COURSE CODE GE 3

COURSE TITLE THE CONTEMPORARY WORLD

COURSE CREDIT 3 UNITS
MODULE NO 2
TOPIC THE GLOBALIZATION OF WORLD ECONOMICS
LEARNING OUTCOMES AT THE END OF THE DISCUSSIONS, THE STUDENTS ARE EXPECTED
TO:
1. define economic globalization
2. identify the actors that facilitate economic globalization
3. articulate your stance on global economic integration
TIME ALLOTMENT 1 WEEK
INSTRUCTOR ZERHAN S. LAARIN
Contact number 09753072789
Gmail account and FB zerhanlaarinsiddik@gmail.com
account ZERHAN SIDDIK LAARIN

INTERNATIONAL TRADING SYSTEMS

International trading systems are not new. The oldest known international trade route was the Silk
Road-a network of pathways in the ancient world that spanned from china to what is now the Middle East
to Europe. It was called such as because one of the most profitable products traded through this network
was silk. Traders used the Silk Road regularly from 130 BCE when the Chinese Han dynasty opened trade
to the West until 1453 BCE when the Ottoman Empire closed it.
However, while the Silk Road was international, it was not truly global because it had no ocean
routes that could reach the American continent.
So when did full economic globalization begin? According to historians Dennis Flynn and Arturo
Giraldez, the age of globalization began when all important populated continents began to exchange
products continuously –both with each other directly and indirectly via other continents-and in values
sufficient to generate crucial impacts on all trading partners.
Flynn and Giraldez trace this back to 1571 with the establishment of galleon trade that connected
Manila in the Philippines and Acapulco in Mexico. This was the first time that the Americans were
directly connected to Asian trading routes. The galleon trade was part of age of mercantilism. From the
16th century to the 18th century, countries primarily in Europe, competed with one another to sell more
goods as a means to boost their country’s income. To defend their products from the competitors who sold
goods more cheaply, these regimes imposed high tariffs, forbade colonies to trade with other nations,
restricted trade routes, and subsidized its exports. Mercantilism was thus also a system of global trade
with multiple restrictions.
IMPORTANT!
Mercantilism is an economics policy that is designed to maximize the exports and minimize the imports for
an economy. It promotes imperialism, tariffs and subsidies on traded goods to achieve that goal.
Tariffs are custom taxes that government levy on imported and some exported goods. Tariffs are also
called customs, import duties or import fees.

A more open trade system emerged in 1867 when, following the lead of the United Kingdom, the
United States and other European nations adopted the gold standard at an international monetary
conference in Paris. Its goal was to create a common system that would allow for more efficient trade and
prevent the isolationism of mercantilist era. The countries thus established a common basis for currency
prices and fixed exchange rate system-all based on the value of gold.

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INTRODUCTION OF THE GOLD STANDARD
When gold was found at Sutter's Mill in 1848, it inspired the California Gold Rush the following
year, which helped unify western America. At the time, it resulted in inflation because the United States was
already on a de facto gold standard since 1834, so the flood of new gold led to rising prices.3
In 1861, Treasury Secretary Salmon Chase printed the first U.S. paper currency. The Gold
Standard Act of 1900 established gold as the only metal for redeeming paper currency. It set the value of
gold at $20.67 an ounce.
European countries wanted to standardize transactions in the booming world trade market, so they
adopted the gold standard by the 1870s. It guaranteed that the government would redeem any amount of
paper money for its value in gold, and meant transactions no longer had to be done with heavy gold bullion
or coins, since paper currency now had guaranteed valued tied to something real.
This huge change also increased the trust needed for successful global trade, and it came with its
own risks: gold prices and currency values dropped every time miners found large new gold deposits. In
1913, Congress created the Federal Reserve to stabilize gold and currency values in the United States.
When World War I broke out, the United States and European countries suspended the gold standard so
they could print enough money to pay for their military involvement.
Gold prices reveal the true state of U.S. economic health. When gold prices are high, that signals
the economy is not healthy. Investors buy gold as protection from either an economic crisis or inflation. Low
gold prices mean the economy is healthy — making stocks, bonds, or real estate more profitable
investments.
Gold prices reflect the beliefs of commodities traders. If they think the economy is doing poorly,
they will buy more gold. If they think the economy is doing well, they will buy less gold. Gold prices reveal
what savvy investors know about economic health. Here are examples of how that works.
When gold was found at Sutter's Ranch in 1848, it inspired the Gold Rush to California and the
unification of western America. In 1861, U.S. Treasury Secretary Salmon Chase printed the first U.S. paper
currency backed by gold. That was the beginning of the gold standard.

GOLD PRICES AND THE GREAT DEPRESSION

The price of gold went from $20.67 an ounce in 1929 to $35 an ounce in 1934. The Federal
Reserve was trying to maintain the gold standard as the economy continued to worsen. That contributed to
the Great Depression, sparked by the stock market crash of 1929 and multiple bank failures.
People started to hoard gold for protection. While countries in Europe had dropped the gold
standard, the United States held on. In 1934, President Franklin D. Roosevelt finally took action and signed
the Gold Reserve Act. This made it illegal for the general public to own gold in most forms.
On April 20, FDR ordered Americans to turn in their gold in exchange for dollars to prohibit the
hoarding of gold and the redemption of gold by other countries. This created the gold reserves at Fort
Knox. The United States soon held the world's largest supply of gold.
On January 30, 1934, the Gold Reserve Act prohibited the private ownership of gold except under
license.8 It allowed the government to pay its debts in dollars, not gold, and authorized FDR to increase the
price of gold from $20.67 per ounce to $35 per ounce (which consequently devalued the dollar).
On March 6, 1933, the newly-elected President Franklin D. Roosevelt closed the banks in
response to a run on the gold reserves at the Federal Reserve Bank of New York. By the time banks re-
opened on March 13, they had turned in all their gold to the Federal Reserve. They could no longer redeem
dollars for gold, and no one could export gold.67
On April 20, FDR ordered Americans to turn in their gold in exchange for dollars to prohibit the
hoarding of gold and the redemption of gold by other countries. This created the gold reserves at Fort
Knox. The United States soon held the world's largest supply of gold.
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 On January 30, 1934, the Gold Reserve Act prohibited the private ownership of gold except under
license. It allowed the government to pay its debts in dollars, not gold, and authorized FDR to increase the
price of gold from $20.67 per ounce to $35 per ounce (which consequently devalued the dollar).
THE BRETTON WOOD SYSTEM
After the two world wars, world leaders sought to create a global economic system that would
ensure a longer-lasting global peace. They believed that one of the ways to achieve this goal was to set up
a network of global financial institutions that would promote economic interdependence and prosperity. The
Bretton wood System was inaugurated in 1944 during the United Nations Monetary and Financial
Conference to prevent the catastrophes of the early decades of the century from reoccurring and affecting
international ties.
The Bretton Wood system was largely influenced by the ideas of British Economist John Maynard
Keynes who believed that economic crises occur not when a Country does not have enough, money but
when money is not being spent and, thereby ,not moving. When economies slow down, according to
Keynes, government have to reinvigorate markets with infusions of capital. This active role of government
in managing spending serves as the anchor for what would be called a system of Global Keynesianism.

Delegates at Bretton Woods agreed to create two financial institutions. The first was the
International Bank for Reconstruction and Development (IBRD or World Bank) to be responsible for
funding post-war reconstruction projects. It was a critical institution at a time when many of the world’s
cities had been destroyed by the war. The second institution was the International Monetary Fund (IMF),
which was to be the global lender of last resort to prevent individual countries from spiralling into credit
crisis. If economic growth in a country slowed because there was not enough money to stimulate the
economy, the IMF would step in.
Shortly after Bretton Woods, various countries also committed themselves to further global
economic integration through the General Agreement on Tariffs and Trade (GATT) in 1947. GATT’s main
purpose was to reduce tariffs and other hindrances to free trade.
WASHINGTON CONSENSUS
Washington Consensus, a set of economic policy recommendations for developing countries, and
Latin America in particular, that became popular during the 1980s. The term Washington Consensus
usually refers to the level of agreement between the International Monetary Fund (IMF), World Bank, and
U.S. Department of the Treasury on those policy recommendations. All shared the view, typically labelled
neoliberal, that the operation of the free market and the reduction of state involvement were crucial to
development in the global South.
With the onset of a debt crisis in the developing world during the early 1980s, the major Western
powers, and the United States in particular, decided that both the World Bank and the IMF should play a
significant role in the management of that debt and in global development policy more broadly. When the
British economist John Williamson, who later worked for the World Bank, first used the term Washington
Consensus in 1989, he claimed that he was actually referring to a list of reforms that he felt key players in
Washington could all agree were needed in Latin America. However, much to his dismay, the term later
became widely used in a pejorative way to describe the increasing harmonization of the policies
recommended by those institutions. It often refers to a dogmatic belief that developing countries should
adopt market-led development strategies that will result in economic growth that will “trickle down” to the
benefit of all.
The World Bank and IMF were able to promote that view throughout the developing world by
attaching policy conditions, known as stabilization and structural adjustment programs, to the loans they
made. In very broad terms, the Washington Consensus reflected the set of policies that became their
standard package of advice attached to loans. The first element was a set of policies designed to create
economic stability by controlling inflation and reducing government budget deficits. Many developing
countries, especially in Latin America, had suffered hyperinflation during the 1980s. Therefore, a monetarist
approach was recommended, whereby government spending would be reduced and interest rates would
be raised to reduce the money supply. The second stage was the reform of trade and exchange-rate
policies so the country could be integrated into the global economy. That involved the lifting of state

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restrictions on imports and exports and often included the devaluation of the currency. The final stage was
to allow market forces to operate freely by removing subsidies and state controls and engaging in a
program of privatization

By the late 1990s it was becoming clear that the results of the Washington Consensus were far
from optimal. Increasing criticism led to a change in approach that shifted the focus away from a view of
development as simply economic growth and toward poverty reduction and the need for participation by
both developing-country governments and civil society. That change of direction came to be known as the
post-Washington Consensus.
NEOLIBERALISM
Neoliberalism is a policy model that encompasses both politics and economics and seeks to
transfer the control of economic factors from the public sector to the private sector. Many neoliberalism
policies enhance the workings of free market capitalism and attempt to place limits on government
spending, government regulation, and public ownership. Neoliberalism is often associated with the
leadership of Margaret Thatcher-the prime minister of UK from 1979 to 1990 and leader of the
Conservative Party from 1975 to 1990-and Ronal Reagan, the 40th president of US(from 1981 to 1989).
Neoliberalism is related to Laissez-faire economics, a school of thought that prescribe a minimal
amount of government interference into the economic issues of individuals and society. Laissez faire
economics proposes that continued economic growth will lead to technological innovation, expansion of the
free market, and limited state interference.

CONCLUSION
International economics integration is central tenant of globalization .In fact, it is so crucial to the
process that many writers and commentators confuse this integration for the entirety of globalization. As a
reminder, economics is just one window into the phenomenon of globalization; it is not the entire thing
Nevertheless, much of globalization is anchored on changes in the economy. Global culture, for
example, is facilitated by trade. Filipinos would not be as aware of American culture. If not for trade that
allows us to watch American movies, listen to American music and consume American products. The
globalization of politics is likewise largely contingent on trade relations. These days, many events of foreign
affairs are conducted to cement trading relations between and among states. .Given the stakes involved in
economics globalization it is perennially important to ask how this system can be made more just. Although
some element of global free trade can be scaled back, policies cannot do away with it as a whole.
International Policy Makers, therefore should strive to think of ways to make trading deals fairer.
Governments must also continue to devise ways of cushioning the most damaging effects of economic
globalizations, while ensuring that its benefits accrue for everyone.

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GUIDED QUESTIONS
No.2

Name:_______________________________________ Date :______________________________

Programme and Year:__________________________

1. How do economic forces facilitate the deepening of globalization?

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2. How is the Philippines central to the history of economic globalization?

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3. Compare and contrast the assumptions of the original Bretton Woods System with those of
Washington Consensus.
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