The Necessity of Reforming the International Monetary System

The current international financial crisis is a crisis of globalised finance, meaning that a crisis in one specific segment of the financial system — specifically the United States subprime mortgage market — eventually spreads worldwide. The effects of such a crisis are not neutral in economic and social terms, added to which the benefits of financial globalisation have come to be called seriously into question. While this crisis is associated with an absence of regulation, particularly by the State, it has been action by Big Bank and Big Government 1 that has prevented it from developing into a depression. This chapter evaluates the present international financial crisis and interpretations of it, and indicates that surmounting it will depend on a series of post Keynesian type measures. To that end, it describes very briefly the origins of the crisis, and developments and lessons from it, then presents the conventional and post Keynesian views of foreign exchange and financial crises, especially as regards the present international financial crisis. Lastly, on the one hand, it sets out the main conventional and heterodox arguments for the necessity of restructuring the international monetary system and some proposals for reform of that system and, on the other hand, in the light of post Keynesian theory, following Davidson (2002), it presents a proposal for restructuring the international financial system. That proposal, in the author’s view, is capable of preventing future foreign exchange and financial crises, while at the same time assuring the conditions for macroeconomic stability, understood as sustainable economic growth with full employment, price stabilisation and external equilibrium.