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This chapter analyses policy responses to the instability of the international monetary system during the 1970s and how these policies affected the City of London. First, the collapse of the international monetary system through the 1960s and then the increased risk to the financial market in the 1970s accelerated the pace of financial innovation. Second, as currency speculation grew, policymakers were reluctant to relax controls on the flow of capital, and this had important implications for London's competitiveness. The debate between the state, academics, and bankers over the desirability of floating exchange rates is surveyed in this chapter. The era of floating exchange rates and inflation prompted an international and domestic banking crisis in 1974 that drew the Bank of England into more active attempts at prudential supervision.

This chapter deals with one aspect of short-term capital movements over the period 1885-1913. It studies the role of the French haute banque in the operation of the international monetary system. It adopts a monographic approach, examining the international balances of the Banque de Paris et des Pays-Bas (Paribas), in an attempt to reinterpret what is known of the pre-1914 international money market's structure. The novelty of this methodology is that it uses microeconomics as a financial probe to reveal a number of more general problems. This is in contrast with macroeconomic studies of statistical interrelations among national interest rates which treat markets as black boxes.

Delving further into US policy determination provides other clues as to why SDRs became marginalized in the late 1970s and 1980s. For instance, US international monetary policy determination was affected by increased Congressional interest in the asset—with the Watergate scandal providing the dramatic backdrop for changing dynamics between the legislative and executive branches of government. These changing dynamics continue to characterize international economic policy determination in the US today, as does the role of the Federal Reserve. Not surprisingly, they also adversely affected prospects for the SDR.

A great debate has been taking place in many nations, especially small ones, in Central, Eastern, and Southern Europe, in the Baltic States, and in the Americas on the need and benefits of abandoning the national currency in favor of the euro or the dollar. This chapter examines the benefits and costs of euroization or dollarization. It analyzes the ways in which the two processes are similar and different, and it examines their likely effect on the functioning of the present and future international monetary system.

Few proposals have been made for the reform of what used to be called the international monetary system, and academic economists have tended to ignore the experience of the European Monetary System (EMS) in their research. An account is given here of this experience. It addresses the functioning of the EMS, considers desirable developments, and examines the difficulties that such developments are likely to encounter.

This chapter discusses developments in the global securities market from 1970 to 1990. It shows that growth and development in the global securities market in the 1970s and 1980s were marked by two major turning points: the abolition of fixed commissions on the New York Stock Exchange in May 1975, which put pressure on stock exchanges in the US and around the world; and the Big Bang in London in October 1986, which not only transformed the British securities market but also intensified the pressure for change which had already been experienced by other stock exchanges, especially in Europe. By 1990, the effects of these twin developments were visible worldwide. The securities markets re-emerged as essential components of national financial systems whilst the global securities market once again became a key element in the financial flows that brought stability to the international monetary system.

Greenwald and Stiglitz argue that an ideal system of international payments should be characterized by stability and balance: stability in exchange rates and the absence of sudden crises, and balance in the sense that individual national economies should suffer neither from deflationary effects of chronic external deficits nor the distorting consequences of chronic external surpluses. Both requirements are essential to the efficient international movement of goods and resources. Yet neither requirement appears to have been met by the current dollar‐based reserve currency system. Recurrent crises in Asia, Latin America, and Eastern Europe, and chronic and growing U.S. payments deficits (with their associated deflationary impact) are longstanding characteristics of the current system.

Special Drawing Rights (SDRs) were announced to the world at the International Monetary Fund's annual meeting in Rio de Janeiro in 1967. Only a few years later, the IMF incorporated in its Articles of Agreement the proviso that SDRs become the principal reserve asset of the international monetary system. Why has this not occurred? Are SDRs still relevant to the world economy today, particularly in the wake of the international financial crisis?

World War I transformed the international economic and political environment. This chapter analyzes the major changes in domestic and international finance and their implications for the economic balance of power. It also describes the changes in domestic political institutions that channeled the pressures felt by policy makers. The six sections of the chapter look at the disintegration of the prewar international monetary system based on the gold standard, domestic finance, foreign finance, trade and competitiveness, domestic political changes, and the implications for postwar international monetary relations.

This chapter develops a historical account of the emergence of an international architecture of austerity in the late Bretton Woods era. These developments were critical for redistributing international monetary power toward central banks and finance ministries. North American and Western European governments reduced controls over capital movements in the late 1950s that, in turn, exposed real weaknesses and limitations to the extant mechanisms for dealing with balance of payments imbalances and speculative attacks on national currencies. Into these institutional gaps stepped the state monetary authorities that developed a network of cooperative arrangements to try and manage the exchange markets. Through these institutional transformations national governments became financially dependent on active cooperation from central banks to protect their currencies from financial speculation.

This chapter aims to contribute to a better understanding of the following two-fold question: To what extent can a contested practice like the maintenance of an undervalued real exchange rate be dealt with effectively under existing international law? Intrinsically related, which are the key aspects on which the IMF’s code of conduct would require reform in order to tackle contemporary challenges to the stability of the international monetary system, such as global current account imbalances? After assessing whether the code of conduct in IMF Article IV:1 constitutes an effective framework for securing systemic stability, this chapter assesses the extent to which WTO rules might constitute an alternative for tackling an undervalued real exchange rate as a prohibited export subsidy. Finally, the chapter looks at overarching conceptual issues and at the G-20’s ongoing efforts to reduce global current account imbalances as one of the underlying key challenges to systemic stability.

This chapter calls for a reform of the international reserve system to address its three fundamental flaws: it has a deflationary bias as the burden of adjustment falls on deficit countries; it has inherent sources of instability associated with the use of a national currency as the major reserve asset and the high demand for foreign exchange reserves by developing countries, due to the pro-cyclical nature of cross-border capital flows and the inadequate availability of “collective insurance”; it exacerbates inequities by transferring resources to reserve currency-issuing countries. The chapter proposes a new system based on the countercyclical issue of Special Drawing Rights (SDRs) to finance International Monetary Fund (IMF) facilities, together with a network of regional reserve funds. It also stresses the need to consider regional monetary arrangements as part of the broader reform of the international monetary system. Finally, it highlights two complementary reforms: placing the IMF at the center of world macroeconomic policy management and rethinking the regulation of capital accounts in light of a reformed global financial system.

The international monetary system faces a growing asymmetry between advanced and emerging nations, echoing the pattern of the late Bretton Woods System. Emerging countries facing the threat of capital flow reversal, have resorted to self-insurance via foreign reserve hoarding. But given “fear of floating” they wish to limit exchange rate volatility through intervention, possibly for competitive export reasons, and/or to avoid boom-bust economic cycles. But this configuration of the world economy is most likely inefficient, resulting from coordination failures and institutional weaknesses. And it may self-destruct if a fiscal variant of the 1960s Triffin Paradox eventually undercuts the creditworthiness of the shrinking set of safe haven governments. These problems could be addressed by better multilateral cooperation, in the IMF or elsewhere, to provide better lender of last resort options, to enable more emergency liquidity, and to avoid currency wars.

This chapter traces the evolution of the International Monetary System (IMS) from the early nineteenth century to the present. In the 1850s, the unit of account in each of the major powers was tied to a fixed weight of one or two precious metals: gold and silver. In response to the demands of increased international trade, the international gold standard was introduced in the 1880s. The two world wars, however, led to the breakdown of the gold standard. After the Second World War, the major powers decided to form the Bretton Woods System (BWS), which created the International Monetary Fund (IMF). But just like the gold standard, the BWS collapsed in a series of crises from 1968 to 1971. The BWS was then succeeded by the managed floating non-system, a system similar to the gold standard and used is used in the Eurozone.

This chapter attempts to draw out the implication of the global financial and economic crisis for emerging markets. The most important implications will focus on financial markets, where there will be less reliance on portfolio capital flows to finance investment and some de-globalization of banking so that the domain of bank operations more closely coincides with the domain of regulation. By contrast, the implications for other dimensions of globalization and for the structure of the international monetary system will be more limited.

This chapter explores ways in which nationalist values helped to shape the emergence of modern territorial currencies in the United States and elsewhere during the nineteenth century. Turning to international monetary systems, it shows how more cosmopolitan nonpecuniary values helped to inspire a failed initiative to create a world monetary union in the 1850s and 1860s. It also examines the international gold standard of the late nineteenth and early twentieth centuries, offering a critique of what many have seen as Karl Polanyi's well-known argument about the economy's socially disembedded nature. The chapter concludes with a discussion of the creation of the Bretton Woods system in the early 1940s, the gold standard's successor, as a clear example of an international monetary system invested from the start with social meaning.

The chapter makes the case that there is a blind spot in the international monetary system. The combination of domestically focused policies and global markets does not constrain the buildup of financial imbalances, due to the spillover of liquidity conditions across borders, and makes it hard for national authorities to see these imbalances coming. Central banks should take the international effects on their own actions—international spillovers and feedbacks or “spillbacks”—into account in setting monetary policy.

Finance can be beneficial for growth, but it can also contribute to financial crises, which are often very damaging for growth. An extensive review of the literature suggests that financial development has a positive impact on economic growth at adequate levels of financial depth but that the effect vanishes, or even becomes negative, when finance becomes excessive. Excessive finance can incubate economic booms and asset price bubbles that end in financial crises, followed by low rates of economic growth for sustained periods. Too little finance is not desirable-but too much is not desirable either. Alternative finance plays an important role in emerging economies, such as China and India. Strong institutions and legal systems may not be prerequisites for growth; alternative systems based on trust, reputation, and other mechanisms can play a crucial role.