Description
history of International Monetary System, origin of Gold standard,collapse of Gold standard, The Bretton Woods Era, end of Bretton Woods System, Post Bretton Woods System and floating Rate Era
The International Monetary System
Contents
? ? ? ? ?
Introduction History of International Monetary System Origin of Gold standard The collapse of Gold standard The Bretton Woods Era
? International Bank of Reconstruction and Development ? International Monetary Fund
? The end of Bretton Woods System ? Post Bretton Woods System and The floating Rate
Era
1.INTRODUCTION
? The International Monetary System establishes the
rules by which countries value and exchange their currencies.
? It also provides a mechanism for correcting
imbalances between a country’s international payments and its receipts.
? The cost of converting foreign money into firm’s
home currency-a variable critical to the profitability of international operations depends on the smooth functioning of the international monetary system.
2. HISTORY OF INTERNATIONAL MONETARY SYSTEM
? The history of Monetary System started when in
ancient time (seventh century B.C.1) tribes & citystates of India, Babylon & Phoenicia used gold & silver as media of exchange in trade.
? The total history of International Monetary System is
discussed below in chronological order.
3. ORIGIN OF GOLD STANDARD
• The gold standard had its origin in the use of gold coins
as a medium of exchange, unit of account, and store of value.
• The theory of the gold standard rests on the idea that
inflation is caused by an increase in the supply of money, and that uncertainty over the future purchasing power of currency depresses business confidence and leads to reduced trade and capital.
• United Kingdom was first to adopt in 1821.
3.1 Advantage
? It created a fixed exchange rate system because each country tied
the value of its currency.
? Representative money and the Gold Standard protect citizens from
hyperinflation and other abuses of monetary policy.
3.2 Disadvantage
Transacting in gold was expensive.
3.3 Sterling-Based Gold Standard:
From 1821 until the end of 1918, the most important currency in international commerce was the British pound sterling because of The United Kingdom’s large territory due to dominant economic and military power. So, most of the people relayed on pound that time. As a result international monetary system during this period is also called starling-based gold standard. The international trust London became a dominant international center in the 19th century, a position it still holds
4.THE COLLAPSE OF GOLD STANDARD
4.1 World War I
During World War 1 normal commercial transactions between the Allies (France, Russia, and the United Kingdom) and the Central Powers (Austria-Hungary, Germany, and the Ottoman Empire) ceased.
The economic pressures of war caused countries to suspend their pledges to buy or sell gold at their currency’s par value.
4.2 Post-War Conferences & Re-adaptation of Gold Standard:
After the War, conferences at Brussels (1920) and Genoa (1922) yielded genera agreements among the major economic powers to pre-war gold standard. Thus it was re-adopted in 1920.
4.3 Implementation of Floating Rate System by Bank of England:
World wide great depression Bank of England
was unable to maintain pledges under Gold standard. On Sep21, 1931, it allowed the pound to float, which means that pound’s value would be determined by the forces of supply and demand and the Bank of England would no Longer guarantee to redeem British paper currency for gold at par value.
4.4 Competitive Devaluation of Currencies & Increased Tariff Rate:
After the United Kingdom abandoned the gold standard, a "sterling area” emerged as some countries, primarily members of the British Commonwealth, pegged their currencies to the pound and relied on sterling balances held in London as their international reserves.
11 Other countries tied the value of their currencies to the U.S. dollar or the French franc. Some countries (United States, France, United Kingdom, Belgium, Latvia, the Netherlands, Switzerland & Italy) were deliberately & artificially devaluating their official value of currencies to make their goods cheaper in the international markets, which is stimulating its exports and reducing its imports.
But, none were getting the benefit due to competitive devaluation at almost same percentage that is each currency's value relative to the other remains the same. Most countries also raised the tariffs they imposed on imported goods in the hope of protecting domestic jobs in import-competing industries. Nations adversely affected by trade barriers of any kind are quite likely to impose retaliatory or reciprocal tariffs
4.5 Effect of beggar-thy-neighbor policies (World War II):
As more and more countries adopted beggar-thy-neighbor policies like devaluation of currencies and increasing the tariff rate on imported goods, international trade contracted that hurt employment in each country's export industries. More ominously, this international economic conflict was soon replaced by international military conflict that was the outbreak of World War-II in 1939.
5. THE BRETTON WOODS ERA
5.1 Post-War Situation
World War II created inflation, unemployment and an instable political situation. Every country was struggling to rebuild their war-torn economy.
5.2 Bretton Woods Conference
Not to repeat the mistakes that had caused World War II, to promote worldwide peace & prosperity and to construct the postwar international monetary system representatives of 44 countries met at a resort in Bretton Woods, New Hampshire in 1944.
5.3 Decision and outcomes of Bretton woods conference:
Following two agreements were takena) Agreement of conferees to renew gold standard on modified basis b) Agreement to create two international organizations namely
1) IBRD ( international bank for reconstruction and development) 2) IMF ( international monetary fund)
5.4 International Bank of Reconstruction and Development
? Commonly known as world bank established in 1945. ? Initial goal was to help finance reconstruction of war-torn
European countries. ? This task was accomplished in mid 1950s ? The Bank then adopted a new mission—to build the economies of the world's developing countries. ? As its mission has expanded over time, the World Bank created three affiliated organizations a) International Development Association (IDA) b) International Finance Corporation (IFC) c) Multilateral Investment Guarantee Agency (MIGA)
International Bank of Reconstruction and Development
IDA
IFC
MIGA
Offer soft loans
Promote Private sector development
Provides Political risk insurance
Together with the World Bank, these constitute the World Bank Group. The World Bank is currently owned by the 185 member countries. The World Bank’s activities are focused on the reduction of global poverty, focusing on the achievement of the Millennium Development Goals (MDGs), goals calling for the elimination of poverty and the implementation of sustainable development. United States is the bank’s largest shareholder.
5.5 International Monetary Fund
International Monetary Fund (IMF) was created to monitor and control the functioning of the international monetary system. It is an international organization that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical assistance. At first 29 countries signed its Articles of Agreement of IMF. But now it has 186 Members. Its Headquarters are at Washington, D.C., USA. Current Managing Director is Dominique Strauss-Kahn. Its Central Bank of Base borrowing rate 5.50%.
Its objectives are as follows:
? To promote international monetary cooperation. ? To facilitate the expansion and balanced growth of international
trade.
? To promote exchange stability, to maintain orderly exchange
arrangements among members, and to avoid competitive exchange depreciation.
? To assist in the establishment of a multilateral system of payments.
? To give confidence to members by making the general resources of
the fund temporarily available to them and to correct maladjustments in their balances of payments.
? To shorten the duration and lessen the degree of disequilibrium in
the interactional balances of payments of members.
5.6 A Dollar-Based Gold Standard: All countries agreed to peg the value of their currencies to gold. However, only the United States pledged to redeem its currency for gold at the request of a foreign central bank.
The U.S. dollar became the key-stone of the Bretton Woods system and became the preferred vehicle for settling most international transactions. The effect of the Bretton Woods conference was thus to establish a U.S. dollar-based gold standard.
Under the Bretton Woods Agreement each country pledged to maintain the value of its currency within ±1% of its par value. If the market value of its currency fell outside that range, a country was obligated to intervene in the foreign-exchange market to bring the value back within ±1% of par value.
This stability in exchange rates benefited international businesses, since the Bretton Woods system generally provided an assurance that the value of each currency would remain stable.
6. THE END OF BRETTON WOODS SYSTEM
The reliance of the Bretton Woods system on the dollar ultimately led to the system's undoing because the supply of gold did not expand in the short run, the only source of the liquidity needed to expand international trade was the U.S. dollar. Under the Bretton Woods system, the expansion of international liquidity depended on foreigners‘ willingness to continually increase their holdings of dollars. Foreigners were perfectly happy to hold dollars as long as they trusted the integrity of the U.S. currency, and during the 1950s and 1960s the number of dollars held by foreigners rose steadily.
As foreign dollar holdings increased, however, people began to question the ability of the United States to live up to its Bretton Woods obligation. This led to the Triffin paradox, named after Robert Triffin.
The paradox arose because foreigners needed to increase their holdings of dollars to finance expansion of international trade. But the more dollars they owned, the less faith they had in the ability of the United States to redeem those dollars for gold. The less faith foreigners had in the United States, the more they wanted to rid themselves of dollars and get gold in return.
The shortcomings are listed below in brief? Limited gold. ? Liquidity problem.
? Foreigners’ behavior of continuous increasing in dollar
holding.
? Foreigners’ less faith on United States
.
6.1 Agreement to Create Special Drawing Rights (SDRs):
To inject more liquidity into the international monetary system while reducing the demands placed on the dollar as a reserve currency, IMF members created the special drawing rights in 1967.
SDR is a credit granted by the IMF that can be used to settle official transactions among central banks. Thus SDRs are sometimes called "paper gold". As of 1993, approximately 21.4 billion SDRs, representing about 2% of the world's total reserves, had been distributed to IMF members in proportion to their IMF quotas.
The value of an SDR is a function of the current value of five different currencies from which it is comprised. They include the U.S. dollar, the Japanese yen, the United Kingdom pound sterling, and the respective euro values of Germany and France.
An SDR's value is currently calculated daily as a weighted average of the market value of five major currencies (U.S. dollar, German mark, French franc, Japanese yen, and pound sterling) with the weights revised every five years. As of May 1995, the SDR was worth $1.54 in U.S. dollars.
6.1.2 Outcome of Creating SDRs
SDRs solved the liquidity problem for the international monetary system, but if failed to solve the problem related to the glut of dollars Held by foreigners & faith. By mid 1971, the Bretton Woods system was tottering, the victim of fears about the dollar's instability. In the first seven months of 1971, the United States sold one third of its gold reserves. It became clear to the marketplace that the United States did not have sufficient gold on hand to meet the demands of those who still wanted to exchange their dollars for gold.
6.3 Official Ending of Bretton Woods System
The Bretton Woods system officially ended when in a dramatic address on August 15, 1971, President Richard M. Nixon announced that the United States would no longer redeem gold at $35 per ounce
7. POST BRETTON WOODS SYSTEM AND THE FLOATING RATE ERA
Most foreign currencies began to float, their values being determined by supply and demand in the foreign-exchange market. The value of the U.S. dollar fell relative to most of the world's major currencies. But the nations of the world were not yet ready to abandon the fixed exchange-rate system. At the Smithsonian Conference, held in Washington, D.C. in December 1971, Central bank representatives from the Group of Ten agreed to restore the fixed exchange-rate system but with restructured rates of exchange between the major trading currencies. The U.S. dollar was devalued to $38 per ounce but remained inconvertible into gold, and the par values of strong currencies such as the yen were revalued upward. Currencies were allowed to fluctuate around their new par values by 2.25%, which replaced the narrower ± 1.00% range authorized by the Bretton Woods Agreement.
doc_848203568.pptx
history of International Monetary System, origin of Gold standard,collapse of Gold standard, The Bretton Woods Era, end of Bretton Woods System, Post Bretton Woods System and floating Rate Era
The International Monetary System
Contents
? ? ? ? ?
Introduction History of International Monetary System Origin of Gold standard The collapse of Gold standard The Bretton Woods Era
? International Bank of Reconstruction and Development ? International Monetary Fund
? The end of Bretton Woods System ? Post Bretton Woods System and The floating Rate
Era
1.INTRODUCTION
? The International Monetary System establishes the
rules by which countries value and exchange their currencies.
? It also provides a mechanism for correcting
imbalances between a country’s international payments and its receipts.
? The cost of converting foreign money into firm’s
home currency-a variable critical to the profitability of international operations depends on the smooth functioning of the international monetary system.
2. HISTORY OF INTERNATIONAL MONETARY SYSTEM
? The history of Monetary System started when in
ancient time (seventh century B.C.1) tribes & citystates of India, Babylon & Phoenicia used gold & silver as media of exchange in trade.
? The total history of International Monetary System is
discussed below in chronological order.
3. ORIGIN OF GOLD STANDARD
• The gold standard had its origin in the use of gold coins
as a medium of exchange, unit of account, and store of value.
• The theory of the gold standard rests on the idea that
inflation is caused by an increase in the supply of money, and that uncertainty over the future purchasing power of currency depresses business confidence and leads to reduced trade and capital.
• United Kingdom was first to adopt in 1821.
3.1 Advantage
? It created a fixed exchange rate system because each country tied
the value of its currency.
? Representative money and the Gold Standard protect citizens from
hyperinflation and other abuses of monetary policy.
3.2 Disadvantage
Transacting in gold was expensive.
3.3 Sterling-Based Gold Standard:
From 1821 until the end of 1918, the most important currency in international commerce was the British pound sterling because of The United Kingdom’s large territory due to dominant economic and military power. So, most of the people relayed on pound that time. As a result international monetary system during this period is also called starling-based gold standard. The international trust London became a dominant international center in the 19th century, a position it still holds
4.THE COLLAPSE OF GOLD STANDARD
4.1 World War I
During World War 1 normal commercial transactions between the Allies (France, Russia, and the United Kingdom) and the Central Powers (Austria-Hungary, Germany, and the Ottoman Empire) ceased.
The economic pressures of war caused countries to suspend their pledges to buy or sell gold at their currency’s par value.
4.2 Post-War Conferences & Re-adaptation of Gold Standard:
After the War, conferences at Brussels (1920) and Genoa (1922) yielded genera agreements among the major economic powers to pre-war gold standard. Thus it was re-adopted in 1920.
4.3 Implementation of Floating Rate System by Bank of England:
World wide great depression Bank of England
was unable to maintain pledges under Gold standard. On Sep21, 1931, it allowed the pound to float, which means that pound’s value would be determined by the forces of supply and demand and the Bank of England would no Longer guarantee to redeem British paper currency for gold at par value.
4.4 Competitive Devaluation of Currencies & Increased Tariff Rate:
After the United Kingdom abandoned the gold standard, a "sterling area” emerged as some countries, primarily members of the British Commonwealth, pegged their currencies to the pound and relied on sterling balances held in London as their international reserves.
11 Other countries tied the value of their currencies to the U.S. dollar or the French franc. Some countries (United States, France, United Kingdom, Belgium, Latvia, the Netherlands, Switzerland & Italy) were deliberately & artificially devaluating their official value of currencies to make their goods cheaper in the international markets, which is stimulating its exports and reducing its imports.
But, none were getting the benefit due to competitive devaluation at almost same percentage that is each currency's value relative to the other remains the same. Most countries also raised the tariffs they imposed on imported goods in the hope of protecting domestic jobs in import-competing industries. Nations adversely affected by trade barriers of any kind are quite likely to impose retaliatory or reciprocal tariffs
4.5 Effect of beggar-thy-neighbor policies (World War II):
As more and more countries adopted beggar-thy-neighbor policies like devaluation of currencies and increasing the tariff rate on imported goods, international trade contracted that hurt employment in each country's export industries. More ominously, this international economic conflict was soon replaced by international military conflict that was the outbreak of World War-II in 1939.
5. THE BRETTON WOODS ERA
5.1 Post-War Situation
World War II created inflation, unemployment and an instable political situation. Every country was struggling to rebuild their war-torn economy.
5.2 Bretton Woods Conference
Not to repeat the mistakes that had caused World War II, to promote worldwide peace & prosperity and to construct the postwar international monetary system representatives of 44 countries met at a resort in Bretton Woods, New Hampshire in 1944.
5.3 Decision and outcomes of Bretton woods conference:
Following two agreements were takena) Agreement of conferees to renew gold standard on modified basis b) Agreement to create two international organizations namely
1) IBRD ( international bank for reconstruction and development) 2) IMF ( international monetary fund)
5.4 International Bank of Reconstruction and Development
? Commonly known as world bank established in 1945. ? Initial goal was to help finance reconstruction of war-torn
European countries. ? This task was accomplished in mid 1950s ? The Bank then adopted a new mission—to build the economies of the world's developing countries. ? As its mission has expanded over time, the World Bank created three affiliated organizations a) International Development Association (IDA) b) International Finance Corporation (IFC) c) Multilateral Investment Guarantee Agency (MIGA)
International Bank of Reconstruction and Development
IDA
IFC
MIGA
Offer soft loans
Promote Private sector development
Provides Political risk insurance
Together with the World Bank, these constitute the World Bank Group. The World Bank is currently owned by the 185 member countries. The World Bank’s activities are focused on the reduction of global poverty, focusing on the achievement of the Millennium Development Goals (MDGs), goals calling for the elimination of poverty and the implementation of sustainable development. United States is the bank’s largest shareholder.
5.5 International Monetary Fund
International Monetary Fund (IMF) was created to monitor and control the functioning of the international monetary system. It is an international organization that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical assistance. At first 29 countries signed its Articles of Agreement of IMF. But now it has 186 Members. Its Headquarters are at Washington, D.C., USA. Current Managing Director is Dominique Strauss-Kahn. Its Central Bank of Base borrowing rate 5.50%.
Its objectives are as follows:
? To promote international monetary cooperation. ? To facilitate the expansion and balanced growth of international
trade.
? To promote exchange stability, to maintain orderly exchange
arrangements among members, and to avoid competitive exchange depreciation.
? To assist in the establishment of a multilateral system of payments.
? To give confidence to members by making the general resources of
the fund temporarily available to them and to correct maladjustments in their balances of payments.
? To shorten the duration and lessen the degree of disequilibrium in
the interactional balances of payments of members.
5.6 A Dollar-Based Gold Standard: All countries agreed to peg the value of their currencies to gold. However, only the United States pledged to redeem its currency for gold at the request of a foreign central bank.
The U.S. dollar became the key-stone of the Bretton Woods system and became the preferred vehicle for settling most international transactions. The effect of the Bretton Woods conference was thus to establish a U.S. dollar-based gold standard.
Under the Bretton Woods Agreement each country pledged to maintain the value of its currency within ±1% of its par value. If the market value of its currency fell outside that range, a country was obligated to intervene in the foreign-exchange market to bring the value back within ±1% of par value.
This stability in exchange rates benefited international businesses, since the Bretton Woods system generally provided an assurance that the value of each currency would remain stable.
6. THE END OF BRETTON WOODS SYSTEM
The reliance of the Bretton Woods system on the dollar ultimately led to the system's undoing because the supply of gold did not expand in the short run, the only source of the liquidity needed to expand international trade was the U.S. dollar. Under the Bretton Woods system, the expansion of international liquidity depended on foreigners‘ willingness to continually increase their holdings of dollars. Foreigners were perfectly happy to hold dollars as long as they trusted the integrity of the U.S. currency, and during the 1950s and 1960s the number of dollars held by foreigners rose steadily.
As foreign dollar holdings increased, however, people began to question the ability of the United States to live up to its Bretton Woods obligation. This led to the Triffin paradox, named after Robert Triffin.
The paradox arose because foreigners needed to increase their holdings of dollars to finance expansion of international trade. But the more dollars they owned, the less faith they had in the ability of the United States to redeem those dollars for gold. The less faith foreigners had in the United States, the more they wanted to rid themselves of dollars and get gold in return.
The shortcomings are listed below in brief? Limited gold. ? Liquidity problem.
? Foreigners’ behavior of continuous increasing in dollar
holding.
? Foreigners’ less faith on United States
.
6.1 Agreement to Create Special Drawing Rights (SDRs):
To inject more liquidity into the international monetary system while reducing the demands placed on the dollar as a reserve currency, IMF members created the special drawing rights in 1967.
SDR is a credit granted by the IMF that can be used to settle official transactions among central banks. Thus SDRs are sometimes called "paper gold". As of 1993, approximately 21.4 billion SDRs, representing about 2% of the world's total reserves, had been distributed to IMF members in proportion to their IMF quotas.
The value of an SDR is a function of the current value of five different currencies from which it is comprised. They include the U.S. dollar, the Japanese yen, the United Kingdom pound sterling, and the respective euro values of Germany and France.
An SDR's value is currently calculated daily as a weighted average of the market value of five major currencies (U.S. dollar, German mark, French franc, Japanese yen, and pound sterling) with the weights revised every five years. As of May 1995, the SDR was worth $1.54 in U.S. dollars.
6.1.2 Outcome of Creating SDRs
SDRs solved the liquidity problem for the international monetary system, but if failed to solve the problem related to the glut of dollars Held by foreigners & faith. By mid 1971, the Bretton Woods system was tottering, the victim of fears about the dollar's instability. In the first seven months of 1971, the United States sold one third of its gold reserves. It became clear to the marketplace that the United States did not have sufficient gold on hand to meet the demands of those who still wanted to exchange their dollars for gold.
6.3 Official Ending of Bretton Woods System
The Bretton Woods system officially ended when in a dramatic address on August 15, 1971, President Richard M. Nixon announced that the United States would no longer redeem gold at $35 per ounce
7. POST BRETTON WOODS SYSTEM AND THE FLOATING RATE ERA
Most foreign currencies began to float, their values being determined by supply and demand in the foreign-exchange market. The value of the U.S. dollar fell relative to most of the world's major currencies. But the nations of the world were not yet ready to abandon the fixed exchange-rate system. At the Smithsonian Conference, held in Washington, D.C. in December 1971, Central bank representatives from the Group of Ten agreed to restore the fixed exchange-rate system but with restructured rates of exchange between the major trading currencies. The U.S. dollar was devalued to $38 per ounce but remained inconvertible into gold, and the par values of strong currencies such as the yen were revalued upward. Currencies were allowed to fluctuate around their new par values by 2.25%, which replaced the narrower ± 1.00% range authorized by the Bretton Woods Agreement.
doc_848203568.pptx