Social and Political Sciences

The absence of an automatic global surplus recycling mechanism is one of the distinctive features of the international monetary order after 1971. During the early years after the war, the United States used to recycle its extra dollars to Germany and Japan, through the Marshall Plan. However, after the stop of the conversion of dollars into gold, the United States had problems funding their wars in East Asia and Vietnam. As a way of increasing the demand for the dollar, the United States requested the Organization of the Petroleum Exporting Countries to increase the prices of the oil. Despite the problem of the dollar, the other countries in the world continued to fund the deficit of the United States. The reason for this was because the US dollar was still referred to as a reserve currency. With the US dollar being regarded as the reserve currency, the economy of the United States expanded. The expansion of the economy led to stagnation in real wages and an increase in profitability, therefore, leading to foreign capital inflow. The low loans that the United States made to Soviet satellites became a struggle when the rate of interest rose under the regime of Volcker. The struggle led to discontent in the Soviet satellite that resulted in demise in the union.

One of the distinctive features of the post-1971 international monetary order is that the United States abandoned the control of the capital in 1974. Despite the economy of the United States is prosperous, the real wages of the workers remained constant, and the rate of inequality increased. With the stagnant wages, the workers took more massive amounts of loans under their house values to cope with the stagnation of their salaries. The financial sector of the state provided the workers with the necessary loan they required. With the increasing expenses on the defense sectors of the country and the lowering of tax rates, the government was falling into significant debts. As a way of handling the increasing debt of the state, the government decided to lose the monetary policy, which led to an increase in the growth of housing values and other assets. Despite the rise in the growth of assets, the Americans were consuming more than they were saving, which increased their rate of foreign borrowing. The financial sector deregulation led to imbalanced lending that made the economy of the nations involved fragile.

A system of fixed exchange rates is another distinctive feature of the international monetary order after 1971. Each independent state that adapted monetary policy was required to maintain its external rates of exchange within 1%. The maintenance was achieved by the countries agreeing to tie their various currency to gold and the ability of the International Monetary Fund to handle temporary payments imbalances. The interdependent states were required to cooperate as a way of making the external exchange possible. It is common knowledge that no effective and efficient transfer can take place in an environment that has high rates of conflict. The monetary policy required the states which conflicted with each other to address the factors that are causing them not to cooperate. To maintain the external exchange rate, the countries were required to prevent competitive devaluation among each other. It was important for the states to maintain the official value of their currency to enable the external exchange rate to be constant within 1%.

The floating of developed countries is another distinctive feature of the post international monetary order. A country like France adapted the two-tier rate of the exchange system. The interventions limited the appreciation of the currency in the exchange of foreign markets and controls of capital. Conflict arose concerning the desire of the United States to assure improvement in their current account and the unwillingness of other countries to improve their various currencies. After some agreement, the value of the US dollar reduced by 7.9%, and the value of other countries such as Japan, Germany, Belgium, Switzerland, and the Netherlands had a mix of steady appreciation. In 1972, the majority of European countries decided that the exchange rates should be maintained within the band of 2.25%. The decision to keep the exchange rate within a specific range resulted in pressure building up, which led to the British pound being allowed to float.

In conclusion, the post-1971 international monetary order has some unique features. Varoufakis explains the absence of an automatic global surplus recycling mechanism as being one of the distinctive features. He explains that earlier United States used to recycle its extra dollars to Germany and Japan through the Marshall Plan. However, the recycling of the dollar came to a stop when the conversion of gold to the dollar was seized. Another feature is that the United States abandoned the control of the capital in 1974. Additionally, a system of fixed exchange rates is another feature of the international monetary order. Lastly, the floating of developed countries is among the distractive features of the post-1971 international financial law.