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SHANGHAI FINANCE UNIVERSITY

SCHOOL OF INTERNATIONAL ECONOMICS AND TRADE

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DEPARTMENT OF INTERNATIONAL ECONOMICS AND TRADE

INTERNATIONAL MONETARY SYSTEM

The History of IMS and its Potential Reformulation

Introduction to IMS, Evolution of IMS, Beginning of Bretton Woods and Ending, Dirty floats, Current situation and Reformed Monetary system

WINNIE PAUL NDOSA (2011178102)

12/24/2013

|The History of IMS and its Potential Reformulation |
| |
|Introduction to IMS, Evolution of IMS, Beginning of Bretton Woods and Ending, Dirty |
|floats, Current situation and Reformed Monetary system |
| |
|WINNIE PAUL NDOSA (2011178102) |
|12/24/2013 |

Introduction


The
year
1252
marked
the
minting
of
the
very
first
gold
coin
in
Western
Europe
since
Roman
times.
Since
this
landmark,
the
international
monetary
system
has
evolved
and
transformed
itself
into
the
modern
system
that
we
use
today.
The
modern
system
has
its
roots
beginning
in
the
19th
century.
In
this
thesis
I
explore
three
main
ideas
related
to
this
history.



First
is
the
evolution
of
the
international
monetary
system.
Within
this
I
will
explore
the
different
eras
that
make
up
this
time.
First
is
the
classic
gold
standard,
then
the
interwar
period,
and
followed
by
Bretton
Woods.
This
section
concludes
with
a
discussion
on
the
current
era,
also
known
as
the
dirty
float.




 The
second
section
is
an
analysis
of
the
current
monetary
system.
The
world
is
facing
two
major
issues
right
now, the
potential
collapse
of
the
euro
zone
and
the
Chinese
holding
of
US
Treasury
debt.
In
this
section,
I
will
explore
these
issues
in depth
and
highlight
how
the
history
of
the
international
monetary
system
has
led
us
to
this
point.



 In
the third
and
final
section,
I
highlight
several
possibilities
for
reform.
This
is
not
a
comprehensive
plan
of
action,
but
rather
ideas
of
where
I
see
reform
is
needed.
Actual
reform
possibilities
have
been
circulating
for
years,
and
these
ideas
represent
a
combination
of
these.

Evolution
of
the
International
Monetary
System


The
Classic
Gold
Standard
(1876­1914)


The
Rise
of
the
Gold
Standard
in
Great
Britain


The
classic
gold
standard
started
for
most
countries
in
and
around
the
1870s,
but
for
Great
Britain,
it
was
far
earlier.

Many
date
the
advent
of
the
gold
standard
in
Britain
to
1717,
when
Sir
Isaac
Newton
set
the
price
of
gold
at
too
low
a
rate,
causing
silver
to
disappear
from
the
country
entirely.
The
actual
date
of
demonetization
didn’t
occur
until
1774,
the
year
when
gold
was
recoined,
silver
was
recognized
as
subsidiary,
and
limits
were
set
on
the
use
of
silver
coins
in
excess
of
25
pounds.




 In
the
years
leading
up
to
the
adoption
of
the
gold
standard
by
continental
Europe,
Britain
faced
several
instances
of
convertibility
issues.
When
the
Reign
of
Terror
took
place
in
early
1793,
there
was
a
sharp
outflow
of
capital
in
the
form
of
both
gold
and
silver
from
France.
This
produced
large
amounts
of
liquidity
in
Britain,
fueling
an
ongoing
mania
to
its
peak.
Eventually
the
assignat,
the
French
paper
currency
of
the
time,
collapsed,
forcing
a
reflow
of
money.
The
British
people
panicked,
and
a
bank
run
ensued.
In
response,
the
British
government
ordered
the
Bank
of
England
to
suspend
convertibility,
well
before
reserves
ran
out
in
an
effort
to
keep
gold
reserves
from
becoming
exhausted
if
all
the
increased
notes
to
finance
the
war
were
cashed
in.
In
1825,
not
long
after
convertibility
resumption,
Britain
once
again
faced
the
threat
of
a
bank
run.
The
Bank
of
France
stepped
in
to
aid
them
at
this
time, easing
the
fear
of
suspension.



 
Britain
recognized
the
need
to
act.
Suspension
of
the
currency
led
to
an
inconsistent
system always
facing
bank
runs.
At
this
time,
however,
there
were
two
schools
of
thought,
the
Currency
School
and
the
Banking
School,
each
with
differing
ideas
on
how
the
money
supply
should
be
handled.
The
intricacies
of
these
two
schools
are
beyond
the
scope
of
this
paper,
but
let
it
suffice
to
say
that
the
Banking
Act
of
1844
was
a
compromise
between
the
two.
For
the
Bank
of
England,
it
created
an
Issue
Department,
which
was
responsible
for
the
issue
of
paper
currency,
and
it
would
also
create
a
Banking
Department,
responsible
for
making
loans
and
discounts
up
to
a
multiple
of
its
reserves
of
bank
notes
that
had
been
produced
by
the
Issue
Department.


Apart
from
a
fixed
initial
quantity
of
Bank
notes
backed
by
government
securities,
“every
note
issued
had
to
be
backed
by
bullion
in
the
vault
of
the
Issue
Department.
This
limited
the
quantity
of
Bank
notes
in
an
effort
to
adhere
to
the
principle
that
“the
way
to
assure
a
sound
paper
currency
is
to
require
any
increase
in
its
quantity
to
be
backed
pound
for
pound
by
increases
in
bullion
reserves
held
by
the
central
bank”.
Basically,
at
this
point
in
the
history
of
banking
in
England,
security
was
more
sacred
than
flexibility.
Choosing
this
path,
however,
made
it
difficult
for
the
Bank
of
England
to
supply
credit
in
times
of
emergency.
When
the
Crises
of
1847,
1857,
and
1866
erupted,
the
Bank
of
England
was
given
permission
by
government
to
break
the
law
by
issuing
notes
not
backed
by
bullion.




 The
Bank
Act
of
1844
had
an
even
more
fundamental
issue
however.
It
presumed
that
“control
of
the
quantity
of
bank
notes,
and
the
reserves
behind
them,
was
the
chief
function
of
central
banking” British
banking,
however,
was
entering
a
new
phase,
the
checking
system.


Continental
Europe
Joins
the
Gold
Standard

The
gold
standard
in
England
had
been
around
for
several
years
before
continental
Europe
decided
to
also
join
in.
During
the
time
that
Britain
had
been
building
and
redefining
it’s
(and
eventually
the
world’s)
banking
system,
they
had
also
been
experiencing
the
Industrial
Revolution.
This
industrialization
left
them
as
the
“world’s
leading
economic
power
and
the
main
source
of
foreign
finance”.

Countries
desperately
wanted
to
trade
with
such
an
economic
resource,
and
the
bimetallic
standards
of
many
of
these
countries
didn’t
facilitate
easy
trade.
Portugal
had
decided
early
on
in
1854
that
it’s
trade
with
Britain
was
crucial,
and
they
in
response
adopted
the
gold
standard
in
1854.
Other
countries,
however,
had
yet
to
come
to
that
conclusion.


By
the
end
of
the
nineteenth
century,
Spain
was
the
only
European
country
still
on
inconvertible
paper.
In
the
rest
of
the
world,
the
United
States,
Japan,
Russia,
India,
and
Latin
America
all
also
instituted
gold
convertibility.
Silver
remained
the
monetary
system
only
in
China
and
a
few
other
small countries.

Under
the
gold
standard,
“the
exchange
rates
of
these
major
industrial
countries
were
firmly
pegged
within
narrow
bands
(the
gold
points)
in
an
environment
free
of
significant
restrictions
on
international
flows
of
financial
capital”. The
rate
of
convertibility
and
price
of
gold
was
fixed,
and
under
this
fixed
system,
the
world
entered
a
period
of
trade
and
globalization
previously
unmatched
in
history.

The
stability
of
exchange
rates
under
this
system
led
to
the
openness
of
the
markets
and buoyancy
of
trade,
which
in
turn
offered
support
within
themselves
of
the
gold
standard.

There
were,
however,
pressures
on
the
Bank
of
England
with
this
increased
use
of
their reserve
services.
Same
as
in
the
domestic
market,
the
international
gold
standard
required on
demand
payment
to
depositors.
As
Bank
notes
weren’t
legal
tender
in
this
newfound
international
exchange,
gold
had
to
be
exported
if
so
desired
by
the
depositor.
Increases
in
the
rate
of
interest
“brought
about
by
increases
in
the
Bank
rate
were
used
to
attract
money
to
London
and
to
prevent
a
drain
of
English
reserves”.


Instability
and
Failure

The
operation
of
the
gold‐standard
system
rested
on
central
banks’
overriding
commitment
to
“the
maintenance
of
external
convertibility.
There
was,
however,
a
key
problem
with
this.
Not
all
countries
had
established
central
banks.
Even
in
the
United
States
Federal
Reserve
wasn’t
established
until
1913.
This
resulted
frequently
in
countries being
forced
to
suspend
gold
convertibility
to
allow
their
currencies
to
depreciate
properly.
Yet
this
was
just
one
issue.


The
biggest
tension
and
pressure
associated
with
the
gold
standard
was
that
of
the
role of
the
Bank
of
England.
As
previously
mentioned,
the
Bank
of
England
was
operating
as
the
steward
of
the
gold
standard,
and
thus
British
participation
in
the
system
was
critical.
It
isn’t
coincidental
that
on
two
separate
occasions,
1890
and
1907,
Britain
received
foreign
support
when
faced
with
inconvertibility.
Yet
by
the
turn
of
the
century, Britain’s
role
was
“being
undermined
by
the
more
rapid
pace
of
economic
growth
and
financial
development
in
other
countries”. Less
of
its
lending
returned
to
London
in
the
form
of
foreign
deposits.
 Ultimately,
none
of
these
issues
resulted
in
the
death
of
the
gold
standard
despite
their
increasingly
worrisome
possibilities.


The
Bretton
Woods
Era
(1944­1971)

In 1944 at the height of world war II, representatives from 44 countries met at Bretton Woods, New Hampshire of the United States, to design a new international monetary system. The motivation behind creating a new international monetary system was desire to avoid the breakdown in international monetary relations that had occurred in the 1930s. The 1930s were marked by major trade imbalances which in turn led to the adoption of widespread trade protectionism, the adoption of deflactionary policies, competitive devaluations and the abandonment of the gold exchange standard.
The Bretton Woods agreement reached in 1944 at Bretton Woods conference created the International Monetary Fund, the IMF was responsible for coordinating the world monetary system.

In
an
effort
to
keep
this
history
concise,
I
will
not
be
discussing
the
wartime
economy,
as
it
within
itself
had
no
direct
effect
on
the
evolution
of
the
international
monetary
system. The
Bretton
Woods
Era
can
be
divided
into
three
sub-periods:
Pre-convertibility
(1944‐1958),
the
Prime
Years
(1959‐1967),
and
the
Collapse
(1968‐1971).I
will
first
discuss
the
vision
of
the
architects
of
Bretton
Woods,
as
it
is
a
telling
statement
of
the
mentality
of
the
period.


The
Vision
of
the
Bretton
Woods
Architects
:The
situation
directly
following
the
war
and
the
experience
of
the
previous
monetary
times
had
a
direct
effect
on
the
ideas
about
a
new
international
monetary
order.
The
original
goal
of
the
Bretton
Woods
system
was
to
combine
the
advantages
of
the
classical
gold
standard
with
the
advantages
of
floating rates.
At
the
same
time,
the
planning
of
a
new
international
order
was
predicated
on
the belief
that
the
mistakes
of
the
interwar
period
were
to
be
avoided.
Europe
was
also
struggling
with
the
recovery
from
the
devastation
of
the
war,
and
having
just
come
off
a time
of
two
world
wars, the
international
community
sought
a
system
that
would
promote peace
and
interdependence. World
War
II
resulted
in
power
shifts
that
in
turn
slanted
discussions
of
the
creation
of
a
new system.
The
United
States
had
emerged
from
the
war
as
the
strongest
and
richest
power
in
the
world,
but
Great
Britain
had
been
severely weakened.


Against
the
backdrop
of
wartime
diplomatic
negotiations,
these
two
countries agreed
to
be
of
assistance
to
each
other
in
the post-war
world.
John
Maynard
Keynes
of the
British
Treasury
and
Harry
Dexter
White
of
the
American
Federal
Reserve
each
drafted
two
plans
of
what
they
believed
the
post‐war economy
should
look
like.
A
compromise
between
these
two
plans,
following
a
period
of
tough negotiations,
led
to
the Joint
Statement
by
Experts
on
the Establishment
of
an
International
Monetary
Fund,
which
in
turn
served
as
the
working
draft
at the
Bretton
Woods
conference
and
led
directly
to
the
Articles
of
Agreement
of
the
International
Monetary
Fund.
Along
with
the
IMF,
Bretton
Woods
also
created
the
World
Bank.


The
Collapse of Bretton Woods
(1968­1971)


In
the
United
States,
it
was
decided
that
the
ideal
action
would
be
to
break
up
the
gold
pool and
adopt
a
two‐tier
system
for
gold.
This
permitted
the
private
price
to
rise
about
the
official
$35.00
an
ounce.
At
the
same
time,
strong
foreign
pressure
was
exerted
against
foreign central
bank
changing
dollars
for
gold,
and
“
a
number
of
financial
instruments
with
exchange
guarantees
were
made
available
by
the
U.S.
Treasury
to
official
dollar
holders
to
forestall
gold
purchases”.
The
United
States
was
facing
a
serious
loss
of
confidence
that
threatened
to
undermine
the
entire
system.

Comparable
to
the
summer
of
1931
the
small
countries
of
Europe
went
ahead
with
the
converting
of
dollars
to
gold.
This
in
turn
led
to
the
Connolly
shock
of
August
1971,
which
then
led
to
the
secretary
of
the
treasury
imposing
a
10
percent
import
surtax
in
an
effort
to
devalue
the
currency.
The
United
States
first
raised
the
gold
price
then
to
$38.00
and
then
to $42.50,
and
it
also
widened
its
permissiable
range
of
fluctuation
against
the
dollar
from
1.5%
to
2.25%.



Errors
in
monetary
policy
and
also
the
enormous
outflow
of
dollars
to
the
Eurocurrency
market in
1970
contributed
to
the
breakdown
of
Bretton
Woods
as
well.
Richard
Nixon’s
reelection
campaign
had
his
economists
very
anxious
about
creating
a
prosperous
economy
by
1972.
To
this
end,
the
Federal
Reserve
system
in
1970
started
to
lower
interest
rates.
This
happened
at the
same
time,
however,
that
the
Bundesbank
of
Germany
was
seeking
to
restrict
inflation
in
West
Germany.
They
did
so
by
raising
their
interest
rate.
These
policies
weren’t
separated
by
geographic
region,
but
were
instead
interconnected
through
the
Eurodollar
market.
The
resulting
flow
of
dollars
ultimately
left
the
liquidity
definition
balance
of
payments
deficit
in
the
United
States
at
a
much
higher
rate.
It,
in
fact,
rose
from
a
“$2-4
billion
a
year
average in
the
1960s
to
a
$20
billion
in
1970
and
a
$30
billion
in
1971”.None
of
the
measures
taken
could
combat
the
events
unfolding.
The
confidence
in
the
dollar
had
fallen
to
an
all
time
low. These
pressures
eventually
caused
President
Nixon
to
end
all gold
convertability
on
August
15,
1971.
This
effectively
ended
the
Bretton
Woods
era.
Several
attempts
were
made
to
fix
the
system
in
the
next
few
years
but
without
any
success.



The
Dirty
Float
(1971­present)


The
recent
years
have
been
marked
by
severe
crises
and
uneven
monetary
policy.
Many
of
these
specifics
are
beyond
the
scope
of
this
paper,
but
I
will
instead
give
a
brief
overview.
In
February
of
1973,
the
currency
was
set
free
to
float.
This
means
that
no
longer
was
currency
pegged
to
gold,
but
instead
the
exchange
rates
against
other
currencies
were
allowed
to
be
determined
by
the
market.
Many
economists
were
surprised
by
its
effects.
Many
thought
that
it
would
do
the
same
as
it
had
in
the
1930s, and
that
flexible
exchange
rates
would
inhibit
capital
flows
because
of
the
uncertainty
of exchange
risk.
This
turned
out
to
not
be
the
case.
If
one
needed
a
substantial
amount
of capital,
it
was
necessary
to
borrow
dollars.
Quantity
turned
out
to
be more
important
than
quality.


Economists
also
though
that
the
floating
dollar
would
lose
its
preeminence
and
its
role
of
the
international
united
of
account,
standard
deferred
payment,
store
of
value,
and
means
of
pyaments.
Again,
these
predictions
were
proved
to
be
wrong.
It
was
perhaps
not
as
strong
as
it
had
been
in
the
past,
but
in
the
immediate
aftermath
of
floating
exchange
rates,
the
dollar
still
maintained
its
role.
The
SDR
of
the
IMF,
which
was
previously
mentioned,
never
was
seen
as
satisfactory
alternative,
and
never
gained
any
position
in
the
international
monetary
system.


At
the
same
time,
however,
this
period
did
begin
a
time
of
severe
crises
and
monetary
upheaval.
It
is
important
to
note
that
European
dependence
on
the
dollar
had
been
well
noted
by
the
Europeans
after
the
collapse
of
the
Bretton
Woods
era.
After
this
series
of events,
the
European
idea
of
a
currency
(the
Euro)
began
to
really
formulate.
The
European
Monetary
system
was
based
largely
on
German
fiscal
sense,
a
fact
that
will
become
increasingly
important
in
later
years,
and
will
be
discussed
at
a
later
point.


Its
also
important
to
note
that
world
banks,
which
were
full
of
new
funds,
after
the
balance
of
payments
problem
in
the
United
States,
started
to
look
for
new
opportunities
to
lend.
This
initiated
the
boom
in
syndicated
bank
loans
to
sovereign
states,
especially
in
Latin
America.
The
boom
in
lending
went
unnoticed
through
the
1970s.
Bankers
trusted
that
these
developing
countries
would
not
repudiate
on
their
loans.
This
awakening
occurred
in
August
1982
for
the
first
time
when
Mexico
failed
to
make
its
interest
payment.


Conclusions
from
the
Dirty
Float
(1971­present) .
Overall
the
inability
of
the
international
monetary
system
to
reconstruct
a
system
of
pegged
but
adjustable
exchange
rates
failed
repeatedly.
The
source
of
the
failure
was
the
ineluctable
rise
in
international
capital
mobility,
which
made
“currency
pegs more
fragile
and
periodic
adjustments
more
difficult”.
Growing
numbers
of
governments
found
themselves
forced
to
float
their
currencies
due
to
the
“heightened
reluctance
of
their
strong-currency
counterparts
to
provide
support”.


Developing
countries
in
particular
have
suffered.
They
found
it
very
difficult
in
these
thin
financial
markets
to
endure
the
volatile
effects
of
rapid
exchange
rate
fluctuations.
Even
Europe and
the
United
States
have
felt
the
effects.
The
European
market
efforts
were
interrupted
at
various
times
due
to
this.
Even
the
United
States
and
Japan
temporarily
lost
faith
in
the
ability of
the
markets
to
drive
their
bilateral
exchange
rates
to
“appropriate
levels
in
the
absence
of
foreign
exchange
market
intervention”. Such
dissatisfactions
led
to
a
variety
of
partial
measures to
limit
currency
fluctuations.

The
Current
Situation


Since
1971,
the
world
has
been
in
a
period
of
floating
exchange
rates,
which
in
turn
has
led
to
high
levels
of
instability
and
increased
financial
crises.
In
order
to
illustrate
this,
I
will
examine
two
troubling
current
events
in
our
monetary
system:
the
current
crisis
in
the
Euro
zone
concerning
government
debt
in
Greece
and
the
Chinese
holding
of
U.S.
Treasury
debt.
Together
these
two
events
highlight
the
need
for
change
and
underline
the
current
problems
facing
our
system.
I
will
do
this
through
economic
analysis
of
newspaper
articles.


Germany
and
Greece:
Struggles
in
the
Euro
zone
:European
enlargement
has
been
a
challenge plaguing
Europe
for
the
past
50
years.
Since
the
1958
Treaty
of
Rome,
which
established
the
European
Economic
Community,
Europe
has
taken
leaps
and
bounds
towards
their
goal
of
full
political
and
economic
integration.
The
crisis
in
the
Euro
zone,
which
is
the
16
countries within
the
European
Union
that
operate
with
the
Euro
as
their
currency,
has
highlighted
the
single
most
important
problem
they
have
always
faced:
the absence
of
a
single
government.
The
euro
zone
is
not
an
“optimal
currency
area,”
and
thus
it
lacks
the
important
tools
to
deal with
asymmetric
shocks,
meaning
shocks
that
affect
some
members
more
than
others.
In
this
sense,
I
mean
tools
to
be
a
“treasury
with
powers
to
tax
and
borrow
and
a
central
bank
that can
act
as
lender-of-last
resort
to member
banks”.


 The
criteria
to
enter
the
union
were
strict,
due
largely
to
the
German
influence,
and
many
of
these
countries
with
depreciating
currencies
were
unable
to
fit
the
criteria
to
enter
the
union.
Instead,
they
relied
on
what
has
come
to
be
known
as
“creative
accounting,”
and
some countries,
for
example
Greece,
even
went
so
far
as
to
“falsify
its
debt
and
deficit
numbers”.
In the
beginning,
however,
this
didn’t
pose
much
of
a
problem.
The
union
itself
is
made
up
of 27
countries
and
has
formed
what
many
called
the
“world’s
most
formidable
economic
bloc,
incorporating
491
people
in
an
integrated
market
that
produces
nearly
a
third
more
than
the
United
States”.

Granted,
the
union
had
its
issues,
but
they
weathered
the
storm
in
admirable fashion.
It
wasn’t
until
the
2008
financial
crisis
that
the
cracks
began
to
show.
 In
early
2010,
the
idea
and
fear
of
a
sovereign
debt
crisis
really
began
to
develop
in
many
troubled
euro
zone
countries,
including
Spain
and
Portugal,
but
the
crisis
developed
most
fully
in
Greece. With
this
situation
in
the
world,
Greece’s
debt
and
fiscal
issues
came
to
light.
National
debt
is
said
to
be
at
around
300
billion,
which
is
larger
than
the
nation’s
economy
itself.
Some
economists
are
predicting
that
the
debt
will
reach
“120
percent
of
gross
domestic
product
in
2010”
(CNN
1).

IMF
Involvement.
The
Greek
bailout
involves
funds
from
both
internal
sources
and
also
the
IMF.
IMF
involvement
was
heavily
pushed
by
Angela
Merkel,
who
was
eager
to
show
Germany that
“their
country
would
not
have
to
foot
the
entire
bill
to
help
Greece”.
Not
all
were
as
excited
over
“substantial
International
Monetary
Fund
financing,”
however,
as
the
Germans.
EU
leaders
had
been
hesitant
up
to
this
point
over
involving
the
Fund,
as
they
weren’t
technically “European.”
IMF
involvement
could
weaken
the
euro
further,
resulting
in
its
fall
against
other
currencies.



 Despite
the
risk,
the
IMF
is
prepared
to
lend
Greece
around
10
billion
Euros.
European
Union
nations
outside
of
the
euro
zone,
such
as
Hungary
and
Romania,
have
all
received
support
from
the
IMF,
which
then
promptly
“imposed
various
fiscal
requirements
intended
to
insure
they
can
pay
back
the
loans”.
The
difference
now
is
the euro
zone
boundary,
and
IMF
involvement
makes
the
EU
look
weak.
Miranda
Xafa,
a
former
executive
board
of
the
IMF,
makes
a
good
point,
however.
She
believes
that
“the time
has
come
for
Europe
to
acknowledge
that
it
has
neither
the
technical
expertise
to
monitor
government
behavior
nor
the
ability
to
raise
rescue
funds”.
Its
believed
by
the
IMF
that
their
involvement
would
help
the
other
countries
and
restore
confidence.

In
Brussels,
the
view
is
the
exact
opposite.


What
This
Means
for
the
Future
of
Europe
and
the
World
as
a
Whole.
For
Greece,
the
bailout
was
a
necessary
action.
It
could
not
have
alleviated
its
debt
without
some
form
of
involvement
from
either
the
IMF
or
the
European
Union.
In
recent
days
Greece
has
continued
to
struggle.
Market
anxiety
has
pushed
Greece’s
long-term
bond
yields
to
“their
highest
levels
since
the
country
joined
the
single
currency
nearly
a
decade
ago”.
Fitch,
a
credit‐rating
agency
also
downgraded
the
country’s
debt
by
two
notches
to
the lowest
investment
grade,
one
grade
above
“junk”
status.
Fitch
has
also
recently
cast
doubt
on
the
Greek
government’s
political
vows
to
cut
the
public
deficit
by
a
third
this
year.
Essentially,
the
recession
is
deepening
and
the
costs
of
servicing
their
high
debt
are
increasing.
So,
as
I
see
it,
it
is
only
a
matter
of
time
before
Greece
must
implement the
European
rescue
mechanism.
Once
Greece
has
decided
that
there
is
nothing
more
they
can
do
domestically,
officials
from
the
European
Central
Bank
and
the
European
Commission
“must
agree
that
Greece
is
out
of
options”.
Once
this
decision
is
made,
the euro
zone
will
be
whipped
into
a
frenzy
of
action,
as
things
are
predicted
to
move
very fast.


For
the
euro
zone,
this
has
placed
tension
on
the
internal
relationships.
Germany,
in
their
reluctance
to
aid,
is
turning
ever
more
inward
domestically.
As
they
have
since
the hyperinflation
always
been
very
fiscally
sound,
such
irresponsibility
financially
doesn’t
urge
the
type
of
international
cooperation
and
integration
that
is
promoted
by
the
treaties of
the
European
Union.



A
Reformed
Monetary
System

As
the
previous
two
sections
highlight,
the
world
is
currently
undergoing
a
series
of
changes.
Europe
is
facing
its
own
internal
debt
crisis,
but
the
fact
that
it
is
the
world’s
largest
exporter, and
one
of
the
largest
economic
blocs
in
the
world,
make
the
issue
international.
The
same
holds
true
for
Chinese‐U.S.
economic
relations.
The
financial
crisis
has
made
this
situation
much
worse,
and
the
international
monetary
system
is
teetering
on
the
edge
of
collapse.
As
the
background
section
highlighted,
there
have
been
definitive
moments
of
change
in
the
history
of
the
monetary
system.
This
is
one
of
those
moments.
Before
the
system
collapses
around
us,
a
new
system
must
be
enacted.
The
ideas
for
such
a
system
have
long
been
debated,
but
here
I
will
outline
what
I
see
as
some
of
the
more
feasible
options.
 The
need
for
a
revised
system
has
been
noted
by
several
world
leaders.
Nicolas
Sarkozy
has
said,
“we
must
rethink
the
financial
system
from
scratch,
as
at
Bretton
Woods”.
Furthermore,
at
the
G20 conference
2010,
a
realignment
of
currency
exchange
rates
was
discussed.
Most
recently,
Prime Minister
of
the
European
Community
and
European
Monetary
Union.
And
we
need
it
fast.
Only this
will
build
a
new
confidence
and
fairness
that
our
citizens
can
trust,
and
that
can
prevent
each
new
crisis
from
becoming
an
epidemic”

The
desire
to
recreate
the
international
monetary
system
is
there,
but
now
the
cooperation
of the
world
is
necessary.




 The
first
of
these
reformation
ideas
was
promoted
by
World
Bank
president
Robert
Zoellick.
In
a
speech
during
2008,
he
called
for
a
“new
multilateral
network
for
a
new
global
economy”. Essentially,
the
G7
is
not
working,
and
it
is
an
outdated
mode
of
viewing
the
world.
Zoellick
suggested
a
new
steering
group
including
the
nations
of
Brazil,
China,
India,
Mexico,
Russia,
Saudi
Arabia,
South
Africa,
as
well
as
the
current
G7
members.
Yet
it
is
important
to
recognize that
simply
putting
new
countries
on
the
“steering
group”
will
not
remake
the
system.
It
would
simply
be
updating
an
old
and
tired
system.
The
system
needs
to
be
reevaluated
on
a
ten‐year
basis
as
to
note
the
growths
in
the
world.




 In
conclusion
of
this
section,
I
would
like
to
say
that
these
are
simply
ideas,
not
a
concrete
plan
of
reformation.
A
concrete
plan
would
require
years
of
thought.
A
policy
idea
gone
right
usually
takes
time
and
many
small
scale
tests.
As
this
is
the
entire
international
monetary
system
that
we
are
discussion,
I
would
advocate
nothing
less.


Conclusion


The
international
monetary
system
has
come
a
long
way
since
the
early
days
of
the
gold
standard.
It
began
with
the
gold
standard
in
the
1800s,
has
been
interrupted
by
two
major
world
wars,
created
two
of
the
largest
financial
institutions
the
world
has
ever
seen,
and
weathered
multiple
financial
crises.
Yet
as
we
approach
the
next
era,
it
is
questionable
as
to
whether
the
system
as
it
is
today
can
exist.
The
euro
crisis
and
the
Chinese
holding
of
US
Treasury
debt
are
two
of
the
largest
issues
the
system
has
ever
faced,
and
when
we
look
back
on
the
history
of
the
system,
it
can
be
seen
that
in
times
of
big
issues,
the
system
changes
irrevocably.
 With
this
in
mind,
it
is
time
that
we
begin
to
formulate
the
system
in
the
way
that
is
best
for
the
world,
and
not
simply
let
what
happens
happen.
As
the
1970s
indicated,
this
is
not
necessarily
the
best
mode
of
action.
We
did
that
then
and
ended
up
with
the
highly
volatile
system
that
we
have
today.
The
time
for
action
and
creation
is
now.
 The
ultimate
goal
of
this
thesis
was
to
highlight
this
urgency.
The
system
has
evolved
considerably
and
it
is
yet
to
finish.
So
long
as
we
live
in
a
global
world,
there
will
be
a
need for
a
global
system,
and
unlike
ever
before,
its
time
to
create
a
truly
equalized,
globalized
international
financial
system.