Sources of Dynamic Change

1. Sources of Dynamic Change Liberalization Old and New

2. All of the Below • Deregulation • Innovation • Technology • But which was primarily responsible for financial liberalization?

3. Earlier Liberalizations • Eurocurrency, Eurodollar markets • Early post-WWII, the General Agreement on Tariffs & Trade (GATT) => a series of rounds of tariff reductions

4. Euro/Asian Currency Markets • A multi-national firm deposits $US1000 in Bank A in London • Bank A credits the firm’s $US account & sends the dollars to Citibank in NY • Citibank now plays the role of central bank; the dollars become reserves to Bank A which can leverage them into loans

5. Euro/Asian Currency Markets • In the 50s & 60s, Bank A was subject to less regulation than were US banks • With fractional reserves, Euro-dollar banks could leverage the deposit into many thousands of dollars in interest paying loans • The innovation was $ denominated accounts in a London bank

6. Euro/Asian Currency Markets • The Soviets liked this market • They could deposit dollars from gold sales to be available for grain imports without the hassles USA kept causing them

7. The GATT • During the Great Depression, countries tried to “beggar their neighbors” by erecting high tariffs on imports • This made them expensive to home buyers and forced them to purchase home produced substitutes • Everybody did it, so trade fell sharply and ceased to be a source of income

8. Tariff History • As a result, poverty spread and deepened even beyond existing levels • Mutual distrust and hatred grew and greatly increased the probability of war • Maybe it would have happened anyway

9. After the War • When it was over, we still had the tariffs, often as high as 100% • Several trading nations set up the General Agreement on Tariffs and Trade (GATT) • It called for tariff reductions to be negotiated in a series of “rounds” • The agreement was limited to industrial goods; no services or agriculture

10. The Rounds • The world has been through several rounds of varying success • The Kennedy Round is perhaps the most famous • In the most recent, in Uruguay, the name was changed to WTO • Discussion of the next round foundered in Seattle due to demonstrations and lack of organization

11. GATT’s Successes • Japan and other Asian countries based their growth strategies on exports • It is not likely that they could have grown so well without the tariff cuts • The GATT enabled (not all alone) an unprecedented increase in human welfare in a very short time period