Ppt IMS- History

7/28/2019 Ppt IMS- History

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INTERNATIONAL MONETARY SYSTEM

Prepared by Vipul S. Sutar

(IMCOST)


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International Monetary System - Vipul Sutar

INTRODUCTION

International Monetary System-

Complex system of international arrangements,

rules, institutions, policies in regard to ex-rates,

international payments, capital flows.


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HISTORY OF THE IMS

BIMETALLISM(pre-1875)

CLASSICAL GOLD STANDARD (1875-WWI)

INTERWAR PERIOD: (1915-1944 )

BRETTON WOODS SYSTEM: (1945-1972 )

FLEXIBLE EXCHANGE RATES: (1973-

PRESENT)


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BIMETALLISM(pre-1875)

Commodity money system using both silver and gold

(precious metals) for international payments (and for

domestic currency).

Eg. gold standard (British pound) or the silverstandard (German DM) and some on a bimetallic

(French franc). Pound/Franc ex-rate was determined

by the gold content of the two currencies. Franc/DM

was determined by the silver content of the twocurrencies. Pound (gold) / DM (silver) rate was

determined by their ex-rates against the Franc.


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Continue

Under a bimetallic standard the silver/gold ratio was

fixed at a legal rate. When the market rate for

silver/gold differed substantially from the legal rate,

one metal would be overvalued and one would beundervalued.

Eg. from 1837-1860 the legal silver/gold ratio was

16/1 and the market ratio was 15.5/1.

Gold was overvalued at the legal rate, silver was

undervalued.


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CLASSICAL GOLD STANDARD

(1875-WWI)

Gold Standard exists when most countries:

1. Use gold coins as the primary medium of exchange

2. Have a fixed ex-rate between ounce of gold and

currency

3. Allow unrestricted gold flows - gold can be

exported or imported freely.

4. Banknotes had to be backed with gold to assurefull convertibility to gold.

5. Domestic money stock had to rise and fall with

gold flows.


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Continue

Under a gold standard, ex-rates would be kept in line

by cross-country gold flows.

Example: suppose that the UK Pound is pegged to

gold at: 6 Pound/oz., and the franc is pegged at 12FF/oz, then the official ex-rate should be 2FF/Pound.


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Advantages of Gold Standard:

1. Ultimate hedge against inflation. Because of its fixed

supply, gold standard creates price level stability,

eliminates abuse by central bank/hyperinflation.

2. Automatic adjustment in Balance of payments due toprice-specie-flow mechanism.


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Disadvantages of Gold Standard:

1. Possible deflationary pressure. With a fixed supply of

gold (fixed money supply), output growth would lead

to deflation.

2. An international gold standard has no commitmentmechanism, or enforcement mechanism, to keep

countries on the gold standard if they decide to

abandon gold.


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INTERWAR PERIOD: 1915-1944

When WWI started, countries abandoned the gold

standard, suspended redemption of banknotes for

gold, and imposed ban on gold exports

Hyperinflation


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BRETTON WOODS SYSTEM: 1945-

1972

At the end of WWII, 44 countries nations met at

Bretton Woods, N.H. to develop a postwar IMS.

IMS established by Bretton Woods was a dollar-

based, gold-exchange standard of fixed exchangerates. The US dollar was pegged to gold at a fixed

price of $35/ounce, and then each currency had a

fixed ex-rate with the $.


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Advantages of Gold-Exchange

System/Bretton Woods in SR:

1. Easier to transfer dollars vs shipping gold overseas

under pure gold standard.

2. By holding $ instead of gold as reserves, foreign

central banks can earn interest vs. non-interestbearing gold.

3. Ex-rate stability reduced currency risk, provided a

stable IMS.


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BRETTON WOODS SYSTEM: 1945-

1972

In long run, Bretton Woods (gold-exchange system)

was unstable.

There was no way to devalue the $, and other

countries were not willing to revalue their ex-ratesupward.

Bretton Woods started to collapse in 1971


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FLEXIBLE EXCHANGE RATES:

1973-PRESENT

IMF members met in Jamaica in 1976 to agree to a new IMS

including:

a. Flexible ex-rates allowed, central banks could intervene in

currency markets. (Under fixed ex-rates, you lose control over

your monetary policy. Monetary policy must be committed to

maintaining the fixed ex-rate, and cannot be used to pursue

other macroeconomic goals)

b. Gold was abandoned as a reserve asset.

c. Developing countries were to get more assistance from IMF.


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Advantages of Flexible Ex-Rates:

a. Countries have control over monetary policyb. A true market value is established for currency,

fluctuates daily to reflect market forces of S and D.

c. Flexible ex-rates maintain BP equilibrium.Example: U.S. has trade deficit, M>X, excess dollars in

world currency markets, $ depreciates,

appreciates, US exports will go up, restore tradebalance.


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Disadvantages:

a. More Volatility.

b. Potential abuse by central bank, reckless monetary

expansion.


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European Monetary System

The single currency in Europe. (1 ECU = 1 Euro)

To qualify, countries had to meet certain economic

criteria:

1) Deficits/GDP less than 3%,

2) price level stability - low and stable inflation, etc.

Of the 15 countries in the European Union, three

countries decided not to join (UK, Denmark, andSweden).


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Euro:

1) The 12 countries fixed their ex-rates against each

other and against the Euro and

2) The Euro became a unit of account. For example,

3.35FF/DM. 6.55 FF/Euro. FF and DM will floatagainst the $, and Yen, but will be fixed against

each other and against the Euro.


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Main Advantages of Euro ():

1. Significant reduction in transaction costs for consumers,

businesses, governments.

European Saying: If you travel through all 15 countries and

exchange money in each country but don't spend it, you end

up with 1/2 of the original amount!

2. Elimination of currency risk, which will save companies

hedging costs

3. Promote corporate restructuring via M&A activity (mergers

and acquisitions), encourage optimal business location

decisions.


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Main Disadvantage of Euro:

Loss of control over domestic monetary policy and

exchange rate determination.


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Thank You

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