Monitory Systems and its Evolution

Wednesday, 01 May 2013

Agenda

1. Evolution of Money

2. Monitory System Evolution Era

3. Evolution Summary

4. Gold Standard 4. BW System

4. Managed Floating Exchange Rate

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Evolution of Money & Monitory System

Barter

Commo dity

Metal

Money in form of Objects

Ancient Coin

Gold Sliver & Copper Coins

Paper Money

Monetary System

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Overview: Modern Monitory System Evolution

Before the Gold Standard (550 BC 1870 AD) Gold Standard (1870 1945)
Electrum Coins, Lydia, 575 BC Silver Coins, Lycia, 500 BC Silver Coins, Athens, 450 BC Silver Coins, Greek city of Thurium, South Italy, 380 BC

The pre WWI financial order Known as the First age of Globalisation Transactions were facilitated by widespread participation in the gold standard

Bretton Woods System (1945- 1971)

The post Bretton Woods system: 1971 present
An alternative name is Washington Consensus Generally seen as spanning 19802009 (the latter half of the 1970s being a transitional period). The "Revived Bretton Woods system" identified in 2003

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Evolution Summary
Date 18031873 18731914 19141924 19241933 19331971 19711973 19731985 19851999 1999System Bimetallism Gold standard Anchored dollar standard Gold standard Reserve assets Gold, silver Gold, pound Gold, dollar Gold, dollar, pound Gold, dollar Dollar Dollar, mark, pound Dollar, mark, yen Dollar, euro, yen Leaders France, UK UK US, UK, France US, UK, France US, G-10 US US, Germany, Japan US, G7, IMF US, Eurozone, IMF

Anchored dollar standard

Dollar standard Flexible exchange rates Managed exchange rates Dollar, euro

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Gold Standard
The pre WWI financial order: 18701914
Great Britain adopted the gold standard in 1821 Australia in 1852 Canada in 1853 France in 1878 Germany in 1871 US in 1879

Process of Adjustment
US - One dollar was defined to be equal to the value of 23.22 grains of pure gold (1 troy ounce = 480 grains of gold). [Gold Standard Act, 1900] UK - The gold content of pound sterling was fixed by Coinage Act of 1816 at 113 grains of pure gold. Exchange rate between the dollar and the pound was p = 113/23.22 = $4.866

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Gold Standard
Gold Export Point
Cost of shipping gold from London to New York was $0.026 per pound Exchange rate was able to fluctuate between limit of $4.866 0.026 $4.892 = gold import point for UK $4.840 = gold export point for UK

Spot Price

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Gold Standard
Between the World Wars: 19191939
During World War I the international gold standard ceased to function. By the end of war in June 1918, inflation rates varied greatly, because nations printed more money to finance war. Russian revolution occurred in 1917. Adjust Gold Parity After the war in 1918, US announced that it would maintain the dollar price of gold at its prewar level. That is, it is willing to export gold at $20.67 per ounce. Gold Standard Act 1925

Gold Standard Restored: 1925-1931

Under this system, each country holds gold or dollar or pound as reserve asset. The United States and Great Britain were to hold only gold as reserve asset. Key reserve currencies, dollar and pound. Dollar and pound were freely convertible into gold between central banks, but not for the general public. Most countries that were on the silver standard also pegged silver to the dollar, except China and Hong Kong.
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Gold Standard
Problems
BP deficits. Adopted deflationary policy In the decade that followed (1930s), these countries had 3 options to prevent gold outflow: (a) countries tried to manage or stabilize the flexible exchange rates - by raising interest rate, but it did not prevent capital outflow. (b) Some countries devalued their currencies (c) others imposed exchange control when faced with capital flight. Gold Standard Amendment Act -1931 - Britain suspended gold payments Devaluation of Dollar - Gold Reserve Act of 1934

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Bretton Woods System

730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States

A desire to reform the intl monetary system to one based on mutual cooperation and freely convertible currencies.

Fixed ex rate system imposes restriction on monetary policy of countries. Floating ex rates were regarded as a cause of speculative instability.

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Bretton Woods Agreement

International Monetary Fund (IMF)
Purpose: To lend FX to any member whose supply of FX had become scarce. (To help the countries facing difficulty: CA deficit tight monetary policy employment). Lending would be conditional on the members pursuit of economic policies that IMF would think appropriate (IMF Conditionality).

Reserve currency
The US dollar would be designed as a reserve currency, and other nations would maintain their FX reserves in the form of dollars.

Gold Exchange Standard

Each country fixed its ex rate against the dollar and the value of dollar is defined by the official gold price $35 per ounce (Gold Exchange Standard).

Fundamental disequilibrium
A Fund member could change its par value only with Fund approval and only if the countrys BOP was in fundamental disequilibrium.

Subscription
Countries would have to make a payment (subscription) of gold and currency to the IMF in order to become a member.
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Decline and Fall of the BW System

1958-65: Private capital outflows from US 1965-68: Johnson Administration The bad US macroeconomic policy package caused considerable damage to the US economy and the intl monetary system.
Involvement in the Vietnam conflict Great Society program G Deficit MS P & CA (stagflation)

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Decline and Fall of the BW System

1971: US CA deficit massive private purchase of DM Bundesbank intervened in FX market by buying

huge amount of dollars, then it gave up and allowed the DM to float.

August 1, 1971: Nixons announcement

Stop to sell gold for dollars to foreign central banks 10% tax on all imports until revaluation of each countrys currency against the dollars Freeze on prices and wages

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Managed Floating Exchange

1971 - Smithsonian Agreement - Stable exchange rates with wider bands 1972 Snake in the Tunnel Europe. 1976 Jamaica Agreement Floating exchange rates Managed Floating exchange rates

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References
Sr. No
1 2 3

Reference
http://en.wikipedia.org/wiki/International_monetary_systems http://www.bcb.gov.br/?originmoney E book (Bretton Woods System)

International Economics by M L Jhingan

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