Presentation Transcript

1. International Financial System The Gold Standard

2. Gold Standard1880-1914 • Currencies valued in terms of their gold equivalent • Mid 1870’s most major economies pegged to gold • All currencies linked together in a system of fixed exchange rates

3. Gold StandardExample • Currency A worth 0.10 ounce gold • Currency B worth 0.20 ounce gold • 1 unit of B worth twice as much as 1 unit of A.

4. Gold Standardpros and cons • To achieve long run price stability • Prices may rise and fall with swings in gold output • National money supplies constrained by growth of stock of gold • As long as gold stock steady prices steady • Countries with balance of payments deficits outflows of gold , msreduce.

5. The Interwar Period1918-1939 • WW 1 ended the gold standard • Europe experienced rapid inflation • USA little inflation so returned to gold standard in 1919. • War ended Britain’s financial preeminicence • USA World’s dominent banker country

6. Interwar Period • 1930’s depression years. • Trying to stimulate domestic economies by increasing exports country after country had to devalue. • Period of competitive devaluations. • Run on US gold holdings at the end of 1931. • USA abandoned the gold standard.

7. The Gold Exchange Standard1944-1970 • Desire to reform the international monetary system led to an international conference at Bretton Woods , New Hampshire. • US dollar key currency in the system. • 1$= 1/35 ounce gold. • Primary architects Harry White of US and Keynes of UK.

8. Bretton Woods • For countries experiencing difficulty maintaining their parity value new institution created. • The International Monetary Fund

9. International Monetary Fund • Headquartered in Washington D.C • Had 30 original member now 180. • Given the task of promoting the growth of world trade, setting rules for maintenance of fixed exchange rates.making loans to countries facing balance of payments difficulties. • Collecting and standardizing int economic data.

10. IMF • oversees the international monetary system • promotes exchange stability and orderly exchange relations among its member countries • assists all members--both industrial and developing countries--that find themselves in temporary balance of payments difficulties by providing short- to medium-term credits

11. IMF • supplements the currency reserves of its members through the allocation of SDRs (special drawing rights); to date SDR 21.4 billion has been issued to member countries in proportion to their quotas • draws its financial resources principally from the quota subscriptions of its member countries • has at its disposal fully paid-in quotas now totaling SDR 145 billion (about $215 billion) • has a staff of 2,300 drawn from 182 member countries

12. World Bank • seeks to promote the economic development of the world's poorer countries • assists developing countries through long-term financing of development projects and programs • provides to the poorest developing countries whose per capita GNP is less than $865 a year special financial assistance through the International Development Association (IDA)

13. World Bank • encourages private enterprises in developing countries through its affiliate, the International Finance Corporation (IFC) • acquires most of its financial resources by borrowing on the international bond market • has an authorized capital of $184 billion, of which members pay in about 10 percent • has a staff of 7,000 drawn from 180 member countries

14. 1960’s • In 1960 USA ; dollar crises due to run large balance of payments deficits • By the late 1960’s foreign dollar liabilities of USA much larger than the US gold stock. • Pressures of this dollar glut terminated Nixon declared 1971 dollar incovertible • Close to the Bretton Woods era fixed exchange rates and convertible currencies.

15. Transition Years1971-73 • Dec 1971 Smithsonian agreement dollar devalued by about 8% , surplus countrie’s curriencies revalued upward. • June 1972 countries like Germany and Switzerland experiencing large inflows of speculative capital. • They applied legal control to slow further movements of money.

16. Transition Years • Dollar still inconvertible. • Speculative capital flows of 1972 further devaluation of dollar. • An ounce of gold rose from $38 to $42.2 still speculative capital flows from weak to strong curr persisted. • March 1973 major currencies began to float.

17. Floating Exchange Rates1973-to the Present • System best described as managed float. • Exchange rate systems; Flexible (floating),Managed Floating, Fixed Exchange Rate Systems.

18. Exchange Rate SystemsFloating -Flexible • Flexible (floating) ; Value of the currency determined by the market. • By the interactions of banks , firms other institutions.Seeking to buy , sell currency for purposes of transactions clearing, hedging, arbitrage and speculation • Most OECD countries , US, Canada, Britain , Australia , European Monetary Union.

19. Managed Float • Hybrid of fixed exchange rate and flexible exchange rate system. • Central Bank holds stocks of foreign currency. • Intervenes in forex market by buying and selling foreign currency to keep exch rate at desired implicit target values.

20. Fixed (Pegged) Exchange Rates • Prior to 1970’s most countries operated under fixed exchange rate system. • Exchange Rate of member countries fixed against US dollar , with the dollar in turn worth a fixed amount of gold. • Why exch rates kept fixed??????

21. Fixed Exch Rates • To facilitate trade • Reducing fluctuations in relative prices. • Reducing uncertainty

22. Adjustable Pegged Exchange RateCrawling Peg • Central Bank fixes the value of the currency when it desires • Crawling peg ; Fixed exchange rate system where fixed rate changes in a pre-determined manner .

23. Floating Exchange RatesSDR • SDR’s are special international reserve assets created by IMF. • If trade is not heavily concentrated with USA diversified across several countries. • More sensible to alter the currency value to a weighted average of foreign currencies.

24. SDR • Some countries choose to peg to the SDR (special drawing rights) • A basket peg is choosen. • Basket of currencies consisting of yen, euro , sterling , dollar.(today)

25. The Choice Of an Exchange Rate System • Country size in terms of economic activity or GDP important for choosing floating or pegging exchange rates. • Large countries more independent , foreign trade constitutes smaller part of GDP..

26. Choice Of Exchange Rate System • Openess of economy ; • the degree to which country depends on international trade. • The greater the fraction of tradable goods in GDP the more open the economy will be. • The more open economy tends to follow a pegged exchange rate.

27. Choice of Exc Rate • Inflation rates ; Countries inflation experience above average tend to choose floating exch rates. • Where exch rate is adjusted at short intervals to compensate for inflation differentials. • Countries that trade with one single currency pegs their exchange rate to that currency.

28. Conclusion • Peggers ; small size , open economy,Harmonious inflation rate, concentrated trade. • Floaters; Large Size , Closed economy , Divergent inflation rate , diversified trade.