_3 Money, Politics and a Future for the International Financial System_ investment are made. This latter point renders the rules governing product markets an integral part for understanding the functioning of the financial system.

**_Financial system architecture_** _-_ **_an economic constitution._** The current debate about a "new global financial architecture" is, therefore, about rules affecting who wins and who loses in the future. The rules and regulations affect the two sides of financial transactions, the flow of information from borrower to lender, say about creditworthiness, and the flow of funds from lender to borrower. Disclosure rules are examples of the former; capital controls one of the latter. The institutions administering the rules and regulations are designed so as to combine a de facto desired mix of autonomy and accountability. Setting those rules and establishing the institutions is like writing the economic constitution of a country. Like with any constitution, there are the issues of how the new constitution is designed and of who supervises implementation raising in turn the age-old problem of who guards the guardians. Right from the start we know, therefore, that there is no tidy technocratic solution to developing new global financial infrastructure. There are no solutions, only re-solutions. The issue is how political forces will arrive at some compromise - by design or by default - that de facto yields the new architecture.

# **1I. Changes in monetary and financial systems during the 2 0 th century**

Given the immense implications for the distribution of wealth we might expect that new monetary and financial regimes are hard to design and agree upon. This might suggest little change of basic systems over time. However, major change has occurred throughout the 20h century.<sup>1</sup>

**_Domestic monetary andfinancial systems._** Following early developments in the _19 th_ century, the 20th century saw the rise of the state-owned central bank as monopoly issuer of domestic currency throughout the world. Currency backing by assets with a market value such as gold or silver was abandoned in favour of fiat money with nothing but the credibility of the central bank behind it. Systems of lender of last resort and deposit insurance were introduced around the globe, notably following the Great Depression of the 1930s. Safety nets backed by fiat money issuing central banks became the underpinning of banking systems everywhere. Bank regulation systems came into being to help protect depositors and control exploitation of the safety net by banks and investors.

**_Exchange rate regimes._** The life span of global monetary regimes that governed the exchange rates established between domestic fiat currencies has not exceeded 30 years in the 2 0 th century. Following the gold standard the chaotic global financial system arising out of the inter war period ended with the establishment of the Bretton Woods system at the end of World War II. The Bretton Woods system of fixed exchange rates broke apart in 1971, although the system's main global financial institutions, IMF and World Bank continued. Now we are almost 30 years into a world monetary system relying heavily on flexible exchange rates and history suggests we may be sliding into a new system.

'For a survey of the history of financial and monetary regimes see Caprio and Vittas (1997), Eichengreen (1998) and Cameron (1989).