The Main Ideas that Shaped Financial & Monetary Reform in the 20th Century

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The Main Ideas that Shaped Financial & Monetary Reform in the 20th Century

Introduction

In the 20th century, even though the effects were deferred, the financial and economic crisis has hit hard the developing nations. Every nation had numerous difficulties to overcome. According to Gurtner (2010), the nearer the developing countries are interrelated with the worldwide economy, the sensitive the impacts. Furthermore, the recovery that has just begun is becoming apparent, for the time being, limited to just some nations and regions. Nevertheless, several nations have made substantial endeavours to reduce the impacts of financial and economic crises. Hence, numerous reforms were taken into consideration.

As per DeLong (2000), the history of the twentieth century was broadly believed to be economical instead of religious, political, or cultural. This essay intends to focus on the primary elements of economic thought that can, in a protected way be lead the course of finance and money within the twentieth century.  Initially, the emphasis of the essay was on the characteristics of the century followed by the chronological order and familiarising with the significant monetary and financial reforms, including Bretton Woods Agreements and its downturn with Nixon in 1971, Century of the Dollar, financial restructuring of World War, and lastly Fiat opposite to money pegged to gold. There might be similar characteristics regarding ideology and thoughts relevant to nineteenth-century sliding in twentieth and of twentieth into 21st. The economic forces of the 20th century have been assessed in the human spectrum of enthusiasm to accomplish the sense of permanence, such as Philip's curve, Keynesianism vs Monetarism, etc., along with some worth talking about the well-known economic figures of the 20th century like Keynes and Friedman. The essay has documented and examined European states' monetary and financial reforms.

Discussion

Characterization of 20th century

According to DeLong (2000), the history of the 20th century can be characterised exceptionally in few words in five propositions. First, the 20th century is more of economic history than religious or cultural. Secondly, the 20th century has perceived the material abundance of detonating humankind further than all past envisioning. Third, technological advancement, profitability and organisation, and the sense of social isolation and anxiety have made the autocracy of the 20th century the cruellest and more savage than ever. Fourth, the 20th century has viewed the overall economic gulf amongst numerous economies proliferating. Lastly, the administration of the economic policy of their economies by governments was at best inept. Little was known or explored regarding how to deal with the market or mixed economy.

Regarding the characterisation of the 20th century of the European economy, Berend (2016) expressed that the 20the century of European states has seen failures and success in response to the hard times of the crises ridden and distressed. However, this age was proved to be the most successful in the history of Europe. Numerous economic regimes were made up and brought into throughout the 20th century. Berend (2016), in his books, further mentioned the enormous discrepancy among European regions that had categorised former periods slowly and surely started to fade away in the 20th century as various countries have attained somewhat the same economic development levels.

As per Cárdenas, Ocampo, and Thorp (2016), the 20th century has observed the century-long economic catastrophe of communism as well as crises long as the quarter-century of fascism. It has also viewed several governments that seem individually inept at handling market economies: inept at dealing with economic shock waves that terrorise to bring about massive unemployment or amplify hyperinflation. A few of it is due to the economists of the 20th century, as they were not familiar with what to lie down: the chronicles of the economic policy reads like alchemy, not chemistry. Frequently anticipated remedies made economic troubles bad (Eichengreen, 1995).

Chronology of the 20th century

The 20th century was subjected to several significant events that define the whole century. These events include First World War, Second World War, nationalism, decolonisation, technological development, and Cold War and conflicts after the war (Mazower, 2002). Moreover, the central event of the 20th century was the Great Economic Depression led by the Gold standard was considered the economic slowdown all over the world all through the early 1930s (Irwin, 2010). Consequently, the Great Depression escorted to the augmentation of Fascism and Nazism within Europe in the the1930s (Cárdenas, Ocampo, and Thorp, 2016). Following the 1930s, the European Integration commenced intense in the mid-1950s and ultimately directed to establishing the European Union, an economic and political union encompassing fifteen countries by reaching the 20th century (Einaudi, 2000). Later on, in the 1950s and onwards, a series of the five-year plan was employed by the Soviet Union for economic progression and industrialisation (Kusluch, 2012).

Later in the 1970s, the majority of the nation’s cast off the system of Gold standard for their currency, and it was replaced by Bretton Woods System, including currencies being attached to the US dollar (Temin, 1993). However, the Bretton Woods System collapsed with Nixon in 1971, and after its collapse, the significant currencies faced a floating exchange rate (Bordo, 2019).

Financial and monetary reforms

When the discussion regarding the 20th century comes into view, the behemoth of a fraction of history which the remains of the era rest include the two World Wars. Hence, it might become engrossed in questioning if the dispute is initially rooted in a concept or theory, which might be a medium to mobilise wartime economies. The root of the argument is that the ideas behind the disputes are based not on the whole in the economic but instead on the psychological components of human conduct and progression. Although a stretch, this will illustrate the concept that escorts to one kind of reform, which is familiarising with an economy to maintain war endeavours. While there might be a financial reason for the commencement of the war, more astonishingly, communal financial orders have demonstrated an intense hatred of wartime. According to Kirshner (2018), this is because of the unforeseeable economic implications caused by disputes in general. Particularly, Kirshner (2018) contends that the disturbance of worldwide finance prevailed as an outcome of the First World War, directing towards an economic frantic interwar time. The fundamental reforms of importance that have emerged from this time are the damages of war enforced on Germany after they failed in World War I.

The Marshall Plan subsequently brought modernisation and economic triumph to the European Union, adhering to World War II (Ikenberry, 2001). The usage in highlighting these reforms is precisely to bring in John Maynard Keynes and demonstrate the foundation that resulted in continual dollar hegemony worldwide via a union of Western countries (Keynes Hutchison, 1973). According to Frieden (2019), the preliminary reform endeavours of the interwar years were at worldwide conferences in Brussels in 1920 and Genoa in 1922. Even though the suggestions of the experts of the Genoa entailed the measures to make the custom processes easier and mitigate the costs of transport, their primary driving force was monetary and was escorted towards bringing an end to the currency downgrading. James (2019) suggests the return of gold convertibility, independent central banks, monetary regulation, financial aid for countries with weak currencies, and collaborative central bank management. The period of post war cemented the path to a new economic order which was made noticeable by a dollar currency standard.

According to Harold James (2019), the agreement of Bretton Woods of July 1994 reflecting on the unsuccessfulness of the interwar tenure of economic order, representatives at the Bretton Woods accords had the historic. It has been contended that monetary and financial reforms are probably when there lies a compromise on the advantages of independent and open trade and when monetary and financial issues are observed as terrifying the steadiness of the international trading system. For instance, at Bretton Woods, the yearning to build a free and open trading framework, and the dread that financial displacement set this aim at danger, assisted in forming the stage for monetary and financial reforms.  

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On the contrary, within the 1930s, there was no relative consensus concerning the advantages of independent and open trade, and consequently, there is no crucial substantial reform on the IMS. This perspective highlights the mixed victory of the present endeavour to fortify the international financial architecture.  The main long-lasting constituent of the late 20s laissez-faire consensus is, for one more time, the advantages of free and open exchange. Therefore, the dread that monetary disorder may incite a protectionist backfire gives a fantastic catalyst to reform at the local level, where exchange matters most (James, 2019).

When in the mid-1990s, the emergency in the European Monetary System (EMS) took steps to release "cutthroat depreciations" and imperil political help for the individual market, Europe sped up its constrained march to the financial association (Eichengreen and James, 2007). What is more, when conversion scale unpredictability disturbed Asian trade adhering to the beginning of the area's emergency in 1997–98, Asian policymakers showed a shocking availability to ponder driven reform initiatives, for example, trade courses of action, aggregate stakes, and surprisingly a territorial money related asset. However, the trading framework has demonstrated shockingly supple to these monetary body blows. In any case, with the monetary interruptions of the latest decade, trade has proceeded to expand. Therefore, to contend that broad financial and monetary reforms are expected to safeguard the worldwide trading framework from a ruinous protectionist kickback would be a stretch (Eichengreen and James, 2007).

One more significant issue that must be settled at Bretton Woods is the focal role of the US dollar. Keynes (1973) recommended making an asset of lendable assets; every nation would store a piece of its standard in gold, up to a maximum dictated by its possessions of gold and "free foreign trade."

Moreover, various significant historical instances of financial regulatory reform happened in the twentieth century, associating with fractional-reserve banking, formulated against the great economic depression and numerous bank runs due to the 1929 crash. These reforms encompass the form of deposit insurance, such as the Federal Deposit Insurance Corporation, to reduce the risk contrary to the bank runs (Mankiw, 2002). Countries have additionally employed legal reserve supplies, which enforce minimal reserve supply on banks (). According to Mankiw (2002), conventional economists assume that these monetary reforms have created unexpected disturbances in the banking system less often.

A spectrum of human enthusiasm and opposition to the war

Fascinatingly, it has been claimed that one of the essential ideas analysed in the essay has been explored based on the spectrum. Moreover, an array of ideas regarding the war can be positioned on the spectrum of enthusiasm for fighting a war or opposition to war. The human concept regarding war can be categorised on the spectrum with enthusiasm on one end, whereas opposition lies on the other. Regarding Mombauer (2019), within Europe, such jubilation occurs as individuals prepare themselves to battle for Kaiser, Tsar, or Patrie. This enthusiasm is often called the August experience, which is considered a unified occasion that supposedly substitutes internal segments and unifies all individuals under the endeavour of battling a war. However, according to Horowitz (2003), this unified enthusiasm is just a myth.

Regarding the question of which groups falls onto what side of the spectrum so in olden times, the opposition has primarily been observed among the individuals who trade, businessmen, feminists and socialists; whereas enthusiasm was found to be in literary entities, analysts as well as politicians(Grady, 2017). 

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According to Grady (2017), enthusiasts have primarily been observed as youths; however, there is no empirical proof for workers to be enthusiasts towards war. What features the latter's concept seems broad to explore its traces in a romanticism regarding war, as well as a philosophical continued existence of the fittest perspective on the world (Sartori, 1996). Besides regarding the impacts of the idea of the spectrum on the monetary and financial reforms, according to Keynes (2019), the spectrum of human enthusiasm for the war has a negative influence on the reforms because war is theorised to have an adverse political effect via the three fundamental catalysts including interruptions from any peacetime political and monetary change agenda; military loss and disturbance, and related debilitating or militarisation of state authority; and after war financial confinement. Subsequent to controlling for social, financial, and institutional components, factual examination affirms the adverse consequences of battle on political and monetary change. Therefore, it can be said that opposition to wars might positively impact monetary and financial reforms. 

Famous economists and their ideas

There is no denying that John Maynard Keynes (1883 – 1946) is considered one of the most dominant thinkers of the 20th century. His work has revolutionised the practice and theory of modern economics. It has a more profound influence on the way economics is perceived and learned, and on economic policy, all over the world. One of the theories formed by famous economist Keynes (2019) was the Keynesian economics theory. Moreover, another famous economist well-known in the history of economics is Milton Friedman, who proposed Monetarist economics.

Both of these macroeconomic theories can straightforwardly influence how fiscal and monetary policies are formed. However, according to Boyle (2021), there has been direct criticism of both of these macroeconomic theories. As per the Monetarist economic theory of Friedman (1973), monetarist economics entails the regulation of the money within the economy.

On the other hand, Keynesian economics theory of Keynes (1973) the economists entails government expenditures. As per Boyle (2021), monetarists thought of regulating the money supply that streams into the economy whilst enabling the remainder market to fix itself. Conversely, Keynesian economics assumes that a challenging economy endures in descending spiral if not an intrusion drives customers to purchase additional goods. If compared to both of these theories, monetarists would be generally worried about adding gas to their tanks, whereas Keynesians would usually be worried about keeping their engines running.

Concerning more intense economic ideas, the Philips curve comes, an economic notion formed by A.W. Philips. The Philips curve in economic history indicates that inflation and joblessness have a steady and inverse association. As per this theory, as the financial moves towards growth, so does the inflation increase. Therefore, with the rise in economic growth and inflation rate, the economy should escort to more jobs and lower levels of unemployment (Coibion, Gorodnichenko, Kamdar, 2018). This theory was developed in the 1970s and was used by economists to guide macroeconomic policy during the 20th century to believe that any upgrade would build total interest and start the accompanying impacts. However, it was called into inquiry by the stagflation of the late 1990s.

Conclusion

The essay concluded the main ideas and theories that shaped financial and monetary reform in the 20th century. The composition further discusses the characterisation of the 20th century of European states, which has seen failures and successes in response to the hard times of the crises ridden and distressed. Moreover, the 20th century is more of economic history rather than religious or cultural. In addition, the chronology of the 20th century was subjected to several major events such as the First World War, Second World War, and Great Economic Depression, replacement of gold standard by Bretton Woods’s system and collapse of the Bretton woods Nixon. Lastly, the spectrum idea was discussed, which has two notions: enthusiasm and opposition to the war. Moreover, famous economists have been highlighted in light of economic theories introduced and employed in the twentieth century.

References

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Bordo, Michael D. The Operation and Demise of the Bretton Woods System, 1958–1971. Yale University Press, 2019.

Boyle, Michael. Keynesian and Monetarist Economics: How Do They Differ? Available at: https://www.investopedia.com/ask/answers/012615/what-difference-between-keynesian-economics-and-monetarist-economics.asp. 2021.

Cárdenas, Enrique, Jose Ocampo, and Rosemary Thorp, eds. An economic history of twentieth-century Latin America: Volume 3: Industrialisation and the state in Latin America: The postwar years. Springer, 2016.

Coibion, Olivier, Yuriy Gorodnichenko, and Rupal Kamdar. "The formation of expectations, inflation, and the phillips curve." Journal of Economic Literature 56, no. 4 (2018): 1447-91.

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Eichengreen, Barry, and Harold James. "11 Monetary and Financial Reform in Two Eras of Globalization." In Globalisation in historical perspective, pp. 515-548. University of Chicago Press, 2007.

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Frieden, Jeffry. "The political economy of the Bretton Woods Agreements." In Bretton Woods Agreements, pp. 21-37. Yale University Press, 2019.

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Mankiw, N. Gregory. Macroeconomics (5th ed.). New York: Worth Publishers. p. 489. 2002. Available at: https://archive.org/details/macroeconomics00mank_0/page/489 https://archive.org/details/macroeconomics00mank_0/page/489

Mazower, Mark. "Violence and the State in the Twentieth Century." American Historical Review 107, no. 4 (2002): 1158-1178.

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