International monetary institutions

Aug 6, 2021 by

In the second session on Tuesday, 27th of July 2021, we discussed the lectures with two great speakers: Kurt Bayer, writer, researcher, consultant and activist, on International Monetary Institutions, and Louison Cahen-Fourot from the Ecological Economics Institute of the University of Economics in Vienna on Central banking for a social-ecological transformation.

Firstly, this blog post is focused on some interesting insights we heard from Kurt Bayer. According to him, changes of who holds the power in our current system are needed to be made. Changes which take into account ecological and social aspects. Some countries have low financial reserves, which is the reason for bilateral swap arrangements between countries to try to help each other out - however, not all countries are included, similarly to the Euro etc.

The only truly global safety net is the IMF, International Monetary Fund - it is a lender of the last resort. Before the financial crisis, the “IMF required countries to pursue very specific mainstream supply-side oriented policies”. However, some countries do not want such rules to be imposed on them (which causes more competition, increasing taxes and cutting down of public expenditures), so they reject borrowing money from the IMF.

However, IMF rules were loosened a bit recently: Due to the Corona crisis, some countries were able to finance health programs and focus on ecological transformations. Nevertheless, it is still out-fashioned as an institution.

The IMF expects countries to repay loans given. It is the preferred creditor, the first one to be paid back. A huge number of commercial banks will not lend to a country if it got a loan from the IMF. The World Bank also has a strong position in international debt. In 2000, developing countries had a too high debt burden, which they could not pay back - their development was endangered, so the World Bank and the IMF forgave the debt as an exception. “But normally you have to pay back, otherwise you are in real trouble.”, added Kurt.

Trading currencies on the other hand is like trading other financial products. Incentives also lead to instability of the system. Kurt Bayer would forbid high frequency trading and go back to 2 times per day auctions, or an auction per week - “with a fixed time when demand and supply can manifest themselves at currency and stock exchange - otherwise, it leads to volatility and instability of the system.”

Secondly, let us have a look at some of the insights from Louison Cahen-Fourot: “We need to reconsider how we use money.” All people (no matter their income) need to be represented sufficiently. “Money is political and is never neutral.” What could be the right instruments? In Cahen-Fourot’s opinion, we do not need to reinvent the wheel - just use the tools of the past which have been in use for generations. Maybe we just need some innovation to refit them for our purpose. Furthermore, he stated that monetary policy cannot do everything on its own even though in the past 50 years, it became very strong. Moreover, we should differentiate interest rates for environmental and social criteria, to have them more favourable for the environment and society.

The discussions in the breakout rooms about questions of understanding were also insightful. For example, we discussed the question of inflation - from an economic versus political perspective. “Money is a trust-based accounting tool to have equivalent values of things. Nevertheless, if you have lost trust in financial institutions, you can lose trust in money, which will trigger inflation… Economic models are however very narrow and often do not account for political aspects.” Another aspect mentioned was that central banks should consider other objectives than only inflation.

Many more questions were raised. For example, why does the US dollar dominate? “It was strongly pushed by the Marshall plan etc. It became an international currency. Wars and military bases also played a role as it is over the planet - it is an efficient way to enforce trust in dollars.”, said Louison Cahen-Fourot. Thus, it is inherently a political and geopolitical factor.

To conclude, changing the monetary system (including interest rates) is needed to consider both environmental and social aspects. To change the system, which is political, there could be a change in the voting system and share ownership of the IMF, the only global monetary safety net, which would change the IMF functioning substantially. Also, trading at stock exchange should be again much less frequent and central banks should look also at other factors than only inflation. Thus, there are many changes to pursue in the current monetary system.

Written by: Marketa Svobodova

Based on the lecture "International monetary institutions" by Kurt Bayer during the AEMS Summer School 2021.