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Postwar international financial system

1.         Why we need a financil system and what are its requirements

Reconcile different needs and objectives. Countries are trying to replicate what they are doing Nationally. Transfer of resources from surplus units to deficit units. Financial system transfers these resources. To opperate effectively

a.      Some vechile to enable saving

Transfer the savings to borrowers

Borrowers should be able to buy goods and repay debts - the money

Nationally state can decide on money and even in institutions in planned economies. Market economies have complex systems.

b.      Financial intermediaries. Banks. They transfer money and create credit.

c.      Conventions and rules. Financial institution and Governemnt behaviour. In international levels. In international level lender of last resort is absent.

Different systems:

a.      barter

b.      bilateral - limits trade to weaker partner and forces to buy expensive goods.

c.      multilateral - medium of exchange needed

International money can be:

a.      gold and silver

b.      currency of the worlds largest nation

c.      create and international institution and let it create an asset

How do you control it:

a.      Cant expand international trade when supply is not enough or when too much is found inflation occurs

b.      Country issuing the money, its monetary policy affects the rest of the world. When it runs Balance of Payments surplus, its money supply will decrease

c.      Real conflict of interests between the countries. Countries with UE will insist on the increase of the asset, countries with inflation dont.

Problem when currencies not backed up by gold, to agree on exchange rate

Fix exchange rates

Flexible exchange rates

Temporary deficit can be financed by

a.      running down reserves

b.      importers can go and borrow on international markets

c.      central bank gies to borrow from other central banks

d.      you have to cut your imports. you have to cut output as well. If it is a large country it will affect world.

Permanent deficit. Borrow over a long term.

a.      Borrow on private capital markets.

b.      governments guarantee the loans

c.      Imort controls. Country would advance less rapidly.

d.      Other countries retaliate and restrict exports

When restrictions are not imposed

2.         Origins and objective of Bretton Woods

3.         How Bretton woods actually worked and why it collapsed

4.         Developments since 1970s, EMS.

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