Development of the International Monetary System (2023)

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Title: Evolution of the International Monetary System

1
Evolution of the International Monetary System

• Bimetallism before 1875
• Classic gold standard 1875-1914
• interwar period 1915-1944
• Sistema de Bretton Woods 1945-1972
• The 1973-Present Flexible Exchange Rate Regime

2
Bimetallism before 1875

• A double standard in the sense that so much gold
  and silver were used as money.
• Some countries were on the gold standard, others on the
  the standard silver, some in both.
• Both gold and silver were used as internationals.
  means of payment and exchange rates between
  coins were determined by their gold
  or silver content.
• Gresham's Law implied that it would be the minimum
  valuable metal that would tend to circulate. Bad
  money drives out good.

3
Classic gold standard 1875-1914

• During this period, in most major countries
• Only gold was guaranteed mintage without restrictions.
• There was a two-way convertibility between gold and
  national currencies in a stable proportion.
• Gold could be freely exported or imported.
• The exchange rate between two countries
  the currencies would be determined by their relationship
  gold content.

4
Classic gold standard 1875-1914

• For example, if the dollar is linked to gold in
  US30 1 ounce of gold and the pound sterling
  is pegged to gold in 6 1 ounce of gold,
  It must be the case that the exchange rate is
  determined by the relative gold content

30 6 5 1
5
Classic gold standard 1875-1914

• Highly stable exchange rates under the classical regime
  the gold standard provided an environment that was
  favorable to international trade and investment.
• Misalignment of exchange rates and
  payment imbalances were automatically
  corrected by the price-species-flow mechanism.

6
price-species-flow mechanism

• Suppose Britain exports more to France
  that France imported from Great Britain.
• This cannot persist under a gold standard.
• Net export of goods from Great Britain to France
  will be accompanied by a net flow of gold from
  France to Great Britain.
• This flow of gold will lead to a lower price.
  level in France and, at the same time, a greater
  price level in Great Britain.
• The resulting change in relative price levels
  will slow down exports from Great Britain and
  encourage exports from France.

7
Classic gold standard 1875-1914

• there are deficiencies
• The supply of newly minted gold is so restricted
  that growth in world trade and investment can
  be harmed by not having enough money
  reservations
• Even if the world went back to the gold standard,
  any national government could abandon the
  standard.

8
The relationship between money and growth

• Money is needed to facilitate the economy.
  minutes.
• MVPY ?The trading equation.
• Assuming that the velocity (V) is relatively stable, the
  amount of money determines the level of
  spent.
• If there are not enough monetary instruments
  available, you can restrict the level of
  minutes.
• If income (Y) grows but money (M) is constant,
  prices (P) must fall. This creates a deflation
  trap.
• Deflationary episodes were common in the US.
  during the gold standard.

9
interwar period 1915-1944

• Exchange rates fluctuated across countries
  used predatory deprecations of their
  coins as a means of gaining an advantage in
  world export market.
• Attempts were made to restore the gold standard,
  but participants lacked the political will to
  follow the rules of the game.
• The result for international trade and investment
  it was deeply harmful.
• Tarifas Smoot-Hawley
• Great Depression

10
Sistema de Bretton Woods 1945-1972

• Named for a 1944 meeting of 44 nations in Bretton
  Woods, Nuevo Hampshire.
• The objective was to project an international post-war.
  Monetary system.
• The objective was exchange rate stability without
  Golden pattern.
• The result was the creation of the IMF and the
  World Bank.

11
Sistema de Bretton Woods 1945-1972

• Under the Bretton Woods system, the US dollar
  was pegged to gold at 35 per ounce and others
  Currencies were pegged to the US dollar.
• Each country was responsible for maintaining its
  exchange rate within 1 of the adopted face value
  purchase or sale of foreign reserves as
  necessary.
• The United States was only responsible for maintaining the
  gold par.
• This created a strong demand for reserves and
  allowed the United States to run trade deficits.
• The Bretton Woods system was a dollar-based gold system.
  exchange pattern.

12
Sistema de Bretton Woods 1945-1972
USD
Set in 35/oz.
gold
13
Bretton Woods collapse

• The global demand for the Triffin paradox requires
  The US will maintain a persistent balance of payments
  deficits that ultimately lead to loss of
  trust him.
• The SDR was created to alleviate shortages.
• Throughout the 1960s, countries with large
  reserves started buying US gold in
  increasing amounts threatening gold
  US reservations
• Large US budget deficits and high monetary growth
  created imbalances in the exchange rate that could not
  sustained, that is, it was overvalued and the
  DM and they were underestimated.
• Several realignment attempts were made, but
  Finally, the US gold supply run caused
  the suspension of convertibility in September
  1971.
• Smithsonian Agreement of December 1971

14
Composition of SDRs
15
The Flexible Exchange Rate Regime 1973-Present.

• Declared flexible exchange rates acceptable
  to IMF members in Jamaica, January 1976.
• Central banks were allowed to intervene in the
  exchange rate markets to solve unwarranted problems
  volatilities.
• Gold was abandoned as an international reserve.
  active.
• Non-oil exporting and less developed countries
  Countries had greater access to IMF funds.

sixteen
Value since 1965
17
current exchange rate

• free floating
• The largest number of countries, around 48, allows
  market forces to determine your currencies
  valeria.
• float managed
• About 25 countries combine governments
  intervention with market forces to establish exchanges
  tariffs
• Linked to another currency
• Like the US dollar or the euro (via the franc or
  brand).
• no national currency
• Some countries don't bother to print their own,
  they use US dollar only. For example,
  Ecuador, Panama and El Salvador were dollarized.

18
European Monetary System

• Eleven European countries maintain exchange rates
  between its currencies within narrow bands, and
  they float together against foreign currencies.
• Goals
• Establish a zone of monetary stability in
  Europa.
• Coordinate exchange rate policies against
  non-European currencies.
• Pave the way for the European Monetary Union.

19
What is the euro?

• The euro is the single currency of the European Union
  Monetary union that has been adopted by 11 countries
  United States on January 1, 1999.
• These original member states were Belgium,
  Germany, Spain, France, Ireland, Italy,
  Luxembourg, Finland, Austria, Portugal and
  Netherlands.

20
EURO CONVERSION RATES

you
21
About the euro

• The sign of the new single currency appears
  an E with two clearly marked, horizontal
  parallel lines through it.
• It was inspired by the Greek letter epsilon, in
  reference to the cradle of European civilization
  and even the first letter of the word 'Europe'.
• All insurance and other legal contracts continued
  into force with the substitution of quantities
  denominated in national currencies with their respective
  euro equivalents.

22
Euro value in US dollars

• January 1999 to July 2004

23
Theory of optimal currency areas

• Cost and benefits depend on how well integrated
  your economy is with those of your potential
  partners
• Fixed exchange rates are most appropriate for
  areas strongly integrated through
  trade and mobility of factors of production

24
Benefits of the ideal currency area
Monetary Efficiency Gain

• Monetary Efficiency Gain
• Savings from floating rates
• Uncertainty
• Confusion
• Calculation
• transaction costs

GG
Tight economic integration leads to interconnection
price stability
Degree of Economic Integration
25
Costs of optimal currency areas
Loss of Economic Stability

• Loss of Economic Stability
• Abandoning the ability to use the exchange rate and
  monetary policy stability of production and
  job
• With fixed exchange rates, monetary policy has no
  power to affect domestic production
• Reduce the loss of economic stability due to production
  market disturbances

LL
Degree of Economic Integration
26
Optimum Currency Area Decisions

• The variability in your product markets makes
  countries least willing to enter the fixed exchange rate
  area fee
• After the 1973 oil crisis, countries
  reluctant to revive the Bretton Woods system of
  fixed exchange rates
• Fixed exchange rate better serves the economy
  interests of each of its members when the degree
  of economic integration is high

profit or loss
GG
The loss outweighs the gain
The gain outweighs the loss
LL
?0
Degree of Economic Integration
27
Ideal currency areas

• Degree of Economic Integration
• They trade a lot with each other.
• There is a high degree of labor mobility among them.
• The economic shocks they face are highly correlated
  (systematic shocks)
• There is a federal tax system to transfer
  funds for regions experiencing adverse shocks

28
The European Union

• Replacement
• EU members export 10 to 20 of their production
  to other EU members
• The US exports about 2% of its GDP to EU members
• labor mobility
• The United States has only minor differences in
  unemployment rate across regions due to
  almost complete mobility
• Europe has certain impediments to mobility
• Language
• Culture
• Regulation

29
The long-term impact of the euro

• If the euro triumphs, it will advance
  the political integration of Europe into an important
  way, eventually making a United States of
  viable Europe.
• The US dollar is likely to lose its
  place as the dominant world currency.
• The euro and the US dollar will both be
  major currencies.

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31
The Mexican Peso Crisis

• On December 20, 1994, the Mexican government
  announced a plan to devalue the peso against the
  dollar by 14 percent.
• This decision changed forex traders
  expectations about the future value of the peso.
• They ran towards the exits.
• In her rush to get out, the weight dropped as much as
  like 40 percent.

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33
How does a devaluation affect foreign investors?

• If a US investor buys a Mexican asset,
  they must buy pesos first.
• When the asset is sold, the proceeds must be
  exchanged before being repatriated, the
  The profitability of US investors is affected by the
  exchange rate at that time.
• If it is greater (weight appreciation), the return to
  The American investor is bigger in terms.
• If the peso has depreciated, the returns will be
  lower.

34
The Mexican Peso Crisis

• The Mexican peso crisis is unique because
  represents the first serious international
  financial crisis triggered by cross-border
  portfolio capital flight.
• two lessons emerge
• It is essential to have multinational security
  net to protect the financial world
  system of such crises.
• An influx of foreign capital can lead to a
  overvaluation in the first place.

35
The Asian Currency Crisis

• The Asian currency crisis turned out to be far away
  more serious than the Mexican peso crisis in
  terms of the extent of contagion and the
  the severity of the economic and social consequences resulting
  costs
• Many companies with securities in foreign currency were
  forced into bankruptcy.
• The region has experienced a profound and widespread
  recession.

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37
Explanations of the currency crisis

• In theory, the value of a currency reflects the
  fundamental strength of its underlying economy,
  relative to other economies. Ultimately.
• In the short term, foreign exchange traders' expectations
  they play a much more important role.
• In today's environment, merchants and lenders,
  using the most modern communications, act for
  fight or flight instincts. For example, if they
  expect others to be about to sell reais
  for dollars they want to get to the exits
  first.
• Thus, fears of depreciation become
  self-fulfilling prophecies.

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39
Fixed vs flexible exchange rate regimes

• Arguments in favor of flexible exchange rates
• Easier external adjustments.
• National political autonomy.
• Arguments against flexible exchange rates
• Exchange rate uncertainty can make it difficult
  international trade.
• There are no guarantees to avoid crises.

40
Fixed vs flexible exchange rate regimes

• Suppose the exchange rate is 1.40/today.
• On the next slide, we see that the demand for British
  Pounds are outnumbered at this exchange rate.
• The United States runs trade deficits.

41
Fixed vs flexible exchange rate regimes
Price in dollars per (exchange rate)
Q of
42
Flexible exchange rate regimes

• Under a flexible exchange rate regime, the dollar
  will simply depreciate to 1.60/, the price in
  that supply equals demand and the trade deficit
  fades away

43
Fixed vs flexible exchange rate regimes
Supply (S)
Price in dollars per (exchange rate)
Demand (D)
1,40
Demand (D)
Q of
D S
44
Fixed vs flexible exchange rate regimes

• Instead, assume that the exchange rate is fixed at
  1.40/, therefore the imbalance between supply
  and demand cannot be removed for a price
  to change.
• The government would have to change the demand
  curve from D to D
• In this example, this corresponds to
  contractionary monetary and fiscal policies.

45
Fixed vs flexible exchange rate regimes
Supply (S)
contractionary policies
Price in dollars per (exchange rate)
(fixed regime)
Demand (D)
1,40
Demand (D)
Q of
D S
46
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