International Monetary Systems Concerns• Internal balance: full employment/price stability• External balance: sustainable CA balance

• Imbalance: intertemporal trade• Imbalance downsides: CA << 0….CA>>0

• 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

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.

• 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 …

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.

• 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 couldn’t lead…US wouldn’t 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: Int’l lender of last resort

support pegs/allow devaluation when fundamental disequilibrium

Impossible Trilogy: • Fixed rates/Independent M-Policy/Free capital flows…Pick two

Problems/breakdown: Speculative attacks/$ Shortage/$ Glut• Nixon Economic Program: Close gold window/surcharge/controls

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