks charge premiums: expected regime change or autocratic to democracy, etc.

exporting inflation

Idea of US exporting inflation. AL: US running inflationary policies, Germany wants to maintain low inflation, in order to maintian pledged ER must buy up dollars with German marks, more marks in domestic system, inflation. - Claim comes from Germany - USD is overvalued and US wants it to drop vs Deutsch marks - US buys USD to bolster price by buying Deutsch marks - There are more Deutsch marks than the German Central Bank wanted - Because of US domestic policies (social programs), it creates inflation and because of its monetary policy, it exports its inflaiton abroad

gold points

In accordance with the law of supply and demand, the concept determined that the fluctuating limits of currency fixed the cost of money between the place where the bill was drawn and that in where it was payable. In the exchanges rates between gold-standard countries, these limits were known as the gold points, for the reason that, if the price of foreign bills rose above the upper limits determined by the exchange rate, countries would find it cheaper to export gold than to export bills for the purpose of settling international accounts. Conversely, if the exchange rate fell below the lower limit of the determined rate, countries would find it cheaper to import gold than to sell bills to foreign creditors. physically moving gold, cost of doing so. transportation, insurance, little variation in ER then. reduced uncertainty, trade increasing, 1 medium of exchange. open - Refers to the idea that if you are physically moving gold, there are fluctuations in doing so - e.g. US to Britain → You're shipping gold across the Atlantic (shipping costs, insurance) - There's difference between the domestic promise in the US and the reality - It's not perfectly fixed, but it's close

forum shopping

Pol process takes over response and forum shopping delays response as they try to find institution who will give best results. simply adding parties delays response. institutions useful, but adding members delays.

jamaica accords

Jamaica accords: 1975, meeting of IMF members, BW is over but they liked fixed ER, in danger of sliding back into 1930s and predatory devaluations. State dept. dosent care much as long as not gold, France predictably wants gold. You can be in IMF and have whatever ER system you want, whatever reserves. Is this a monetary regime anymore? Some concerned about risks of int. comerce, investment concerns, speculators concerned, greater risks, some see opportunities for greater profit. IMF and WB still functioning. But IMF undermined, not needed to solve BoPay because govs can just float currency which is more attractive option. ○ Realism: hegemonic decline, not as much ability to coercively enforce regime, Smithsonian agreement worked though, Jamaica accord sign of recovery of major powers. Idea of heg. Instability heg declines and system falls apart. Did not happen though, US got its way as BW collapsed. ○ AL: prefs diverged, US could sustain inflation, wanted different things from ER structure of prefs plus power component. ○ Consts: old ideas out new ideas in, monetarism: you cannot keep the market constrained or fixed forever, too costly, the market will win and should be let free. New idea emerging in 1970s contrasting with Keynesianism. - Relate it to Bretton Woods - Key actors - Why it's significant The IMF's first prey is Jamaica bc it was about to fall apart economically - Why it was caused a problem - Took place in 1975 - Meeting in Jamaica where countries agreed to disagree (lol) = Rules not constriaining anymore - Decided that pledge parities not obligatory anymore - You do not need gold as reserve anymore - Place of the IMF

network externalities

Network externalities are the effects on a user of a product or service of others using the same or compatible products or services. Positive network externalities exist if the benefits (or, more technically, marginal utility) are an increasing function of the number of other users. Negative network externalities exist if the benefits are a decreasing function of the number of other users. For example, Facebook likely confers positive network externalities since it is more useful to a user if more people are using it as well. Conversely, a road probably confers negative network externalities since a consumer of the road creates traffic for other consumers of the road.

dirty float

Not leaving ER completely to market determination, but no public commitments. Prevents predatory devaluation.

quantitative easing

Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. When short-term interest rates are at or approaching zero, and when the printing of new banknotes isn't an option, quantitative easing can be considered. buy back treasury bonds and other gov debt from firms and investors to stop their holding assets and convert into cash. they will spend or lend to make revenue. most were used to pay off debt. not borrowing...over following years expanded money supply so should push down USD, others respond similarly but not expanding as much as US , no quantitative easing

bw

Realism: Power distributed by World War I, trend reinforced by World War II. End of WW2, US has most of gold in Fort Knox. US comes out as economic/military superpower. Clear leader of the West. Going to dictate the rules. Needs to hold on power going forward. AnLib: Divergence of preferences in the 1920s and 30s, convergence after WWII, states wanting similar things, cooperation. Constructivism: Interwar gold standard worked poorly, great depression plus new ideas produced new shared social purpose, shared understanding of how policy can work. Keynesian takes over by 1944, standard way of thinking of how economy works and what the government's role is. New shared understanding of how monetary systems work and how international systems should be organized. Bretton Woods was perhaps foreshadowed by the London Conference of 1933, though much more successful. Bretton Wood's goal was to imitate gold standards with harmonized, fixed exchange rates across states while avoiding the problems of the 1930s by leaving states some domestic policy autonomy to react to shocks and issues of exchange rate stability, which is embedded liberalism. The conference took place in New Hampshire in 1944 with 44 states present. The most pressing disagreements were between the United States' Whites Plan and the UK's Keynes Plan. Ikenberry states The Whites Plan or Treasury Plan had an unalloyed free trade position whereas the British war time cabinet was in search to secure postwar employment and economic stabilization. Thus, an epistemic community came together and compromised on the Bretton Woods plan. The US's policy experts were based in the treasury department under Morgenthau in the 1930s to deal with the ER stabilization. They had been behind the Tripartite Agreement of 1936. In 1941, they began forming an inter allied stabilization fund which would provide basis for postwar international monetary arrangements. Britain's group was led by John Maynard Keynes. The UK policymakers were concerned with social welfare and that economic management must dictate postwar international economic plans. The British and US experts negotiated and discussed between 1942 and 1944, in both formal and informal settings facilitated by the Economic and Financial Group. All members were largely Keynesian based and had a common understanding of ideas outside of FDR's conservative administrative ideas and the banking communities. State department, who pushed for the USD role's to be pushed during the meetings, was ignored for its lack of response during the great depression. So, Treasury becomes the dominant voice. Keynes proposed an international clearning union which would have the authority to create and manage an international currency (25 to 30 billion USD worth), the bancor, which would be used to manage intercountry balances. It sought to put pressure on surplus and deficit nations to balance, tax, on excess reserves and such. ICU would help manage how governments managed domestic monetary supplies, lends money to countries with deficits and tax countries who ran surpluses. Tax disincentives for running a surplus. Attractive for Britain, able to borrow from ICU. US, however, doesn't want intl medium of exchange since the USD is now, and tax surplus country, more like just tax the US. Disincentive to US primarily. White's Plan: Formation of IMF, wants US to sit in central position to help countries in BoP deficits. Wants fixed Ers, avoid predatory devaluations. Each state puts some gold/currency in the IMF and uses it to lend to other countries who have BoP deficits. Conditions on the loan, expected to get out of the deficit. Give advice on how to change economic conditions to improve competitiveness, etc. IMF promotes keynesian everywhere, low interest rates, inflation. Bad for banks, capital being constantly devalued , supports Keynes at home. Keynes doesn't like this because it isn't a symmetrical arrangement. Surplus countries don't need to talk to the IMF, don't need help, don't want to be told not to run a surplus. US would have most votes and contribute most. The US counterpart developed a similar idea, which laid out the framework for negotiations that followed out from 1943 to BW. They settled on fixed exchange rates, states would peg their currency to the USD who backed their currency with gold. The system allowed for some domestic monetary policy autonomy, considering everyone had suffered in the 1930s and the need to interfere in the domestic economy may be necessary to avoid future drastic shocks and to stimulate economies now to get citizens back to work and lower unemployment. Capital controls were agreed upon for a moment, but were to be dropped later once states built their economies back up. They also agreed to assistance for balance of payment adjustments, however, only the US had a surplus so they would be the only ones to help. They choose White's Plan and state they will implement the rules in 5 years, which doesn't happen due to how damaged Japan and the European economies are. The world bank can't raise capital to help them because wallstreet won't lend money because they don't like Breton Woods, so Europe has a hard time accumulating hard currency and everyone wants USD since it's the only market to purchase things from. Dollars still coming back to the US and not leaving, so the US encourages allies to discriminate against it in trade (tariffs), adopt competitive exchange rates against the dollar, and undervalue currency against the USD. The international liquidity issue persists, so the US adopts some unilateral policies to promote dollar outflows in the 1950s such as military expenditures by deploying forces overseas, bases abroad, spending money at these bases, tax laws to encourage outward FDI, encouraging firms to make profits outside USD, large firms encouraged to take USD out of US and buy property elsewhere. US companies were now going abroad into Europe and Latin America, buying existing factories and companies and US tax law was encouraging this. The US was also sending tremendous aid so foreigners could buy US military equipment. The IMF did not resolve this issue, but the US did. R: American power stabilizes the regime, US enforces the rules. (Hegemonic stability theory). Cetner of BW practices, think of whos excluded. AnLib: What do diff. states want? If they want the same thing, cooperation should be easier. Can get cooperation without bullying. Constru: Norms matter, shared ideas produce cooperation. Institutions and rules created were about pursuit of shared social purpose. After the implementation of Bretton Woods, the dollar becomes the key currency and medium of exchange and chief reserve asset for most countries. Countries accumulate dollars, cash in for gold at fort knox, backing own currencies with USD. The regime will function well as long as other desire USD and US gold reserves remain substantial. However, due to the US's practices throughout the 1950s, it can't cease military aid to countries, especially in light of the Soviet Union. It's difficult to reverse these policies. So, the dollar glut develops by 1960 in which dollars are leaving the United States, liquidity is expanding, and gold isn't going up in Fort Knox along with credit expansion. So, there are too many dollars available and not enough gold to back it. Eichengreen: By 1958, US begins running constant deficit with dangerously low levels by the 1960s. Eichengreen states it may not because of the US's practices but because of expanding economies which are using USD as a reserve and the US's role as a banker to the world and the international apetitie for USD was causing a deficit as growing economies ran surpluses against the United States and without gold shifting in price, it created an inelastic monetary gold supply. Especially considering European countries tried to reverse military spending current account deficits in the 1960s but it had minimal impact. The US also tried tighter rules for tourists, i.e. only allowing them to bring back 100USD rather than 500USD, and the interest equalization tax to discourage long term lending to foreign countries, i.e. a 1% rate of interest was imposed on foreign bonds sold in the United states. US also collaborated with US companies to submit BoP reports and to push investments until future. The response was the London Gold pool. It was designed to contain pressure on the US dollar. In March 1960, Gold rose above 35$ an ounce on the London Gold Market, and policymakers were worried rise in free market price of gold would cause a drain of US Gold reserves. It was then seen as essential that London gold price not go above US convertability. European central banks thus agreed to refrain from buying gold when it went above price, and in 1961, countries agreed to supply together the gold needed to counter rise in price on the London Market (Eichengreen). This all could have been solved by revaluations of foreign currencies, but there were collective action issues and free riders. And many were benefiting from having their currencies devalued against USD. So, no one is changing their parities even though they are allowed, no one wants to admit it, so speculation continues and governments begin intervening in larger amounts. This exposes some tensions in Mundell flemings, remove capital controls and see tensions between exchange rates and domestic policy autonomy. realism: US power stabilizes the regime by enforcing the rules in ways benefiting itself. central role for USD. has some leverage over other states. currencies supposed to flow thru NY, can block access, cut them out of the loop. anlib: shared preferences make cooperation easier, but prefs start to diverge. disagreement over undervaluing/overvaluing, whatever. Japan and germany have success in trade when their currencies are undervalued, driving their development. US wants change, but not happening. con: norms matter, shared ideas make cooperation work, but conditions change. implementing rules and discovering rules don't work and the ideas are flawed. What now? how do you explain change? Relate to Triffin Paradox, belgium economist who said national currency being managed by national authorities with international repurcussions. Too much liquidity, need to restrict. US, at this point, has a few options. It could get others to appreciate their currencies to devalue the USD. It could constrain domestic policy to increase confidence in the dollar. Or it could devalue the dollar unilaterally by changing the relationship to reserves, however, since the other currencies were backed by the USD, it would be useless to do so (nth currency problem). Executives refuse to constrain domestic policy and are inflating the dollar to promote the Vietnam war effort, which is having an adverse affect on other currencies, i.e. inflating them too. Domestically, there are no strong opinions, but externally, Germany is most vocal since they are inflating the marc by inflating the USD. USD also has no rival currency, important note. Argue US is exporting inflation. Bundesbank trying to counteract it buy buying USD but is having to buy way too many because of inflation, so Germany is losing control of its own money supply. So, Nixon moves to benign neglect. It ignores currency interventions to support pledge parities. Refuses to negotiate pledge parities. Gowa argues Nixon's administration knew it was going to fail and decided to muddle through. The system was supposed to function off of the IMF and Gold and SDRs as reserves and countries would maintain their pegs using mechanisms like exchange for gold, but the USD functioned as the world bank and took on roles of gold and the IMF. This put too much pressure on the system so it began to erode. Fixing it would require resolve of deficit, which US was unwilling to do. Not interested in constraining domestic policy to suit international needs. In 1968, Nixon closes the gold window for private citizens. Then informally for states. France challenges them buy asking for gold continually, not afraid of US threatening lack of security from Soviets. August 15, 1971, Nixon goes off gold. Symbolic actions of revaluing dollar. Punishes other states until they revalue their currencies, coercive 10% import surcharge tariff on goods coming into US from countries not agreeing to repledge parities. Hits Germany and Japan hardest. Everyone else abandons BW and floats. Odell states the last straw was greater trade concessions and military burden sharing from Europe and Japan. We assume a government will tend toward a floating exchange rate when running persistent BoP imbalances, however policy depends on the BoP and the security goals of the state. US policy after WWII reflects shift as going from pursuing non discrimination and multilaterialism to allowing and encouraging discrimination to US in order to foster economic recovery in military alliance against the USSR. Odell domestic considerations of who will get elected or re-elected, both coming for elections, interest group pressures. Domestic situations led to Nixon hesitating closing the window. Lingering Death: Smithsonian agreement, Jamaica accords, 73 germany and japan refuse to pledge parities any longer.

casino capitalism

The kind of high-risk- high-reward behaviour indulged in by former high street bankers and many others which helped lead to the ongoing economic crisis ○ Strange's casino capitalism § Placing a bet § Buying selling stocks, asking for contracts related to stock rose or dropped § Now ppl just buying insurance, like placing a bet § Don't own other asset § Def more regulation req. at intl level

derivatives

The term derivative is often defined as something — a security or a contract — that derives its value from its relationship with another asset or stream of cash flows. There are many types of derivatives and they can be good or bad, used for productive things or as speculative tools. Derivatives can help stabilize the economy or bring the economic system to its knees in a catastrophic implosion due to an inability to identify the real risks, properly protect against them, and anticipate so-called "daisy-chain" events. § Analyzie data in sstatitsitcs § Mainly invested in oil from alaska, identify some other investments that fluctuate in a very different way like south africa wheat, anayze as independent investments, fluctuate, spread money out in that way Diversify risks and guaruntee profits somewhere. Hedging ensures stability and insurance for loss.

Mundell-Fleming

The trilemma between open economy, fixed exchange rates, and domestic policy autonomy. Bearce elaborates with his work on interest rates showing that if state's peg, their interests rates too will remain consistent with who they are pegged to, which again, limits domestic monetary autonomy and how states may react to certain economic crises, such as unemployment and liquidity issues. If they wish to stabilize their ERs, they must also move national IR in line with prevailing world IRs. This originated in the 1960s, because in the 1950s, there were fixed ERs, capital controls and monetary policy autonomy in the time states recovered from the war. they needed to rebuild the international economy, foster economic growth, and prevent unemployment, and cap interest in order to invest in domestic recovery. This time also describes embedded liberalism. States begin removing controls in the 1950s, and once removed, it shows pressures on the ER, arbitrage is occuring. Once giving up on these capital controls, they then must choose between ER stability or domestic monetary policy autonomy. Interest rates too then need to support fixed rates unless you want to let it float. Mundell and Fleming note how increased liberalization of capital markets upset this issue of embedded lib. ER lie on a spectrum, however, such as crawling pegs, and such, and capital controls can be sophisticated, so the picture isn't so clear cut, but it is a good way to consider how policies fit together. AnLib: unemployment or ER stability? Obstfeld, ir rate ander.

emergency financing mechanism

US needs to be able to go on exchange markets or country in matter of days or weeks to react more quickly. more money to be set aside too. but few doubts expressed abt merits of globalization or abt value of pegging.

Mancur Olson

We draw mostly from economist Mancur Olson's work when describing an analytical perspective. His view is mostly concerned with proximity, i.e. how concentrated actors, political parties, sectors, etc., are, their shared characteristics or existing cleavages, such as language, churche, factors of production, and their selective incentives, such as fairs, teaching sessions, or union insurances. Olson's work allows us to analyze domsetic perspectives in why some monetary policy outcomes are selected over others in regards to whose voices were heard and why and how these affected policy outcomes.

Greenspan

american financial markets broad and deep, making US more attractive than others, so dont worry. Response to obstfeld concern that deficit keeps growing, is constant and unsustainable. Dangerously low deficit, steadily neg. since 90s. but market support looks like hot money behind EA financial crisis...drop in dollar's value could trigger problems.

SAP

arose after debt crisis. IMF loans like SAF and ESAF not exactly equipped to deal with the debtor issue or longer term debt repayment services. So it talked with member states and renegotiated to create new rules and policies for lending. it created some overlap with the world bank, and their cooperation form SAPs. SAPs are intended to improve the ability of states to pay back debt in USD. Interacting reforms to sustain this improvement, support trade and comparative advantage. States that are pursuing export oriented industrialization easier to achieve structural adjustment, more problematic for states like Brazil or Argentina pursing ISI. Structural adjustment going to try and undo these policies. protecting interests of vested interests of powerful interest groups. Gov austerity since its sovereign debt, collect more taxes/raise money but also pursue free trade, reduce state tax revenue. get state to pursue policies that boost exports and reduce imports, some policies dont support this. liberalize domestic market to improve competitiveness of individual firms, IMF experts attacking gov policies which seem to impede marketization adjustment. summary: gov austerity, raise taxes, liberalize trade, liberalize domestic markets. controversy: slow to show results. asking country to open borders and import competition will encourage labor to move toward comparative advantage or industralize, does not seem to change actions of domestic actors. politically painful, generate domestic opposition, austerity not popular, gov unpopular, raises taxes...tariff liberalization opposed by powerful groups, i.e. labour groups. domestic liberalization often opposed to because asking gov to remove controls that support certain industries is controversial. ex. agriculture support. why did they perform poorly? econ results not there. macro and micro aspects dont line up. how exports understood trade did not interact properly with micro level. micro actors either dont have resources for action or are weary of it, trade adjustment requires changing what you make and how you make it. market lib not enough, austerity reduces gov support for changes, reducing unemployment benefits make more diff for labour to move btwn sectors, poor understanding of how trade adj. occurs or how policy shapes it. poor understanding of politics as well. consequences: hurts image of IMF and WB. govs unhappy, banks unhappy, lots of criticism, reform of IFIs needed...

overhang

because the pound was a key currency, britain could get others to accept pound since confidence was so high and its capital markets were so large and deep. it was the preferred currency of transactions since they were practicing such liberal free trade policies. the pound was as good as gold and was preferred over gold as a result, so the banks continued to lend gold as foreign exchange holdings of pounds rise and gold became harder to find. credit expansion via fractional banking, the money was 2 places at once, you give to the bank and the bank loans the money out and expands their credit, assume you wont come get it out all at once. an overhang develops where there are more pounds in circulation than there is gold reserves to back it. not an issue until 1914, such high confidence no one questioned it. thought it was in line with psfm. -Lots of pound in circulation in terms of credit and the gold reserve is not expanding -More claims on the reserve than there are reserves -Linked to credit expansion via fractional banking (money two places at once) -Potential problem if everyone wanted to withdraw gold -Overhang becomes a problem after 1914 (WWI shakes confidence)

key currency

coined by Susan Strange, arrayed currencies hierarchically. key currencies play an important role in international currency. they are the most desirable, its investment must hold, must be able to purchase internationally with it, and others must be willing to accept it internationally. They are a sort of collective good as they aid other countries in making transactions somewhat freely, and the state who owns the key currency will accrue some benefits, both economically and politially. Currently, the USD serves the role. From an Anlib perspective, banks benefit from this currency as they issue the money that foreigners want, as well as shipping and insurance companies. Realists believe it will benefit the state as the issuer controls access to its own currency, and it will gain power over others according to Cohen. Payments used to flow thru national territory, and states used to be able to block others from using their currency. It also gives increased policy options and autonomy, you may be able to pay with your own money for BoP which is best. Make your currency key by adopting free trade, removing capital controls, changing tax laws, encourage others to use your money, increase confidence by maintaining high interest rate over time, though there is some tension between confidence and liquidity..

complex goods vs commodities

complex: automobile - Good that requires a lot of different parts/engineering to produce it - Quality of the product is more important than the price (producers compete on the quality of their product) - quality varies from one market to the other - prefer (or accept) appreciation - exchange rate does not affect abilitiy to compete commodity: wheat - basic good used in commerce that is interchangeable with other commodities of the same type - quality only differs slightly across producers - prefer depreciation - commodities are on a price based competition complex goods producers prefer or accept appreciation commodity producers prefer depreciation. relate to anlib.

FEAR OF FLOATING

concerns over volatility of exchange rates, corpporations could adn will lose money bc of unanticipated shifts of ER, may discourage trade/investment

Indebted industrialization

deving countries use unregulated eurodollar market to fund ISI or industrial programs in state. States pursuing ISI find it attractive, but underestimate the risk. Economic risk, pol. risk, exchange risk..

dollar glut

currency overhang develops by 1960 (dollar glut). -dollars leaving us, liquidity expanding, gold not going up in fort knox in 50s. credit expansion, multiflication effects. glut: too many dollars available. US dollars value versus gold challenged. manifests in London gold market first. US is printing so many dollars that people realize we don't have enough gold to back it up - Undermines people's confidence - can't stop printing dollars or else it stops liquidity of the system, aka Triffin Dilemma - Manifests in the London gold Market first

bank rate

describes how bank of england could play the capital market by raising interest rates to adjust its balance of payments to remain in surplus throughout the late 19th early 20th c. benefits of a key currency hume psfm supposed to limit gov intervention in balance of payments, however, bank of england was exept from this for this reason. -A bank rate is the interest rate at which a nation's central bank lends money to domestic banks -basis for evernight landing between banks to complete balance sheets -sets the goal for the interest rate at witch banks will lend and borrow money -interest rates = amount of extra money coming in from lendings. Perits to lend and invest more and more over time -makes banks profitable

tradeables vs non-tradeables

ex. of tradeable: T-shirt non: haircut tradeable sectors prefer depreciation, non-tradeable sectors prefer appreciation. ER thus determines profits, viability. tradeable: - Goods that are traded across borders (e.g. t-shirts, caps) - Influenced by exchange rate - prefer depreciation - Will they be able to export easily or face cheap imports? non: - Goods that are not traded across borders - Services (haircut) - Not tied into the intl markets - To the extent that they care, they would prefer appreciation - allows them to consume imports at a lower cost

currency board

extreme form of pegged. backed by fixed ratio to reserves, similar constraints as gold standard, lack of dom pol autonomy, following whatever peg is following, tends to be successful then falls under pressure

monetarism

following collapse of breton woods, issues choosing ER options to avoid BW issues like deficits, etc. changes understanding of MF model, focuses government on stable growth of money supply /stable domestic growth and stable exchange on fed exchange market. stable value of currency would cause trade flow causing change in BoP causing flow of foreign exchange, stable money supply causes stable domestic growth.

TARP

is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by a Democratic Party controlled Congress and signed into law by Republican Party President George W. Bush on October 3, 2008. It was a component of the government's measures in 2008 to address the subprime mortgage crisis.

joint product

key currencies are a joint product, they have attributes of a collective good and traits of a private good. others use it, but issuer draws specific benefits. - has attributes of a collective good and also traits of a private good - others may want to use it, but issuer draws specific benefits

Secondary market

means debtors can buy back their debt, creating grounds for negotiating debt conversion. deving country debt traded at a discount.

bipolar hypothesis

middle ground on exchange rates is too hard to maintain because of mundell fleming constraints. may imply subtle differences not very attainable, countries push in one direction or the other.

basel accords (begin in 1988)

negotiating with representatives from private actors and a bunch of governments to sort out problems from issue. who is responsible for given issues and accounts, need to coordinate to remove possible loopholes. regulations on deposits, different for foreign currencies. issue of info btwn banks and checking previous loans. if saw how much brazil was borrowing, wouldn't have given many loans. how much reserves and what type of capital, responsibilities clarified, most troublesome what counts as capital? composition of capital regulated and coordinated, harmonized, US and UK share many accounting standards and are major financial players so have to force changes on other countries like Japan, Canada, Aus. uniform capital adequacy levels set. gov responsibilities clarified. composition of capital regulated.

speculation

other issues: pledged parities prove hard to defend. most undervalued, encouraged to be. can it be maintained? many begin speculating, buying and selling currencies based on where they think currencies will move. can't keep price the same with this arbitrage, though they promised it would. government now needs to intervene. rules in 1944 said govs could change parities, but no one admits need to change. they're getting a trade advantage having their dollars undervalued, why complain. speculation continues and govs begin intervening in larger amounts Mundell and fleming observe: removal of capital controls exposes built in tensions. recovered from WWII enough, we'll let currencies leave.. well.. can't just move IR up and down while having no capital controls while keeping the ER the same. IR fluctuating, foreign exchange value set, removing cap controls, people see prices going up and down, they take it and exchange it for foreign currency to make a profit. speculation on foreign exchange markets accelerates. speculators making money, gov's losing Ppl have knowledge about the price of currencies Govts had promised when and how much they want to intervene in the market and ppl can anticipate fluctuations If the currency dips, ppl will know they should buy right now because the govt will intervene to have it gain value

LLR

responds to liquidity crisis, helps healthy banks survive panic, lets insolvent banks fail - via creation of money. IMF not positioned to be LLR, cannot create money, can lend from reserves and amount it can lend is limited. small amount does have have some regulatory powers. IMF cannot observe state policy that well. in the 1990s, taking gov positions at word and not checking to see if policy actions line up with what is said.

gold pool

response to dollar glut -US response. Need gold for market. dont need to draw down own reserves, need IMF members to help us pool gold to buy and sell gold on the market, else we can't maintain the relationship between gold and dollar. -Aka the London Gold Pool -the pooling of gold reserves by eight central banks in the US and seven European countries that agreed on November 1, 1961 to cooperate to maintain Bretton Woods System (fixed rate convertible currencies and defending a gold price of $35 USD per ounce -Was intended to counter spikes in prices -US provided 50% of gold required for the sale -Germany 11%, UK 9%, France 9%, Italy 9%, Belgium 4%, Switzerland 4% -Collapsed in 1965 as the balance of outflow of gold reserves with buybacks were unable to be met -Excessive inflation in the US to fund Vietnam War was major cause - US payment deficit was $3 billion -France withdrew from agreement first in 1967 -In 1968, the Zurich Gold Pool was created to establish Switzerland as the major gold trading location

1985 Baker Plan

stop the gap measures, move ahead. IMF supposed to create new lending, need to keep putting money into these countries to keep them moving forward. borrowers need to make changes, efforts to earn dollars. IMF/IBRD lending, private lending, IMF eager to lend it was neglected during BW. Priv. banks reluctant, coerced into it. IMF not designed to resolve issue, not enough resources, insufficient tools, time frame too short, cannot lend money for longer terms which was necessary...IMF will lend money and apply conditions to resolve issue, put borrower into better position to acquire hard money

subprime lending

sub-prime lending, customers that not as good as regular customers, these riskier supposed to pay more. In 90s housing boom, house prices going up, sme pol actors for pol reasons expanding activities to assist thos who cannot buy houses buy, giving when banks wont lend. What are IR being charged? Policy changes allowing people to qualify for loans when before wouldn't, cutting down payment required, from 20 to 10 and some 5%, extending timeframe of repayment. Thing accelerate in 90s early 2000s dotcom boom, some companies super succesful, others failing, 9/11 so expectations fo econ slowing down, so lowered IR, problems was encouraged people to now buy homes or invest in housing market, can qualify for loans now when wouldn't before. Housing prices had been increasing steadily for 20-30 years, shouldn't be risk to buy, if cant pay mortgage sell house and make profit. Fed raises IR after 2004, people cant make payments so starting to sell, bubble bursts, everyone trying to sell, panic, everyone trying to sell, prices dropping. Trouble spreads through banks making mortgaged backed securities, packaging securities of these mortgages and selling to investors, probs of defaulting seem low so investing, house bubble booms, what happens? What mortgages are owned here, were told secure, but if they default whats it worth? Lots of people are hodling these, uncealr whats inside, noone will buy them, market for them dies. Were passing around in 2004-2006, into 07-08 dies. Credit defautl instruments tirggered, a form of insurance, if first part of contract falls through get payent from the cheap insurance, strong profits in 90s because no one claiming, low default rate, but what happens with insured contrcacts on mortgage securities when bubble bursts. Europeans had bought some of these securities, so spreads there, broader int crisis started here

arbitrage

the process of moving from one market to another and buying and selling currencies in those markets. this forces an equilibirum a la hume's price specie flow mechanism if permitting. this also relates to the mundell fleming framework, as if states have no capital controls, i.e. an open market, you must choose between a fixed exchange rate or domestic policy autonomy. According to Frieden, these choices will depend on your market and if it is large, deep, or suscpetible to economic shocks. - Broadly, arbitrage refers to the process of simultaneously buying and selling comparable assets and profiting from a disparity in their prices. - has to with interest rate

Brady Plan

○ 1989 brady plan: debt conversion will be the solution going forward. The government will assist in determining, but can only work once banks are in position to write off the debt. Banks themselves recognize they need to be regulated.

Usury laws

usury laws were christian interest laws which kept interest rates below a certain point as not to take advantage or make too much of a profit off of consumers and debtors, etc. with the bank notes act of 1833, the bank of england became exempt from usury laws, which marked an important point of how the pound became a key currency and began restoring confidence and desirability in its currency. the bank could also now pay off its deficits by raising the interest rate, which was important in britain's role as hegemony and constantly running surpluses. - Limits how much interest you can charge - B of E exempted from these laws -Part of the Bank Notes Act of 1833

predatory devaluations

when Britain went off gold in 31 when it was pushed off by France cashing in pounds for gold in the global liquidity crisis, britain held foreign exchange to pay debts, it has USD so it buys and sells pounds on ER markets and pushes the pound's value down, interventing in the Er markets. devalue currency so goods looks lucrative. others learn, pursue predatory devaluations. conscious decision to push value of dollar down to make exports attractive, race between countries for devaluations, but if all do it, no one gains an edge. able to do this with the new domsetic policy autonomy. currency blocs emerge, then tripartite agreement in 1936 with the US, UK, and France to stop predatory devaluations and stabilize exchange values. - Happens starting in 1933 w/ the US as it sees that Britain is devaluating its currency to gain an advantage in trade - Britain's actions come after it went off the Gold Exchange Standard in 1931 and didn't have to hold the high valuation of its currency - The term refers to the conscious decision to go on the market and push down your currency below market prices to increase exports (make your goods look cheap) and decrease imports - It helps correcting a negative BofP - It creates uncertainty and is not sustainable

triffin paradox

• The dollar as key currency: ○ USD used widely ○ Every money needs management, problem: too much liquidity. Potential conflicts of domestic and int. monetary policy. ○ Whos responsible? Fed reserve. ○ National currency so national concerns. ○ Triffin paradox: the policies that you do to provide liquidity like US running BoPay deficit, creates glut, reduces demand for currency, what was done to encourage use of USD reduced demand and undermined its confidence. - Author: Robert Triffin (Belgian economist) - National currencies being managd by national entities but with intl consequences - Short-run (domestic) vs long-run (intl level) goals - Short run: managing inR and employmeny (Keynesianism) - Long-run: reducing intl liquidity problem of USD - Linked with Bretton Woods

contagion

→ Contagion: countries linked, crisis on one country affects another. Thai devaluations hurt Malaysian exports, 92-93 ERM crisis hurt competitive devaluations, etc. why contagion? See one devalue and downshift expectations of other countries. Similar cultures maybe. Possible fixed regimes suceptible to herding. Costs of abandoning falls when others do it first. econs linked thru trade, shock can hit several states at once. doesnt seem to explain. same investors? investors trying to cover losses? if investors see crisis in one place, might pull out of others to eliminate risk, investor irrationality? market manipulation, investors, know they can put pressures on markets and start the herd, can instigate peg breaking Investors may be hedging, diversifying interests so cover self by mixing investments in such a way that if u lose money in one it will be a gain in the other. taking unrelated or thought unlinked areas and spread through them but that could be actually linked or become linked, perhaps linked because of investors.

herding (krugman)

→ Herding: ER markets inefficient, drop in price makes holders sell, drops more imitation drives stampede or herd mentality. Bandwagoning. Competition btwn investors and principal agent style relations. Speculation=self-fulfilling prophecy, snowballing, imperfect info and psychology of investors, see some leaving assume they have bad news, also pull out. Draws attention to signalling and credibility. Govs speaking to multiple audiences, if commits to inflationary policy investors hear this and may pull out, who do the investors believe, who is credible? Gov, CB? Is CB as independent as it claims? Crisis manifests as capitaal outflows but herding behaviour among investors may take over. Crises apparently spill from one country to another but connections unclear. Creates notion of contagion. Note: volume traded on exchanges clearly greater than before

hot money

□ Value of trade less than value of money changing hangs □ Increase in buying/selling currencies □ No longer tethered to "real economy" □ Money moving around in short term capital flows □ Putting money in, six months later, getting return back, move it somewhere else □ Can move so quickly, why its called hot money, moving daily capital which is frequently transferred between financial institutions in an attempt to maximize interest or capital gain. important during asian finan crisis where foreign money coming into countries was hot money short term investments, need to rethink whether that money is actually going to stay or not. the banks were using this money to invest in real estate with poor financial regulation. IMF realized it promoted opening borders before ensuring adequate domestic regulations for finance in place.

baht

○ Foreign money flowing in, baht pegged § Tied to USD ○ Private money goes into local banks ○ Money coming in and being depositied in short term deposits ○ Local banks now flush with capital, busy making loans ○ Big emphasis on construction, boom in building in Bankgok, resorts, etc. ○ Fueling real estate ○ Then local bank loans stop performing ○ Too high, can't afford them anymore ○ Real estate bubble ○ Llocal banks starting to lose money, risk investments not good ○ Foreign money begins pulling out, peg abandoned, and baht dropped rapidy ○ Central bank forced to raise interst rate, bad for dom econ ○ Again, inadequate hard currency reserves to intervene effectively ○ Not a strong exporter so obv doesn't hand reserves ○ Baht devalued july 2 1997 ○ Currencies of phil, malaysia, indonesia, and sk all affected by july 14 ○ Thai received aid from IMF and japan ○ But then turned out thai cb owed even more money than originally thought ○ Made problem worse for thailand

financialization

○ Many practices that were meant to reduce risk backfired § Syndication (as with MBS, other assets) □ Spread risk, made it diff. to assess value and risk of securities. Greater uncertainty. § Hedging □ Didn't help bc system wide, insurance didn't help, couldn't pay bc everywhere § Insurance □ Completely unregulated, not even monitored, no one knows how much is owed, can't make policy decisions on it. ○ All of these practices expanded since 1980s, financialization. § Industries getting involved, investing excess capital. Non-banks getting involved makes it worse when crisis hits. Automobile makers, GM makes system in 80s and 90s making loans to help ppl buy cars which is profitable. Increased in late 90s to early 2000s, financialization becoming larger part of US markets and econ, larger portion of firm profits than traded goods.

Tesebonos

○ Mexican gov had sold some bonds denominated in USD (tesobonoes) § Mex wants to borrow USD § Making promise to pay it back in USD, covering exchange risk investors were worried about § Why issue? For intl investors who wanted to avoid exchange risk § Gov exposed though 23 billion in tesebonos when only 5 bil in USD reserves, clearly exposed to hurt if peg is dropped which increases pressure on peg. speculators go against peg.

benign neglect

○ Nixon moves to policy of benign neglect: we are unhappy with fixed Ers, you wont help so we will push costs onto fex market, make everyone else have to buy up dollars. 1968 Nixon closes gold window for private US citizens. Informally closes it for other states, uses leverage with others to make sure they don't try to use reserves to get gold. Doesn't work on France. France will end up leaving operational functions of NATO, independent nuclear etc. • The Nixon shocks: ○ Aug. 15th 1971 Nixon announces US changing monetary policy. USD no longer convertible into gold. US has large gold reserves compared to others except for France who ahs been demanding gold from US and has accumulated sizable reserves relative to domestic money supply. Nixon choice to undermine regime rather than absorb domestic costs of adjusting dollar. Who is concerned in topic of domestic realm? Workers want inflation, what do banks want? Uncertain. ○ Forces other to re-evaluate Ers ○ Coercion 10% import surcharge imposed on countries US wants to re-value the currencies of, it works. -the centre country (the US) provided domestic price stability which other countries could "import" -as the centre country did not engaging in currency intervention (ie. did not care about the exchange rate) it was referred to as benign neglect -While the US had benign neglect, all other countries had the obligation to intervene in the currency market to fix their exchange rates against the US dollar

Smithsonian Agreement

○ Smithsonian agreement Dec. 1971: tried to concentrate on others appreciating value, though USD would have to be devalued. Speculators won big, kept speculating with fixed Ers, other countries still having to buy up USD by a billion dollars a day, abandon fixed ER in 1973 ○ Realism: hegemonic decline, not as much ability to coercively enforce regime, Smithsonian agreement worked though, Jamaica accord sign of recovery of major powers. Idea of heg. Instability heg declines and system falls apart. Did not happen though, US got its way as BW collapsed. ○ AL: prefs diverged, US could sustain inflation, wanted different things from ER structure of prefs plus power component. ○ Consts: old ideas out new ideas in, monetarism: you cannot keep the market constrained or fixed forever, too costly, the market will win and should be let free. New idea emerging in 1970s contrasting with Keynesianism. - agreement among IMF members to restructure and strengthen the international monetary system created at Bretton Woods - It was signed in 1971

moral hazard

○ Us facing moral hazard § US gov and IMF making loans and getting involved to help countries make up for the mistakes made § Shouldn't intl investors just lose money? They chose something risky, doesn't work out, why don't they lose money? § Create situation where they can make high profits with risk and if they lose the gov will bail them out § Providing insurance by telling intl investors go ahead and do it again § No guaruntee behaviour wont be repeated ○ Promotes idea of greater IMF surveillance