|Cours||International Economic History|
- Introductory aspects of the International Economic History Course
- Introduction to the International Economic History Course
- Between Free Trade and Protectionism: 1846 - 1914
- International triumph of the gold standard: 1871 - 1914
- International Finance and Investment: 1860 - 1914
- New Challenges in International Trade: 1914 - 1929
- New monetary and financial order: 1914 - 1929
- Dark history for the world economy: 1930 - 1945
- Crises and regulations: 1930 - 1945
- Divided trade policies: 1946 - 1973
- Bretton Woods System: 1944 - 1973
- Money, Finance and the World Economy: 1974 - 2000
- Trade and the World Economy: 1974 - 2000
New monetary regime[modifier | modifier le wikicode]
In December 1971, the Smithsonian agreements in Washington concluded by the group of ten devaluing the dollar. An ounce of gold goes from $35 to $38. We see a return to a fixed exchange rate around the dollar with wider fluctuation margins at 2.25%. We see a re-installation of the system, but under different conditions. The external position of the United States is still deteriorating, dollar claims continue. In 1972, a new wave of speculation leads to a 10% devaluation of the dollar leading to the emergence of a new international monetary system.
1973 is an important date in monetary history because there is a system change and a real plunge into the unknown. Until then, the purpose of international monetary policy has been to fix exchange rates except in limited periods such as wars, periods of reconstruction or depression. In 1973, when the decision was made to float the exchange rate, monetary policy was emancipated, but there was some hesitation about this decision. Following the failure of the Smithsonian, decisions were taken without finding a solution to the global system. We are talking about large countries for which international transactions play a limited role. For the United States, the uncertainty associated with floating is tolerable. For smaller or more outward-oriented economies, the floating exchange rate is disturbing. European economies export 25% of their country, and a floating exchange rate is not a good idea. The same is true for developing countries that are concerned about the floating exchange rate for the stability of their economies. Europeans are looking for a regional solution.
The countries of the European Economic Community do almost 50% of their international trade within their area. They have an interest in maintaining stability between their respective currencies. The European economies seek to create stable monetary conditions to promote the conditions for intra-European trade. The monetary snake lasted from 1972 to 1978 and then the European Monetary System from 1978 until the European Union's creation. We see a will immediately after the end of the Bretton Woods System. For the other countries that have less institutional capacity than the Europeans, they adapt to the system as best they can. Many developing countries seek to maintain a fixed exchange rate with their largest trading partners.
With the advent of the new floating exchange rate regime, there is a tendency to believe that this change of system goes hand in hand with a liberalization of international capital flows. From a logical perspective, there are good reasons to think so because floating exchange rates allow for the liberalization of capital flows without transgressing Mundell's trilemma. With the transition to a floating exchange rate, some countries in the world, especially countries claiming to compete for dominance of the international financial market, are liberalizing their international capital transactions. The most important changes are taking place in the United States, which is trying to regain ground following the removal of capital controls and is committed to financial sector liberalization. For other countries, we see a "back-and-forth" during the 1970s regarding even capital flow controls, not to mention their financial sector's liberalisation.
Germany liberalized capital flow controls, but these controls tightened further in the late 1970s in the face of the weak dollar and the strong mark. This was an outcome that the Germans sought to limit, given the implication of a strong currency for its exporters. The Germans are not interested in having a reserve of official currency in dollars since they want to have a currency that is not too expensive in order to sell their products abroad. There is always this conflict in countries that are very dependent on exports and do not want to have a currency that costs too much. The Germans and the Swiss impose controls and restrictions on the arrival of capital. The Swiss even impose a cost on foreign investors to put their investments in Switzerland. We don't see financial liberalization right away in the 1970s in terms of deregulating the rules that weigh on the world's financial systems. Even in France and Italy there was a hesitation about liberalization, but also in Britain before the Conservatives came in 1979.
Most developed countries except the United States did not dismantle their protection in terms of capital flows until the 1980s. From the 1980s onwards, liberalisation took place for European countries with the Single European Act of 1986. It is especially in the 1990s that we see a profound liberalisation of capital flows.
Petrodollar Recycling: 1973 - 1982[modifier | modifier le wikicode]
How is it possible not to see a decrease in financial regulations and to have financial integration? Global financial integration is linked to the rise of Eurodollar markets. These markets exist outside national markets. The liberalisation of the Euro markets is caused by the recycling of Eurodollars following the OPEC countries' decision in 1973 to double the price of oil and double it again in the following months. This means that oil-exporting countries' income rises from $24 billion before the oil shock to $117 billion. The exporting countries accumulate term deposits in Eurodollars called petrodollars. International banks hold these deposits and are looking for opportunities to recycle these petrodollars. The developing countries agree to finance their deficits, which are increasing due to the rise of the oil countries, and the banks that hold the petrodollars lend to these developing countries to finance their investments. We see the recycling of the petrodollars that arrive in the oil-exporting countries, which are put in London and then exported to developing countries to pay for their deficit caused by the increase in oil price.
The increase in the debt of developing countries in the 1970s explodes. In the early 1980s, international interest rates began to rise due to the efforts of liberalized countries to control their inflation rate pushed up by rising oil prices. Developing countries already have a large external debt that costs much more. We can see that with the increase in interest rates in the United States and Great Britain, there is a great recession being provoked in these industrialized countries because of the decision to raise interest rates and a deflationary decision. We are seeing a provoked recession that is bringing down exports from developing countries that export their products to the United States or Europe. Developing countries are facing the cost of debt and a decrease in their income as they are less able to pay their debt. In 1982, Mexico provoked a moratorium on its debt which caused an international crisis. There is an outbreak of crises reminiscent of the period before the 1930s. Faced with this moratorium, the international banks fear non-payment.
When the Bretton Woods system is in place, it is a remarkable period with almost no banking crises. Then the crisis problem resumed with major systemic crises in the period after the fall of the Bretton Woods system.
Faced with Mexico's moratorium and other developing countries, international banks fear non-payment of their loans and refuse to lend more. For example, the City bank finds itself in a delicate situation because of these debts. It is mainly debtor countries and especially Latin American countries that are in the most terrible situation.
Debt crisis of the years: 1982 - 1989[modifier | modifier le wikicode]
The IMF, the United States and the Paris Group, an informal group of official creditors, are committed to rescheduling developing countries' debt to help them pay for their debts in a longer-term perspective. However, the debt burden increases and a new crisis is provoked in 1987. With the Brady Plan in 1987 is reduced particularly the debt of developing countries. It talks about restructuring and debt reduction completed on condition that the countries concerned commit themselves to liberalizing their economies and opening their doors to international capital flows. It is no coincidence that developing countries committed to liberalizing their financial systems in the late 1980s as a condition for debt reduction.
The IMF finds a second life in the 1980s, which during the Bretton Woods system deals with industrialised countries' problems. We can see this when we see the loans granted to the IMF during this period because two-thirds of the loans are for industrialized countries. In the 1980s, the United States, along with the IMF, promoted neo-liberal policies. We see a similar transformation of the World Bank created under the name of the International Bank for Reconstruction and Development [IBRD]. Initially, it was created to help Japan rebuild its economy, but it was to shift to helping developing countries on condition that they restructure their economies. Capital flows resumed at the end of the 1980s and global financial integration resumed with renewed vigour during the 1990s.
Global Financial Integration: 1990 - 2008[modifier | modifier le wikicode]
We see a diversification of flows. There is a resumption of mandatory issues, a rise in direct foreign investment and an increase in equity issues. We see all the mechanisms for the development of international capital flows. This concerns only part of the international markets, because we have to add the foreign exchange market, which is a short-term trading market.
We can see that the amount of exchange is very important and we can see that if there is a price for the importance of trade, it is to the derivatives traded internationally during this last period constituting an important innovation of the end of the 20th century. Derivatives are contracts whose value is derived from underlying products.
« [h]istory confirms that there is something different and disturbing about our age. »
— Bordo, Eichengreen, Klingebiel, and Martinez-Perez, 2000
Something new and disturbing is happening. There has been tolerance for financial crises until recently, because when financial crises cluster, they are interpreted as localized problems and as the fault of developing countries. Economists are finding that these crises can be solved locally with the help of the IMF, the lending banks and the creditor countries. Throughout the 1990s, there has been a growing role for the IMF in developing countries affected by currency crises. There is a willingness on the part of developing countries to control their own destiny.
There is a significant increase in reserves during this period.