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International Political Economy: Monetary Affairs PO 325: International Politics International Money and Business In addition to the trade of goods, the nature and exchange of money are important factors in international political economy The transaction of money is at the heart of several current issues and debates important to the global system, including international development and the politics of multinational corporations The Currency System For Centuries, International Currencies Pegged to Precious Metals (Gold, Silver) In Recent Times, The Values of Currencies are Defined in Relation to One Another (e.g., $ to ¥), and They are Backed By Hard Currency Reserves The Currency System Relative Values are Arbitrary; It is the Changes in Relative Values over Time That are Meaningful Exchange Rates Can Be Fixed (Determined by States’ Establishment of Official Rates) or Floating (Determined by Global Currency Markets) – Latter is More Common The Rise and Fall of Currencies Supply and Demand Increased Supply of Currency is Beneficial for Governments, Because it Increases Revenue Best Way to Increase Supply is to Print More Money – BUT, Printing too Much Increases Inflation (Amount of Goods Unchanged But More Money to Buy it) – This Causes Relative Currency Devaluation This Decreases International Demand For a Particular Currency, Weakening It The Rise and Fall of Currencies Intentional Devaluation (Unilateral Change in Value to Fix Financial Problems) Many Governments Trust Central Banks to Control Currency Lending Rates – Increases Trade Stability The Bretton Woods (1944) System Provided Stability/Capital Access, and Promoted Third World Development and Integration Set up Regime of Stable Monetary Exchange, Based on US Dollar and Backed By Gold (1/35 of an ounce) Other States’ Currency Fixed to Dollar; International Monetary Fund (IMF) Established New Rates Based on Long-Term Fluctuations and Balance of International Payments The Bretton Woods (1944) System If Country’s Relative Currency Value Fell, it Would Have to Buy Currency Back with Specie Bretton Woods Also Established World Bank (International Loans) Overvaluation of Dollar Led to Collapse of Fixed Exchange System in 1971 (Unilateral US Decision) IMF Created Special Drawing Right to Which Dollar Was Pegged State Financial Positions Balance of Payments: Summarizes All Capital Inflows and Outflows Current Account: Includes ExportsImports (Trade Balance) + Government Transactions and Payments. Capital Flow (Foreign investment + Loans and Other Inflows Changes in Reserves State Financial Positions Why/How Do States Go Into Debt? Trade Deficit (Must Be Rectified Through Balance of Payments, Sometimes Through Borrowing) Domestic Income and Consumption Patterns – If People Overspend, Must Borrow from Gov’t to Pay Bills Government Overspends Taxation (Keynesian Deficit Spending) Multinational Business Actual Transactions Carried Out by Firms – In IPE, the Most Important of These are Multinational Corporations MNCs: Companies Based in One State But With Affiliated Branches in Others Can Be Industrial Corporations (Make Goods In Various Countries and Sell them Elsewhere) (GM) Can Be Financial Corporations or Service Sellers (AT&T, McDonalds) Multinational Business MNCs Have Increasingly Gained Political Power in The International Realm Multi-billion Dollar Earners; Motivated by Profit Often Seem Beholden to No World Government; Count Stockholder Loyalty as Most Important The Politics of Foreign Direct Investment MNCs Operating Abroad Invest in Foreign Economies (Capital Ownership) FDI is Long Term Investment in Host Government– Relationship of Host, Home Country, and MNCs Important The Politics of Foreign Direct Investment Political Conditions of Host Countries Can Directly Impact MNCs Host Countries: Can Stimulate Growth, But Results in Loss of Sovereignty, Tradition MNCs: Political or Popular Hostility Can Diminish Safety and Productivity; No Guarantee of Protection From Home Countries (Subject to Foreign Law – ex: Intellectual Property) Home Gov’t: Still Taxes MNC, Holds Trade Policies, Controls Currency – Effects MNC