An Introduction to International Money and Finance

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Short Course on International Money & Finance

The idea that money is empowering and liberating is central to the desire to possess money, to work for it, to accept it as payment and to save and invest it. Through the division of labour in capitalist societies see Chapter 2, this volume , money links people together in offices, factories, homes and shopping malls in different parts of the world. Money may in some senses be corrosive of social bonds, but it also creates a community that can forge new connections and hold people together.

Many geographers, particularly those working in a political economy tradition, have argued that capitalism appears to be speeding up and spreading out Harvey , Massey Capitalism is seen to be spreading out in that more people in different countries and regions are becoming bound up with the logics of contemporary capitalism. It is also speeding up in that the pace of life seems to be increasing in different parts of the globe.

In Box This has led many theorists to argue that money is a vehicle for the homogenization of space, for making different spaces more similar. While there are ongoing debates about the extent to which capitalism is generating a global culture see Chapter X, this volume , it is difficult to argue with the contention that financial markets in different countries have, since the mids, become more interconnected Harvey , Martin and homogeneous. When we talk about the globalization of finance, however, we are talking about more than just the growth of international financial transactions, or the growing presence of multinational companies in domestic financial markets.

Globalization implies a strong degree of integration between the different national and multinational parts. And above all, it [globalization] refers to the increasing freedom of movement, transfer and tradability of monies and finance capital across the globe, in effect integrating national markets into a new supranational system.

International Finance - Lecture 01

Martin The emergence of this supranational system coincides with the increasing difficulties faced by nationally based regulatory authorities like the Bank of England or the US Federal Reserve. Whether or not you agree with these views, it is true that the degree of integration of the financial system profoundly shapes and connects the lives of people thousands of miles away from each other. A good example of this is considered in Case study The fates of individuals and companies in Britain and Thailand are connected through the workings of foreign exchange markets that, in turn, link national currencies to the competitiveness of different nation-states.

This example highlights only some of the interconnections between changes in the value of the Thai baht and how these affected businesses across Asia and Europe. For those in households dependent on the wages of someone made redundant there would be further belt-tightening or a search for alternative sources of income.

Importance of International Finance

For the unemployed, job losses in the area might mean more competition for any new jobs that are created and so forth. Currency speculators, already nervous about slowing growth in the region, started to sell the baht Thai currency as they expected the currency to be devalued. In July, the baht was devalued. As a result, Thai exports became cheaper and, to stay competitive, Indonesia, Malaysia, South Korea and the Philippines allowed their currencies to fall sharply. One-third of the workforce of 90 people were facing redundancy and their boss had his salary bonus cut 10 per cent, in line with the loss of work from Siemens.

The hotel responded to the closure by switching their market focus. As the flow of German executives and their UK contractors slowed and then ceased, the hotel sought to attract more families. Since August, Siemens business had dried up and 85 drivers were chasing work for Drivers started to economize by bringing in their own lunches and by cutting down their trips to the local pub.

Currency Substitution in Developing Countries: An Introduction

The landlord, who blamed the Siemens shutdown for the reduced trade, cut his opening hours. Attempts to drum up more trade by price reductions had little effect. The landlord was hoping for more business around Christmas. He and his partner had less money for spending on their leisure activities, which included visiting places like Whitley Bay.

Source: Adapted from Carroll For example, how did the US housing and subprime mortgage crisis that started in change the lives of people in not only in the United States, but also in other continents see section The global financial crisis is often framed as one caused by unscrupulous financial practices in both the global financial command and control centres London, New York and so forth and the daily life of consumer banks and their customers.

Many financialization scholars situate the beginning of this most recent bout of financialization in the s with the rise of neoliberalism see Chapter 8, this volume , the crisis of Fordist capitalism in the West see Chapter 3, this volume , the breakdown of the Bretton Woods system see sub-section 8. Others have pointed at financial deregulation and the associated changes on Wall Street and the City of London in the s, including technological developments see below and the growing volumes of money that pension funds seek to invest. The decline of communism and the fall of the USSR see Chapter 3, this volume at the end of that decade are also mentioned as contributing factors, in part because they discredited non-capitalist alternatives and underwrote how neoliberal and financial discourses became dominant Aalbers More generally speaking, financialization is part of and key to structural transformations of advanced capitalist economies.

According to some scholars, we have been here before, e. To illustrate the financialization argument, different authors cite different statistics to show that a whole range of financial markets have grown rapidly since the s. In the US finance has become the dominant source of profits since the s Krippner , but this can be witnessed in most OECD countries. By contrast, the wage share of national income has fallen across the board, although less so in countries with strong labour unions Epstein and Jayadev Geographers have repeatedly stressed that financialization is an inherently spatial phenomenon that should be much more central to economic geographic analysis.

Local, national and macro-regional institutions act as filters of how financialization plays out and is perceived.

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How has this financialization of the economy and globalization of money come about? There is a range of factors to consider here. First, through the s and s, different governments and international institutions, like the International Monetary Fund IMF , have pursued neoliberal, free market policies and encouraged the deregulation of financial markets by eliminating exchange and capital controls and the liberalization of flows of capital across national borders.

Second, there have been advances in telecommunications and computing technologies.

International Money and Finance

Computers have transformed payments systems. For hundreds of years, payments and transfers of money were completed in cash — coins and notes — and written down in ledgers. Coins and notes were superseded by cheques that in turn have been superseded by electronic monies that can be moved around the world at the speed of light. Semiconductor chips in computers mean that consumers in many countries can use credit and debit cards to pay for goods.

These innovations have made hour trading possible as high-speed computers link stock markets in different countries.

New communications and software technologies have also spawned the proliferation of financial websites, information providers and intermediaries able to provide financial information to firms and consumers. Online providers, without the costs of maintaining the bricks and mortar associated with a high street presence, provide insurance, banking, pension and other financial products to firms and consumers with access to Internet technologies. Third, and closely related to developments in technology, there have been innovations in tradable financial products that have made it easier and faster to move money around the globe.

Derivatives are one example of this kind of innovation. They often include swaps, options, futures and mortgage-backed securities see also sub-section They can be used to hedge against risk, or to provide leverage. In the s, financial derivatives were created to allow financial managers to deal with currency risk, but since that time they have become increasingly sophisticated and extended to more markets.

Since , for example, energy suppliers, transport agencies, construction companies, wine bar owners and other firms exposed to weather risk the possibility that weather could have an adverse impact on their profits and cash flow have been able to purchase weather derivatives contracts to protect themselves against this risk Pollard et al. With this extension, however, there has been the proliferation of purely speculative trading of such financial instruments — and the development of other much more complex contracts.

Round the clock trading of financial instruments in different places and time zones opens up opportunities for speculation and arbitrage, which is the ability to profit from small differences in price when the same financial product is being traded on more than one market. For individual consumers with access to the appropriate technology there are now on-line financial bookmakers encouraging clients to enjoy spread betting and possibly tax-free profits on price movements of stocks, stock indices, currencies, interest rates, commodities and even house prices.

These, then, are some of the ways in which money has become more global since the s. But what motivates such changes? For those working in a political economy tradition, like David Harvey , the motivation for these changes is the search for profit. Capitalism is fundamentally about the accumulation of surplus.

International Finance - Introduction - Tutorialspoint

Competition drives capitalists to seek out new markets, new products and to reduce the turnover time of capital see Spotlight box In different parts of the globe, finance is the language through which the imperatives of capitalism are being communicated. So, there is a very strong economic rationale for the globalization of money. And it is difficult to argue with the contention that money has become more globalized since the s, that it has, increasingly, connected people in distant places and homogenized financial space.

Others argue that this view is too simple, that geography remains critical to our understanding of global finance. We now turn to consider these views in more detail. From left to right in the equation, money M is invested by producers to purchase commodities C , namely labour power LP and the means of production MP , say pieces of wood and wood cutting machinery. The turnover time of capital is the amount of time it takes for money to complete this circuit. The shorter the turnover time, the more often money can be lent out and the more profit can be made.

Producers therefore have a very strong incentive to, where possible, reduce the turnover time of capital; time is money. The Japanese yen, the euro and most especially the US dollar are very useful in international markets because they are accepted as forms of payment, unlike, for example, Indian rupees. For that reason, the US dollar is also the most popular as a global reserve currency, that is, as a store of value see Box Historically, the country that occupies a dominant economic and political position has underwritten the soundness of the international financial system and had its currency accepted internationally as the currency in which commodity prices are quoted and payments made.

Before the Second World War, Britain and the pound sterling fulfilled this role; after the Bretton Woods conference in , the US dollar became the key international currency. More recently, as the economic dominance of the US has declined, the yen, the euro and the Chinese renminbi have become relatively more important in international markets. So, some currencies, like the US dollar, are truly international while some others are national. There are estimated to be over 4, local currencies in operation around the globe that facilitate exchange only within very specific spatial and social contexts. Since their establishment in Canada in , LETS schemes have spread to Europe, Australia, New Zealand and North America, allowing members not only access to credit, but also the chance to engage in productive activity to earn such credit. Some local currency schemes are devised in times of hardship to allow local people to trade goods and services when they are unemployed and have little money.

Other schemes are motivated by ecological concerns, the desire for community development and social cohesion, and the desire to construct alternative local economic geographies as a form of resistance against the global spread of capitalism Lee He identifies four geographies of money: locational, institutional, regulatory and public. The locational geography refers to the location of different financial institutions and markets.

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Financial institutions and specialized functions like foreign exchange markets tend to be agglomerated in large urban centres, with London, New York and Tokyo sitting at the top of the global hierarchy.

An Introduction to International Money and Finance An Introduction to International Money and Finance
An Introduction to International Money and Finance An Introduction to International Money and Finance
An Introduction to International Money and Finance An Introduction to International Money and Finance
An Introduction to International Money and Finance An Introduction to International Money and Finance
An Introduction to International Money and Finance An Introduction to International Money and Finance
An Introduction to International Money and Finance An Introduction to International Money and Finance
An Introduction to International Money and Finance An Introduction to International Money and Finance

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