POLB81H3 Lecture Notes - Lecture 9: Transnationalism, Global Financial System, Bretton Woods System
ProfessorM.Hoffmann- Universityof Toronto
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Lecture 9 – POLB81 – March 11th 2013.
Governing Financial Crisis
Governing Financial Crisis – Institutionalism
2008 financial crisis: video. A series of banks were failing in the US. When the Lemon brothers
collapsed on Wall Street that’s when people started to realized that they’re in big trouble.
There was an urgency of financial crisis on how some very serious republicans who don’t like
government intervention were convinced to talk about days and weeks of financial collapse and
it wasn’t just a problem in the United States. The cotangent effect makes it difficult to govern.
The US injected 700 Billion dollars into the financial economy to try to stop the bleeding of the
financial crisis. That was enough to soften the crisis to make it the Great Recession and not a
Great Depression. When we talk about financial crisis we have to talk about the tools of
multilateral approaches (IMF).
History and Function of the IMF
Institutionalism: Governing through the IMF
History and Function of the IMF
o Global institutionalism problem is a cooperation problem because financial
stability is a public good.
o Institutions were made to deal with financial stability and to be there to respond
in financial crisis and make solutions.
o The Great Depression was the cause of WWII which created a series of
institutions that will help maintain global financial stability. It created GAAP, it
set up the World Bank to make development, enhance economic growth, and
they set IMF to try to insure global financial stability.
o IMF’s job is to make currency exchange. IMF is set up to manage the currency
o In the Bretton Woods system, the currency exchange rate started off as Fixed
Exchange Rates ($35=10z gold). The value of the US dollars was impeded to gold
and every other currency was impeded to US dollars. Other currencies were
fixed to the US dollars. The goal behind this was stability. This would remove the
temptation to devalue currency rapidly to make your products cheaper in the
market place. If everyone devalues currency, you get currency wars that create
financial crisis. This worked for a while.
o The financial crisis causes the US dollars to be overvalued. US had a flexibility to
value its currency. It can’t just print money. Overvalued currency makes your
products more expensive. US ran into economic trouble.
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o In the 1960s, US embarked in social spending and started fighting a war in
Vietnam. The US could no longer maintain the fixed exchange rate.
o 1971, the US said we are no longer impeded the US dollar to gold. 1971, was the
official date where the US fully withdrew from the gold standard.
o IMF had to change to Floating Exchange Rates where the market would
determine how currencies were worth. IMF lost its entire being. There’s no more
fixed rate system. IMF had to adapt. IMF moved general responsibility to
maintain global financial stability. The guardian of the global financial system
through technical advice, surveillance, and lending.
Technical assistance – IMF is a big consulting firm that will tell countries
how to set up their economic system in order to best function. They give
advice on how to run your economy.
Teaching Liberia who is a developing state.
The IMF also teaches industrial states and how to set up and run their
This is not macroeconomic advice. This is on the ground governing
“They governing in an efficient and legitimate way”
Why? Because of Financial/Economic stability = Political stability
Currency exchange low = exports goods.
Laws for financial management
Financial stability anywhere is financial stability everywhere. We
care about it. Financial stability and political stability are linked.
This is classic institutionalism perspective.
Economic Surveillance: When you sign up to be part of the IMF which
everyone has, you agree to be watched. Key aspect of what institutions
Interdependence = Need for cooperation
Code of Conduct Monitoring
All countries continuously
In their own interest – in states best interest, helping them be
better in sovereignty. Therefore, being part of IMF is on the states
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