c




 
 


Arora Gaurav Singh

Mukesh Kumar
Rwechungura Seriaris
Amandeep Singh
Gurpreet Singh
 Introduction
=che institutional arrangements that countries adopt
to govern exchange rates are known as the
international monetary system
=When a country allows the foreign exchange market
to determine the relative value of a currency, a
floating exchange rate system exists
=che systems can grow organically as the collective
result of numerous individual agreements between
international economic actors spread over several
decades
 uoals

= n open economies, policymakers are motivated by

two goals:
ë nternal balance
t requires the full employment of a country͛s
resources and domestic price level stability.
ë External balance
t is attained when a country͛s current account is
neither so deeply in deficit nor so strongly in surplus.
 uold Standard, 1870-1914

= rigins of the Gold Standard

ë che gold standard had its origin in the use of gold
coins as a medium of exchange, unit of account, and
store of value.
ë che Resumption Act (1819) marks the first adoption
of a true gold standard.
t simultaneously repealed long-standing restrictions
on the export of gold coins and bullion from Britain.
ë che U.S. Gold Standard Act of 1900 institutionalized
the dollar-gold link

 ^ra of uold Standard

=che gold standard worked fairly well from the 1870s

until the start of World War  in 1914
=During the war, many governments financed their
war expenditures by printing money, and in doing so,
created inflation
=People lost confidence in the system and started to
demand gold for their currency putting pressure on
countries' gold reserves, and forcing them to suspend
gold convertibility
=By 1939, the gold standard was dead.
 c
Int
rwar Y
ars, 1918-1939
= With the eruption of WW in 1914, the gold
standard was suspended.
ë che interwar years were marked by severe economic
instability.
ë che reparation payments led to episodes of
hyperinflation in Europe.
= che German Hyperinflation
ë Germany͛s price index rose from a level of 262 in
January 1919 to a level of 126,160,000,000,000 in
December 1923 (a factor of 481.5 billion).
 c
Int
rwar Y
ars, 1918-1939
= che Fleeting Return to Gold
ë 1919
U.S. returned to gold
ë 1922
A group of countries (Britain, France, taly, and Japan)
agreed on a program calling for a general return to the
gold standard and cooperation among central banks
in attaining external and internal objectives

c
Int
rwar Y
ars, 1918-1939
ë 1925
Britain returned to the gold standard
ë 1929
che Great Depression was followed by bank failures
throughout the world.
ë 1931
Britain was forced off gold when foreign holders of
pounds lost confidence in Britain͛s commitment to
maintain its currency͛s value

 c
Int
rwar Y
ars, 1918-1939
= nternational Economic Disintegration
ë Many countries suffered during the Great
Depression.
ë Major economic harm was done by restrictions on
international trade and payments.
ë chese beggar-thy-neighbor policies provoked
foreign retaliation and led to the disintegration of
the world economy.
ë All countries͛ situations could have been bettered
through international cooperation
Bretton Woods agreement
 c




  





 

 !
 c
Br
tton Woods Syst
 & t
IMF

= nternational Monetary Fund (MF)

ë n July 1944, 44 representing countries met in
Bretton Woods, New Hampshire to set up a system
of fixed exchange rates.
All currencies had fixed exchange rates against the
U.S. dollar and an unvarying dollar price of gold
($35 an ounce).
ë t intended to provide lending to countries with
current account deficits.
ë t called for currency convertibility

G
 rgaisations Involv
d
che Bretton Woods agreement also established two
multinational institutions:
= the nternational Monetary Fund (MF) to maintain
order in the international monetary system
= the World Bank to promote general economic
development

 c
Br
tton Woods Syst

and t
Int
rnational Mon
tary
Fund
= Goals and Structure of the MF
ë che MF agreement tried to incorporate sufficient
flexibility to allow countries to attain external
balance without sacrificing internal objectives or
fixed exchange rates.
ë cwo major features of the MF Articles of Agreement
helped promote this flexibility in external
adjustment:
MF lending facilities
MF conditionality is the name for the surveillance over the
policies of member counties who are heavy borrowers of
Fund resources

c
Br
tton Woods Syst
 & t
IMF

= ´onvertibility
ë ´onvertible currency
A currency that may be freely exchanged for foreign
currencies.
Example: che U.S. and ´anadian dollars became convertible
in 1945. A ´anadian resident who acquired U.S. dollars could
use them to make purchases in the U.S. or could sell them to
the Bank of ´anada.
ë che MF articles called for convertibility on current
account transactions only.
 c
Rol
f c
World Bank
che World Bank is also called the nternational Bank for
Reconstruction and Development (BRD)
chere are two ways to borrow from the World Bank:
1. under the BRD scheme, money is raised through bond sales
in the international capital market
= borrowers pay what the bank calls a market rate of interest -
the bank's cost of funds plus a margin for expenses.
2. through the nternational Development Agency, an arm of
the bank created in 1960
= DA loans go only to the poorest countries
 c
Collaps
f c
Fix
d
^xc ang
Rat
Syst

=Bretton Woods worked well until the late 1960s.
=t collapsed when huge increases in welfare
programs and the Vietnam War were financed by
increasing the money supply and causing significant
inflation
=ther countries increased the value of their
currencies relative to the dollar in response to
speculation the dollar would be devalued
 Collaps

= However, because the system relied on an
economically well managed U.S., when the U.S.
began to print money, run high trade deficits, and
experience high inflation, the system was strained
to the breaking point

 # $ %%
 & G


"
c
Floating ^xc ang
Rat
R
gi

=n 1976, following the collapse of Bretton Woods,
MF members formalized a new exchange rate system
at a meeting in Jamaica.
=che rules that were agreed on then, are still in place
today

 c
Jaaica Agr


nt
Under the Jamaican agreement:
=floating rates were declared acceptable
=gold was abandoned as a reserve asset
=total annual MF quotas - the amount member
countries contribute to the MF - were increased to
$41 billion.
 ^xc ang
Rat
s Sinc
1973
=Since 1973, exchange rates have become more
volatile and less predictable than they were between
1945 and 1973.

Volatility has increased because of:

=che 1971 oil crisis
=che loss of confidence in the dollar that followed the
rise of U.S. inflation in 1977 and 1978
=che 1979 oil crisis

=che unexpected rise in the dollar between 1980 and
1985
=che partial collapse of the European Monetary
System in 1992
=che 1997 Asian currency crisis

 Fix
d V
rsus Floating ^xc ang

Rat
s
=che merit of a fixed exchange rate versus a floating
exchange rate system continues to be debated
=Many countries today are disappointed with the
floating exchange rate system

 SDR

= Special Drawing Right (SDR)

= SDR (Special Drawings Rights) : this were created by
the MF in 1969 as a type of reserve assets to
supplement international reserves of gold &
national currencies for setting balance of payment
accounts.
= SDR is the MFs main reserve asset, & is held by
member-countries of the MF as part of their
international reserves. A member may use their
special account to obtain needed foreign currency
from another member



 VALU^D
1
Japan
s
Y
n
2
US Dollars
3
Britis Pounds
4
^uros
 F
atur
s of SDR

ë SDR is not a real money & has no gold backing.
unlike gold & foreign exchange, it doest not have
tangible life of its own. t is created by the MF &
takes the form of book-keeping entries in a
special account managed by the fund.
 CURR^c ScAcUSQ
= Practice of FLAcNG RAcE EX´HANGE SYScEM.
= A floating-exchange rate system permits each
currency to find its own level of exchange, which
will change from time-to-time, as economic
conditions change.
= However many countries are still not comfortable

 CURR^c ScAcUSQ F IMF
= t is an organization formed with a stated objective
of stabilizing international exchange rates and
facilitating development through the enforcement
of liberalising economic policies on other countries
as a condition for loans, restructuring or aid.
= t also offers highly leveraged loans mainly
to poorer countries.
 SAcUSQ F IMF
= Headquarters in Washington, D.´.
= An organization of 187 countries (as of July 2010).
= Facilitate international trade, promote high
employment and sustainable economic growth, and
reduce poverty.
= With the exception of ´uba (left in 1964),
caiwan(expelled in 1980), North Korea Andorra
Monaco Liechtenstein cuvalu and Nauru, all UN
member states participate directly in the MF

= Member states are represented on a 24-member
Executive Board (five Executive Directors are
appointed by the five members with the largest
quotas, nineteen Executive Directors are elected by
the remaining members), and all members appoint
a Governor to the MF's Board of Governors

= cA YU͙͙͙͙͙