Money, Finance and the World Economy: 1974 - 2000
New monetary regime[edit | edit source]
In December 1971 are the Smithsonian agreements in Washington concluded by the group of ten consecrating the devaluation of the dollar. An ounce of gold goes from 35 dollars to 38 dollars. We see a return to fixedity around the dollar with fluctuation margins widened to 2.25%. We see a reinstallation 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 led 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 change of system and a real dive 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 to float the exchange rate was made, monetary policy emancipated, but there was some hesitation about this decision. Following the failure of the Smithsonian, decisions were taken without finding a solution to the world 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-looking economies, the floating exchange rate is disruptive. European economies export 25% of their country, and the 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 carry out almost 50% of their international trade there within their zone. They have an interest in maintaining stability between their respective currencies. European economies seek to create stable monetary conditions to promote conditions for intra-European trade. The monetary serpent lasted from 1972 to 1978 then the European monetary system from 1978 until the creation of the European Union. It is a will that we see immediately after the end of the Bretton Woods system. For other countries that have less institutional capacity than Europeans, they adapt to the system as they can. Many developing countries seek to maintain a fixed exchange rate against their most important trading partners.
With the arrival of the new floating exchange rate regime, there is a tendency to believe that this system change goes hand in hand with a liberalization of international capital flows. There are good reasons, from a logical perspective, to think so, because floating exchange rates make it possible to liberalize capital flows without transgressing Mundell's trilemma. With the transition to the floating exchange rate, some countries of the world and especially countries that claim to compete for the 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 abolition of capital controls and is committed to the liberalisation of the financial sector. For other countries, we see a "back and forth" during the 1970s even with regard to capital flow controls, not to mention the liberalization of their financial sector.
Germany liberalized controls on capital flows, but these controls became even tighter at the end of the 1970s in the face of the weakness of the dollar and the strength of the mark. This is a result that the Germans are seeking to limit given the implication of a strong currency for its exporters. Germans are not interested in having a reserve of official currency in dollars since they want to have a currency not too expensive in order to sell its products abroad. There is still this conflict in countries that depend a lot on exports and do not want to have a currency that is too expensive. The Germans and the Swiss impose a control and a restriction on the arrival of capital. The Swiss even impose a cost on foreign investors to put their investments in Switzerland. There was no immediate financial liberalization during the 1970s in terms of deregulation of the rules that weighed on the world's financial systems. Even for France and Italy, there was hesitation about liberalisation, but also in Great Britain before the Conservatives arrived in 1979.
Most developed countries except the United States did not dismantle their capital flow protection until the 1980s. It was from the 1980s that the Single European Act of 1986 was liberalised for the European countries. It is especially in the 1990s that we see a profound liberalization of capital flows.
Petrodollar Recycling: 1973 - 1982[edit | edit source]
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 the eurodollar markets. These markets exist outside national markets. The liberalisation of the Euromarkets is caused by the recycling of Eurodollars following the OPEC countries' decision in 1973 to double the price of oil and to double it again in the following months. This means that the income of oil-exporting countries rose from 24 billion dollars before the oil shock to 117 billion dollars. Exporting countries accumulate euro-dollar term deposits called petrodollars. International banks hold these deposits and seek opportunities to recycle these petrodollars. The developing countries agree to finance their growing deficit due to the rise of the oil-producing countries and the banks that hold the petrodollars lend to these developing countries to finance their investments. We see the recycling of petrodollars that reaches oil exporting countries, which are put in London and then exported to developing countries to pay their deficit caused by the increase in the price of oil.
The increase in developing countries' debt in the 1970s exploded. In the early 1980s, international interest rates began to rise because of liberalized countries' efforts to control their inflation rate pushed upwards by rising oil prices. Developing countries already have a large external debt that costs much more. We see that with the increase in interest rates in the United States and Great Britain, there is a great recession caused in these industrialized countries because the decision to raise the interest rate and a deflationary decision. We are seeing a recession that has brought down the exports of developing countries that export their products to the United States or Europe. Developing countries face the cost of debt and reduced 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 a crisis outbreak that recalls the period before the 1930s. Faced with this moratorium, international banks fear non-payment.
The period when the Bretton Woods system is in place is a remarkable one with almost no banking crisis. Then, the crisis problem resumed with major systemic crises in the period after the fall of the Bretton Woods system.
Faced with the moratorium in Mexico 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 in particular Latin American countries that are in the most terrible situation.
Debt crisis of the years: 1982 - 1989[edit | edit source]
The IMF, the United States and the Paris Group, an informal group of public creditors, are committed to rescheduling developing countries' debt to help them pay in a longer-term perspective. However, the debt burden increased and a new crisis was provoked in 1987. With the Brady plan in 1987 was particularly reduced the debt of developing countries. Restructuring and debt reduction are said to have been completed on condition that the countries concerned undertake to liberalise their economies and open 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 reducing their debt.
The IMF finds a second life in the 1980s which during the Bretton Woods system deals with problems of industrialized countries. We see this when we see the loans granted to the IMF during this period because 2/3 of the loans are intended for industrialized countries. In the 1980s, the United States promoted neoliberal policies with the IMF. We see a similar transformation of the World Bank created as the International Bank for Reconstruction and Development[IBRD]. Initially, it was created to help Japan rebuild its economy, but will move to aid to developing countries on the condition that the countries concerned restructure. Capital flows resumed in the late 1980s and global financial integration picked up again in the 1990s.
Global Financial Integration: 1990 - 2008[edit | edit source]
We are seeing a diversification of flows. There is a recovery in mandatory issues, an increase in foreign direct 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 it is necessary to add the foreign exchange market which is a short-term trading market.
We see that the amount of exchange is very important and we see that if there is a price granted for the importance of trade, it is to derivatives traded internationally during this last period constituting an important innovation at 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 worrying is happening. There is a tolerance for financial crises until recently, since when financial crises come together, they are interpreted as localized problems and as the fault of developing countries. Economists note that these crises can be resolved locally with the help of the IMF, creditor banks and creditor countries. Throughout the 1990s, there was 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.