Topic 5 Flashcards
(161 cards)
1
Q
how did the first world war change the structure of the international economy?
A
abandonment of gold standard
international financial relations changed
altering of trade patterns
war demand for materials stimulated the worldwide expansion in their production
2
Q
how did international financial relations change after the first world war
A
US emerged as major creditor nation
British position weakened by war debts to the US
France also had large debts
Germany forced to pay reparations
disintegration of Austro-Hungarian and Ottoman Empires
3
Q
altering of trade patterns after WW1
A
european countries were making war materials and military equipment instead of civilian goods
stimulated industrialisation in countries like Australia, Canada, Brazil, India and Japan
4
Q
Main powers position on reparations for germany
A
France advocated for tough reparations as they were the largest recipient of reparations
Britain was concerned about the effects on the European economy of harsh reparations
US argued against reparations (Woodrow’s 14 point plan)
5
Q
treaty of versailles
A
28 June 1919
Surrender its naval forces, army was restricted to 100,000 and not allowed an air force
Lost 13% of pre-war territory and 7 million people (12% of population)
Took coal, agricultural and manufacturing resources
Give up overseas colonies
Admit Liability for war damage - War Guilt Clause
Pay reparations (132 billion gold marks) final payment made in October 2010
6
Q
Keynes position on reparations
A
opposed tough reparations arguing that destabilising germany would undermine post-war economic recovery in Europe, instead arguing for war debts to be forgiven
7
Q
total european debt owing to America by 1922
A
US$ 9.4 billion
8
Q
german rates of hyperinflation in 1923
A
over 100 million percent
9
Q
main causes of inflation
A
persistent shortages in civilian products, considerably worsened in 1923 by the French occupation of the German Ruhr and closure of its industries
the government’s monetary funding of its ballooning budget deficits and war reparations
10
Q
german government monetary funding war and post-war
A
the german government relied entirely on borrowing to fund military spending rather than raising taxation
war inflation amplified the budget deficits and made it increasingly difficult to effect funding through long-term borrowing
11
Q
German military government rationale for its war debt funding
A
on winning the war, the war debt would be paid for by annexing resource rich industrial territory to the west and east and imposing massive reparations on defeated Allies
12
Q
position of weimar republic in 1919
A
inherited a massive war debt that could not be service by raising tax revenue in the debilitated post-war state of the economy
the public refused to take up Government securities, so the government was compelled to issue short term treasury bills to finance its deficits
13
Q
German fiscal position by 1921
A
by 1921, as production of civilian goods began to recover, the German fiscal position deteriorated with the first reparation payments in june of that year
14
Q
devaluation of the mark and the first reparation repayment
A
first reparation payment marked the beginning of an increasingly rapid devaluation of the mark
mark fell in value from 90 to about 330 marks per USD
15
Q
impact of the devaluation
A
contributed to higher inflation via rising import costs
government began to issue money to buy foreign currency in equivalent gold marks to make reparations repayments
16
Q
impact of the devaluation on reparations
A
germany could not purchase gold to make reparation repayments
reparations were instead paid in goods such as coal
january 1923, French and Belgium troops occupied the Ruhr industrial region to appropriate coal
this led to a general strike supported by the government printing money that crippled national production and induced hyperinflation
17
Q
consequence of hyperinflation
A
led to price inflation outrunning the growth in the quantity of paper which eventually created a shortage of money for transactions
18
Q
shortage of money for transactions impact
A
gave the government an opportunity to bring the inflation under control by the issuance of a new revalued currency called the Rentenmark in October 1923
19
Q
Dawes Plan year
A
1924
20
Q
What did the Dawes Plan do?
A
ultimately facilitated currency stabilisation by the rescheduling of reparation payments and floating an international loan to make the first payment and enabled Germany to return to the gold standard with a new currency, the Reichsmark, at the old pre-war parity
21
Q
What did the Dawes Plan consist of?
A
Ruhr Area to be evacuated by foreign troops
Reparation payments would begin at one billion marks the first year, increasing annually to two and half billion marks after five years
the Reichsbank to be reorganised under Allied supervision
the sources for the reparation money would include transportation taxes, excise and custom duties
Germany would be loaned 800 million marks from the US through a consortium of American investment banks
22
Q
Impact of foreign lending on German economy
A
heavy reliance on mainly american loans left the economy vulnerable to the Wall Street Crash of 1929 and directly spread the Great Depression to Germany
23
Q
political impact of hyperinflation
A
many people’s savings were wiped out, and many of those who lost their savings, commonly small businessmen and public servants, joined the Nazi Party in the early 1920s
24
Q
desire for restoration of the Gold Standard
A
after the exhaustion of WW1, the major nations wanted to return to the pre-war stability of the gold standard - prior to the war, the international monetary system under the gold standard provided a conducive environment for the growth of foreign trade and foreign investment
25
when does a bimetallic standard work
works smoothly whilst the ratio between the values at which silver and gold was freely minted into coins approximated to the ratio of values in the international bullion market
26
what happens if silver and gold ratios diverge?
the metal with the higher international market value will flow out of a country in return for the lower value metal, eventually leaving it with only he lower value metal in circulation
27
major catalyst for the international adoption of the gold standard pre-war
the decision by a unified Germany to change from a silver to a gold standard
this was made possible by the larger war indemnity that France was forced to pay Germany on its defeat in the Franco-Prussian War
additionally decline in the value of silver
28
1878 gold standard
Belgium, Holland, France, Switzerland and Scandinavian countries joined Britain on the gold standard
29
US adoption of gold standard pre-war
the US did not officially adopt the gold standard until 1900, however, the resumption of convertibility of paper in 1879 meant it effectively operated on the gold standard via its bimetallic standard
30
external adjustment under the gold standard
called price-specie-flow mechanism
when the external account is in surplus, specie will flow in as net foreign payments and specie reserves will increase, inducing a lowering of interest rates, greater lending and a monetary expansion that will, in turn, raise income and prices of tradable goods. the higher prices relative to foreign goods will thereby lead to a turnaround in trade flows and a tendency toward external balance.
31
external adjustment in reality
relied on central bank management, especially by the Bank of England, with most foreign trade financed through London, its market providing international liquidity to smooth out external adjustments
32
crucial factor to the re-establishment of the pre-war international monetary policy
Britain's return to the gold standard and London's capital market resumes its central role in international finance
33
what happened to the british exchange rate in 1919
the wartime peg of the USD/pound exchange rate was abandoned so that it could fluctuate as a measure of progress
34
impact of abandonment of wartime peg
post-war boom caused a global price inflation that was quickly arrested by US Fed raising interest rates in 1920
35
1920 to 1923 value of pound to USD
By 1923 the pound had recovered from its low of US $3.60 in 1920 to reach US $4.60 but Britain had still not achieved parity on price competitiveness with the US
36
Keynes Opposition to Britain's Return to the Gold Standard
argued that a return to the pre-war gold standard would require a persistent deflationary policy that would worsen the already high 10% unemployment
37
according to keynes, how much would unemployment need to fall by to bring about partity with the us
12%
38
Keynes' alternative proposition
thought it would be wise to delay the return to gold until wage and price inflation in the US increased toward that existing in Britain
Keynes argued instead for a stimulatory monetary policy to revive British industry and reduce unemployment, which was incompatible with a return to the pre-war standard
39
British Treasury Argument
argued that unemployment could only be reduced by a worldwide recovery in trade for which stabilisation of the exchanges was a necessary precondition
further argued that Britain's repayment of foreign creditors in full value pounds was necessary if London's position as world's premier capital and money market was to be restored
40
later commentators opinions on British return to gold standard
later commentators have asked why Britain did not seek to return to the gold standard at a lower exchange rate e.g. US$ 4.40
this may not have made much difference given that after Britain's return to gold, France and Belgium deliberately fixed their franc currencies in 1926 at lower rates to advantage their export industries
41
implications of Britain's return to the gold standard
Keynes was proved correct
continued deflationary policy to keep Britain on an over-valued currency led to persistent economic stagnation and unemployment until the Great Depression
Led to general strike
Britain failed to return to its dominant role in the international monetary system
42
when did Britain return to gold standard?
1925
43
Britain General Strike
1926 - British trade union movements resisted the attempt by employers to reduce the money wages of workers in established industries (beginning with coal mining)
44
British abandonment of gold standard
In 1931, in the midst of the Great Depression, Britain abandoned the gold standard as policymakers sought to independently stimulate the economy. This led to the collapse of the gold standard
45
restoration of gold standard post-war
by 1928 most nations returned to the gold standard so in appearance the international monetary system had been restored
46
what enabled post war recovery
the stabilisation of exchange rates and prices via, crucially, American loans
47
when did weimar germany reach its pre-war production?
by 1925, then proceeded to expand in the following years on the basis of a building construction boom
48
european economic boom
late 1920s up to 1929, started by building construction boom in germany
49
commodity prices in 1920s
decline in price as a result of the growth in global production outstripping its demand
50
1920s progress in agriculture
rapid technological progress with increased use of chemical fertilisers, mechanisation and improved methods for breeding plants and animals. development of combustion-powered tractor with ancillary apparatuses
51
raw material prices during war and immediately post-war
price rose considerably due to the strong demand for war materials and food, together with the loss of agricultural production in areas of europe devastated by conflict and occupation especially in France, Belgium and in central and eastern europe
52
impact of wartime prices on economies not directly involved in conflict
naturally encouraged global agricultural production
53
post-war impact on raw materials and agricultural prices
war-time demand for primary products declined at the same time as European supplies recovered and appeared on the market.
weak industrial expansion also contributed to low agricultural prices, rising farm debt and general distress for producers in the 1920s
led to increased protectionist measures for agriculture by primary producing countries
54
post-war impact on commodity exporting nations
By mid-1929 a number of commodity exporting nations that relied on capital inflow began to experience considerable foreign debt problems as international credit conditions tightened
- largely a result of the US Fed raising interest rates in 1928 and 1929
55
most defining event of the interwar period
great depression
56
when is great depression commonly understood to have started
1929
57
what marked the start of the great depression
collapse of stock prices on New York's Wall street on Black Tuesday 29 October
58
how much did world gdp contract between 1929 and 1932
15%
59
peak unemployment in germany during great depression
30% in 1932
60
peak unemployment in US during great depression
25% by 1933
61
peak unemployment in Britain during great depression
15% in 1932
62
peak unemployment in Australia during great depression
29% in 1932
63
peak unemployment in Canada during great depression
27% in 1933
64
summary of impact of great depression in one sentence
had far-reaching implications for social, political and policymaking institutions and for international relations in the 1930s and beyond
65
how long is the great depression generally considered to have lasted
throughout the 1930s - so from 1929 to 1939
66
when did most recoveries begin to recover and why did this not align with the end of the depression?
most economies including the US began to recover from deep depression by 1933 or 1934, but the severity of the downturn and the rate of recovery varied between them
67
which industrial nation was most severely affected?
US
68
US contraction in industrial production and gdp during depression
industrial production is estimated to have contracted by nearly 50% and GDP by 30% between 1929 and 1933
69
Germany contraction in industrial production and GDP during depression
industrial production contracted by 40% and GDP by 20% between 1929 and 1932
70
UK contraction in industrial production during depression
industrial production contracted by 28% between 1929 and 1931
71
France contraction in industrial production and GDP during depression
industrial production contracted by 24% and GDP by 15% between 1929 and 1932
72
how did recovery differ between nations
variation reflected the self-indepence of their autarky
73
Japanese recovery from depression
japan recovered strongly in 1932
74
UK recovery from depression
UK began to recover in 1932 but gained momentum in 1933
75
france recovery from depression
In France recovery remained weak such that GDP failed to reach its 1929 level by the end of the 1930s
76
German recovery from depression
continued to strengthen so that GDP had exceeded its 1929 level by 1935
77
US recovery from depression
recovery began in 1934, gathered strength in 1935 and 1936 until afflicted by another downturn in 1937-38
78
overarching cause of great depression
represented a catastrophic and persistent failure of demand (over-production/under consumption)
79
what exacerbated and spread the depression
the state of the international economy in the late 1920s
80
most common explanation by historians for great depression
most involve a failure of policy and institutions, in particular, the international monetary system based on the gold standard, the Federal Reserve Bank and the Hoover Administration as well as corresponding policymakers among the major nations
81
catalyst for the great depression
restrictive monetary policy of the US federal reserve bank in 1928 and 1929 in an attempt to arrest a speculative price boom on Wall St
82
why was restrictive monetary policy the trigger for the great depression
contributed to a decline in industrial production in the US, discernible by mid 1929
policy extracted gold reserves from RoW placing upward pressure on world interest rates and leading to a tightening in credit conditions
eventually burst the stock market bubble causing a crash
83
impact of stock market crash on private wealth
declined by some 10% increasing the ratio of debts to assets of consumers as well as financial institutions and led to a decrease in consumption expenditure, especially on consumer durables. also led to some immediate bank failures
84
international propagation of great depression
US downturn was quickly transmitted to the rest of the world, especially Europe, by the calling in of its loans as US financial institutions attempted to shore up liquidity and redress their deteriorating leverage position
- drying up of american capital flows brought about a collapse of credit based investment and consumption in Europe
- banks in other countries compelled to also tighten monetary policy to maintain gold reserves
85
how did the downturn become a great depression?
wall street stock market did recover somewhat in early 1930 before steeply declining
bank failures
lack of prudential controls and coherent monetary policy
decline in spending that brought on a price deflationary process
86
1930 bank failures
in november and december about 600 US bank failures occurred as a result of bank panic that followed the collapse of calwell and co, a large financial holding company and tennessee and the largest bank in NY
87
deflationary spiral as a cause of depression
collapse of demand led to a deflationary spiral that increased the real interest rate and exacerbated the financial position of indebted firms and households and intensified the reluctance to borrow which further depressed spending
88
how did great depression impact US farmers
rural towns in America were hit especially hard with many farmers already indebted because of the persistence of low agricultural prices in the 1920s. recurring droughts in the mid-west in over farmed and marginal farmings areas in the 1930s contributed to the rural depression
88
major contributor to the deflationary spiral
collapse in commodity prices as the demand for raw materials by industry and the consumption of foodstuffs sharply declined
89
European Currency Crisis
May 1931 - Credit Anstalt collapsed leading to a run on the Schilling which led to a run on the Reichsmark in June and July. reichsbank ran out of reserves and instituted exchange controls. currency crisis spread to the pound sterling
90
how did the treasury bank deal with the currency crisis
unwilling to raise the rate, they supported the pound by direct intervention, that is, by buying pounds at gold parity, which they financed by borrowing gold reserves from the US and France. this was unsustainable and they abandoned gold standard in September 1931
91
Smoot Hawley Act
passed in 1930
substantially increased the American tariff on imports
had been considered beforehand to protect producers, especially in agriculture
92
impact of american protectionist policy i.e. Smoot Hawley Act on other countries
sparked retaliatory protectionism by foreign countries that became fortified in the 1930s, contributing to the 50% contraction in international trade between 1929 and 1933
also contributed to collapse of gold standard as it made it difficult for debtor countries who relied on exports to service and repay their foreign debt
93
impact of Smoot Hawley Act for America
may have aided American recovery and the adoption of autarkic policies by nations following the example of the US did lead to more self-reliant monetary and fiscal policies to stimulate internal demand
94
Actions of the federal reserve following Britain's abandonment of gold standard
with the blessing of the Hoover Administration, the Fed chose to resist the international pressure and preserve the gold value of USD. to do so, it raised nominal interest rates, further pushing up real rates with a disastrous effect on banking
95
what did the fed's depression policy reflect
a concerted effort to preserve the gold standard even though it was being abandoned in Europe
96
how many banks failed in the US 1930-33
8812 banks
97
how did the bank failures end
Roosevelt called a bank holiday in March 1933 and imposed controls on foreign exchange trading to decouple monetary policy from the gold standard
98
hoover administration fiscal policy response 1929 to 1931
at first adopted an expansionist policy to stimulate investment consisting of tax reductions and the income of federal public capital outlays
99
hoover administration fiscal policy post 1931
reversed expansionary policy through large tax increases to eliminate the budget deficit and relieve international pressure on the USD, further contributing to the depression
100
Roosevelt's New Deal
began in 1933 and a more aggressive fiscal expansion was implemented that provided welfare relief, jobs programs and public work. the funding was more direct in trying to curb unemployment
101
fiscal policy 1933 to 1936
steady modest focal expansion as tax revenue growth lagged behind spending. in 1937 policy was tightened through higher taxes contributing to the 1937-38 recession before expansionary fiscal policy was adopted in 1939 and 40 as war approached
102
why was recovery in US slower and longer than other nations
because of policy mistakes that worsened the depression and the modestly, and at times, inconsistency of expansionary macroeconomic policy. This also explains why UE remained high until the beginning of WW2
103
First New Deal years
1933-34
104
main objective of first new deal
to provide relief and to restore confidence in banking, business and consumer spending
105
elements of first new deal
Banking: emergency banking act (treasury supervision), glass-steagall act (regulate and limit bank speculation), federal deposit insurance corporation (insured deposits up to $2500 to stop runs on banks), Securities Act (balance sheet disclosure), and to regulate wall street - the US securities and exchange commission created in 1934
relief: public works administration (1933-35 $3.3 billion in 35,000 mainly construction projects)
Farm and Rural programs: resettlement administration, rural electrification administration (to install rural electricity infrastructure), agricultural adjustment act (to raise agricultural prices and increase farm income)
106
second new deal years
1935-38
107
second new deal main objective
income redistribution through extension of social welfare and progressive taxation mainly applied to taxing corporate earnings
108
elements of second new deal
social welfare: social security act (permanent system for universal retirement pensions, unemployment insurance and benefits for handicapped and needy, financed by payroll taxes), food stamp plan introduced in 1939
employment works programs: Works progress administration (nationalised unemployment public relief schemes aimed at returning unemployed to the work force)
tax policy: Revenue Acts (to tax wealthy and undistributed profits tax and graduated corporate income tax)
housing: Housing Act 1937 (to eliminate urban slums)
Labour relations: national labour relations act
109
legacy of new deal
established a national social security system, putting in place the regulatory framework for banking, legislating the union rights of workers and collective bargaining, and laying the foundations for a wider tax base and more equitable tax system
110
Roosevelt's policy post new deal
began to adopt a more Keynesian approach to stimulate the economy (i.e. deficit spending) which was put in place when defence expenditure increased from 10% in 1936 to 16% in 1940 to 41% by 1950
111
When did Germany begin recovering from depression
began in late 1932 just before Hitler and the Nazi's came to power in early 1933
112
German UE in 1934
well under 10%
113
German economic expansion from mid-1930s to war
expanded by 9% PA - spurred on by rearmament
114
what are the reasons for Germany's initial recovery
the reichsbank restored confidence to the banking system by easing credit conditions for business
state-financed work creation schemes first implemented by Chancellor Bruning of the last Weimar government to ameliorate unemploument
these schemes were expanded under Nazis
115
Economic Recovery in Nazi Germany
persistent expansionary fiscal policy with a low-rate monetary policy
employment creating public works programs with public investment
expanded labour services programs and other incentives
tax concessions to promote motor vehicle industru
116
Why was Britain's great depression less severe than other industrialised nations?
because the economy struggled with economic growth in the 1920s - the whole interwar period was economic stagnation
117
what worsened the great depression in britain
tightening of fiscal policy in 1931 in a failed attempt to defend sterling parity against gold
118
when did economic recovery begin in Britain
1932
119
economic recovery in britain
began in 1932 and was built on a cheap money policy, that is low interest rates. made possible by the abandonment of the gold standard
120
Britain's cheap money policy
Bank of England sharply reduced its discount rate in late 1931 into 1932
treasury converted 5% war loans to an issue yielding a more economic 3.5% thereby reducing the interest on the government's large debt
121
Exchange Equalisation Account
created by Treasury in 1943 to stabilise foreign exchange flows so that the sterling remained stable consistent with cheap monetary policy
122
how did the low interest rate policy in britain contribute to recovery
stimulated interest-sensitive spending, especially inducing a boom in residential housing construction that characterised recovery, mainly in the South of England
123
British protectionist policy
in 1932 Britain adopted a general tariff of 10% on imports, with only raw materials exempted and reciprocal concessions negotiated on trade with countries in the commonwealth
124
Fiscal benefits from cheap monetary policy
reduction in debt-servicing cost to the government budget, enabling increases in unemployment benefits, welfare relief as well as some other public expenditures
125
treasury view of fiscal policy in 1930s
a balanced budget was necessary to maintain financial and investment confidence
126
when does fiscal policy become expansionary in Britain
only from 1936 onwards does it become moderately expansionary with increases in defence spending from 118m pounds to 353m in 1938
127
debate over macroeconomic policy in Britain
in 1920s and 30s debate developed over how to restore health to Britain's economy and eliminate high unemployment - treasury view vs Keynes view
128
Keynesian macroeconomic argument
Keynes argued that besides a low interest rate monetary policy at the expense of the gold parity, an expansionary deficit-financed fiscal policy, consisting of investment in public works, should be undertaken to reduce unemployment
129
Treasury macroeconomic argument
a balanced budget was necessary to maintain investment confidence, arguing against deficits to finance public works programs on the basis of the crowding out view
130
Keynes General Theory 1936
Keynes outlined an alternative theory of output which showed that unemployment was caused by demand failure and provided the rationale for why an expansionary deficit-financed fiscal policy consisting of increases in government investment, could overcome the crowding out objector and achieve lower unemployment
131
Keynes Principle of Effective Demand
saving is a function of income and in a closed economy its level can always be increased up to a maximum at the full employment level of income and output
hence budget deficits can be financed by higher levels of saving generated by an increase in income below full-employment without constraining existing private investment
132
when was Keynesian fiscal policy implemented by US and Britain
Only seriously implemented in the late 1930s for the purpose of rearmament and then in the 1940s to prosecute war against the Axis powers
133
Japanese implementation of Keynesian fiscal policy
implemented from 1931 for rearmament and war
134
German implementation of Keynesian fiscal policy
implemented in the early 1930s to recover from its severe depression and then from the mid-1930s it was employed by the Nazis for rearmament and preparation for war
135
Keynes role in government policy making
During WW2 Keynes was a key economic advisor to the British government, where he shaped the nation's wartime economic policies as well as its post-war recovery policy. he also contributed to shaping the international institutions of the new world order established after the war by the US
136
major structural deficiencies that led to Great Depression
European economies dependence on American credit, especially Germany, with its reliance on short term as well as long term american funding
Depressed commodity prices caused by excess global capacity in the 1920s (1) caused contractions in indebted countries reliant on commodity export income and (2) depressed rural income and demand globally, especially in the US
US trade protection intensified by Smoot Hawley Act made it nearly impossible for major European nations to service and repay US-financed foreign loans and sparked the further spread of protectionist policies internationally
until the successive abandonment of the gold standard by major nations from 1931, monetary policy was constrained from lowering interest rates in response to deflation
the distribution of income in favour of the wealth y in the 1920s, especially in the US, contributed to the large decline in consumption and its depressed levels as unemployment grew
the lax US prudential regulations and policing in banking and securities allowed for destabilising speculative activity and excessive leveraging that led to bank failures and the near collapse of the credit system. connected to this was the policy incoherence of the Federal Reserve Banking System
Policy failures of central banks that sprang from outdated laissez-faire based conventional wisdom about appropriate policy responses
137
Main historical implications of the Great Depression
intensified political as well as economic isolationism as nations adopted autarky to solve their economic problems
encouraged military-minded leaderships in Japan and Nazi-germany
contributed directly to political extremism through high UE and ultimately to the rise and spread of fascism, undermining democratic rights and liberty, especially in Europe
led to collapse of German Weimar republic
138
Keynesian Revolution
Keynes central ideas on policymaking to maintain a full employment economy were adoped following the experience of the great depression and the subsequent lessons learnt
139
how did the keynesian revolution begin?
With a change in Keynes' thinking about economy theory and policy in the late 1920s leading him to challenge Treasury View
Role on MacMillan Committee (1929) allowed him to question conventional wisdom and recommend alternative policy
140
How did the Keynesian revolution spread?
In the late 1930s a younger generation of economists and economic advisors became adherents to Keynes' ideas and through them influenced policu
141
When and how did the Keynesian revolution alter the conventional wisdom of policy making and shape the institutional machinery of government?
During WW2 and post-war recover
Wartime experience and post-war needs equipped policy makers with the knowledge to implement Keynesian policy in peacetime
142
What lessons from Great Depression became important for policy makers
achieving and maintaining full employment became the central objective of macroeconomic policy in the post-war era
143
Summary of Keynes' Central Policy Ideas
public investment program to achieve and maintain full-employment policy
sustained low interest rate policy to support private spending, minimise the government's debt servicing burden, and pursue euthanasia of the renter by distributing income in favour of low income earners to increase MPC
universal social welfare and progressive taxation system that would increase MPC
inflation controlled by way of wage-income policies
liberal trade policy based on reciprocity and an international monetary system that provided an expansionary bias to external adjustment process
counter-cyclical policy to rely on fiscal policy through adjustments to taxes and short-term government spending
split budget into current account, composing current expenditures and revenue from taxes and other dividends and capital account, composed of public capital spending (less asset sales) financed by public debt. Current account should be balanced
144
Which bits of Keynes' thinking did Western Governments employ?
focus on counter-cyclical policy, and from 1950s, monetary policy was used to regulate the cycle and inflationary pressures. deficit spending was employed to counter downturns to maintain full employment
145
Bretton Woods Conference
Held in July 1944 in Bretton Woods to establish a new international monetary system
worked out articles of agreement of the IMF and agreement for the establishment of the International Bank for Reconstruction and Redevelopment
146
New Bretton Woods Exchange System
exchange rates of member countries were fixed at par against the USD or gold, and agreed to peg the exchange rate of their currencies against other countries within a range of 1% around the par value
147
How did the IMF deal with pressure on exchange rates due to disturbances in a countries BoP
IMF had a pool of foreign exchange reserves upon which it could draw
148
overarching purpose of the IMF
to create conditions for open multilateral trade in which the transfer of goods and services between countries was unfettered by trade restrictions and controls over international payments
149
three main objectives of IMF
a multilateral system of payments based on worldwide convertibility of currencies through elimination of foreign exchange controls by countries
exchange rate stability was to be secured by preventing competitive exchange rate devaluations. any adjustments arising from persistent external imbalances were to be done in an orderly and transparent way
the stability of exchange rates was to be maintained consistent with member countries pursuing policies for full-employment
150
removal of foreign exchange controls
members had to remove forex controls on current account transactions consistent with reestablishing convertibility of their currency
transition period for countries to build up their USD reserves
151
what would the IMF do in a case of fundamental and persistent equilibrium in BoP
IMF would step in to supervise exchange rate adjustments in concept with IMF agreement to devalue or revalue their currencies against the USD up to 10% of their par value to correct a fundamental external balance disequilibrium
152
when did most industrial countries in Europe acquire sufficient USD reserves
1958
e.g. Britain, Germany, Switzerland, Italy and France
153
When did Japan get enough USD reserves
1964
154
non-resident convertibility
meant that exchange regulations of these countries only applied to their residents; whilst non-residents could freely shift funds for current account purposes from one country to another
155
Reason for establishment of IBRD
to assist finance post-war reconstruction but was later given theb broader role of extending aid to developing nations
156
What did IBRD do
made loans for specific development programs of nations
157
GATT establishment
established in 1947 in Geneva
158
two major principles for GATT
there should be multilateral and non-discriminatory approach to international trade (exceptions were customs unions, temporary external balances and developing countries to aid their growth)
There should be no quantitative trade restrictions (exceptions were for short-term external balances purposes or developing countries)
159
was bretton woods successful
Yes, helped establish multilateral trade which would play an important role in promoting growth and development in the post-war era
nations actively employed Keynesian fiscal and monetary policy to generate demand consistent with objective of maintaining full employment
160
Bretton Woods nth country problem
as the nth country, the USD could not be adjusted in the event of America facing a fundamental balance of payments disequilibrium - by the 1970s this imbalance would bring down the system
