The International Monetary System (2023)

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Title: The International Monetary System

1

• The International Monetary System
• (Shapiro chapters 2 and 3)

2
The International Monetary System

• The International Monetary System is a set of
• Agreements, rules and institutions
• Regarding exchange rates, international rates
  Payments and flow of funds via national route
  Limits
• The current system is based on a floating system
  Exchange rates - emerged after the fall of the
  o sistema Bretton Woods
• Development of international monetary systems
• How do different currency systems affect currency?
  Values?

3
Development of the International Monetary System

• Bimetallism before 1875
• Classic Gold Standard 1875-1914
• interwar period 1915-1944
• Bretton-Woods-System 1945-1973
• Das Post-Bretton-Woods-System (The Flexible
  exchange rate regime) 1973-present

4
Bimetallism before 1875

• A double standard in the sense that both are gold
  and silver were used as money.
• Some countries were on the gold standard, others were on the
  the silver pattern, some in both.
• Both gold and silver were used as international currency
  Payment methods and exchange rates between each other
  Coins were determined by their gold
  or silver content.

5
Classic Gold Standard (1875-1914)

• gold standard rules
• Set an official gold price in local currency
  e.g. 20.67 an ounce of gold in 1879
• The money supply must be backed by gold
• Prices around the world would depend on demand and
  gold supply

6

• The exchange rate between 2 countries was determined
  by the gold content of the respective coins
• For example, 1 ounce of gold was sold in Germany for 20 DM
• 1 ounce of gold sells for 10 in the UK
• This implied that DM 20 10
• d.h. DM 1 0,5 (10/20)
• 1 DM 2 (20/10)
• linked to the domestic price level in a country
  the supply of gold from monetary reserves
• The money was fully backed by gold
• Governments need to find more gold to grow
  money stock

7

• One motivation behind the gold standard is price.
  stability
• As currencies are pegged to gold, prices depend on it.
  at the cost of producing gold
• Hence the long-term cost of producing gold
  determine the price level

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How exactly does the gold standard work?

• Assume you are assuming the balance
  Productivity gains in the US
• Production costs go down
• The price level falls (since prices are fixed
  based on how much gold is needed to make a
  goods package)
• US export prices are falling relatively
  for imports
• Demand for US exports is rising
• Gold flows into the US, increasing money
  offer and prices
• With respect to the initial equilibrium prices
  everywhere will be a little smaller than before
  how production costs have fallen
  general
• The reverse is true when prices rise in the US.

10

• imbalances in exports and imports
  self-corrective
• For example, imagine a situation where Germany is exporting
  more to britain than it matters
• UK net payment to Germany
• Gold flows from Great Britain to Germany
• UK gold supply falls
• Price level in Great Britain falls
• UK imports are relatively more
  attractive
• The imbalance changes

11

• The period 1821-1914 was indeed marked by
  Price stability, stable exchange rates, expansion
  international trade and economic growth
  worldwide
• While the average rate of inflation during gold
  The level was lower than in the post-war period
  was the variability of inflation in the US
  higher below the gold standard

12
Problems with the gold standard

• World trade has been hampered by the availability of
  Gold
• Inflation rates across countries would have to be
  balanced
• Necessary coordination of the national currency
  politics with international politics
• This is especially true in times of
  Inflation

13
interwar period 1915-1944

• Exchange rates varied widely across countries
  beggar-your-neighbor used or voracious
  Depreciation as an advantage
  the world export market.
• Nations cheapened their currencies to increase them
  its exports at other costs and reduce
  The imports led to a trade war.
• Attempts were made to restore the gold standard
  but the participants lacked the political will to do so
  follow the rules of the game.
• The result for international trade and investment
  it was deeply harmful.

14
Bretton Woods Agreement 1945-1973

• Most countries abandoned the gold standard later
  the great depression
• Bretton Woods Agreement
• The Statutes led to the birth of the
  International Monetary Fund (IMF)
• Rules of Conduct for International Monetary Policy
• Birth of the International Bank of
  Reconstruction and Development (IBRD)
• Financing of development projects

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• Each country has established its own denomination
  Currency against US dollar
• The exchange rate was allowed to float within
  1
• 1 ounce of gold (set) 35
• Countries had the opportunity to change the parity
  Rate in response to a fundamental imbalance
• Countries were allowed to seek their own
  domestic macroeconomic targets
• Temporary imbalances in the balance of payments
  be covered by a buffer stock of reserves and
  IMF loan
• When the demand for this versus that increases,
  the Bank of England must be ready for delivery
  extra pounds, so that's exchange rate parity
  prepared

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Bretton-Woods-System 1945-1973
American dollar
Mated to 35/oz.
Gold
17

• Problem
• Requires official intervention abroad
  stock market
• Expect UK inflation.
• This would lead to an increase in your prices.
  Export
• Consequently, exports would decrease and imports would increase.
• Pound supply should rise to the
  world currency markets
• This offer would decrease the value of the pound
• To reduce the oversupply, Great Britain would have
  repurchase with your reservations
• This would reduce the domestic money supply and
  Prices
• Problems arise when governments are not prepared
  do it

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• In fact, most countries kept their exchanges
  dollar-linked interest rates and changes in a
  Minimum
• Hence the dollar exchange rate
  corrected in this process
• How the war devastated economies outside the US
  rebuilt, helped fixed rate stability
• But US liabilities soon held out
  Alien was more than it could bear
  through gold reserves held in the US (using the
  fact that 35 an ounce of gold

19

• US dollars had to be continually replenished
  world trade finance
• Dollars transferred from the US to others
  countries
• The US had to be willing to manage the balance of payments
  deficits continuously
• Gradually this led to a loss of confidence in the
  Dollar
• The basis of the system (trust in
  dollars) collapsed

20

• In 1963, President Kennedy raised interest rates
  Equalization tax (IET)
• Tax on U.S. purchases of foreign securities
• Dollars would be less likely to leave the US
• 1965 Foreign Credit Restriction Program
• Regulates the amount of US dollars, banks
  could lend to multinational companies
• 1970 IMF introduces Special Drawing Rights (SDR).
• SDR is a basket of currencies allocated to the IMF
  members
• Can be used to finance transactions (instead of
  to die)

21

• During the Vietnam wars in the late 1960s
  US inflation rose to 3.5 based on
  Producer prices (compared to 1951-67) -
• The dollar has lost credibility
• All these factors overload the system
• In 1971, President Nixon suspended the dollar
  Gold Convertibility
• Smithsonian Agreement
• 1 ounce gold 38 (devalued dollar)
• revalued coins
• Flexible exchange rates - range from 1 to 2.5
• This deal also failed a year later

22
The flexible exchange rate regime 1973 - today

• Flexible exchange rates have been declared acceptable
  to IMF members.
• Central banks were allowed to intervene
  resolve exchange rate markets unjustifiably
  volatilities.
• Gold was abandoned as an international reserve
  Attachment.
• Non-oil exporting countries and least developed countries
  Countries had better access to IMF funds.

23
Current exchange rate agreements

• free floating
• Most countries, around 48, allow this.
  Market forces to determine your currencies
  Wert.
• float managed
• About 25 countries unite the government
  Intervene with market forces to determine tradeoffs
  Prices.
• Linked to another currency
• Like US Dollar or Euro, for example, HK7.80
  US1
• No local currency
• Some countries don't bother to print their own,
  They only use the US dollar. For example,
  Ecuador, Panama and El Salvador gained dollars.

24
1973-present (Post Bretton Woods)

• OPEC-Crisis 1973-74
• Some nations like the US have tried to counteract this
  increase in oil prices due to the expansion
  Monetary policy and trying to control the price
  of oil, leading to BOP deficits
• Others, like Japan, have allowed oil prices to rise
• Dollar Crisis 1977-78
• Enter Paul Volcker, who announced a big change
  in monetary policy
• The Fed would focus on controlling money
  delivery
• Dollar on the Rise 1980-85
• 1981-84- Inflation dropped and the dollar
  valued

25

• Others, like Japan, have allowed oil prices to rise
  1981 Expansionary fiscal policy and tight monetary policy
  politics in usa
• Led to a sustained appreciation of the dollar
  (estimated at nearly 50 in 1985 compared to
  1980)
• It remains of dollars 85-87 e a Plaza Louvre
  intervention agreement
• On September 22, 1985, G-5 officers
  countries - Great Britain, France, West Germany, Japan
  and the US met at the Plaza Hotel in NY
• ? Committed to supporting a reduction in
  Dollar
• ?The dollar fell a lot and continued falling until
  1986

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• The dollar fell so low until 1987
  led to the Louvre Agreement on February 22, 1987
• Countries pledged to maintain exchange rates
  children of soul
• However, the target zones were never publicly announced.
  The zones are assumed to have been bands of /- 5
  around the value of 1.825 DM / and 153.50 /
  (these were the courses that were in the
  Friday before the session)
• At the same time, the European Community
  Rallying to limit the exchange rate
  fluctuations

27

• 1988-Present
• Fell against Yen and DM in 1993-95
• Rally 1996
• Recent dollar decline

28
The European Monetary System (EMS)

• EMS was founded in 1979 to raise money
  Stability in the EC (European Community).
• ECU (European Currency Unit) is weighted
  Average of various currencies in the EC.
• The individual currencies are determined using the
  ECU
• Monetary Union - EMU (European Monetary Union)
  and or euros
• Conditions of Participation

29
EMU and the euro

• EMU single currency area within Europe, where
  People, goods, services and capital can be moved
  No restrictions.
• The euro is the single currency of the European Union
  Monetary union adopted by 11 members
  United States on January 1, 1999.
• The idea was that a single currency would be promoted
  stability in the region.
• A single currency unit removes the exchange rate
  Instability, reduces transaction costs and makes
  more competitive companies.
• Those original Member States were Belgium,
  Germany, Spain, France, Ireland, Italy,
  Luxembourg, Finland, Austria, Portugal and
  Netherlands.

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• Currently, member countries participating in it
  about euros
• 1 Euro 40.3399 BEF (Belgian Franc)
• 1.9558 DEM (German DM)
• 340,750 GRD (Greek drachma)
• 166,386 ESP (Spanish pesets)
• 6.5595 FRF (French Franc)
• 0.7875 IEP (Irish Point)
• 1936,27 ITL (italian enemy)
• 40.3399 LUF (Luxembourgish franc)
• 2.2037 NLG (Dutch guilder)
• 13.7603 ATS (Austrian Shilling)
• 200,482 PTE (Portuguese Escudos)
• 5.9457 FIM (Finnish brand)

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euro notes
32
euro coins
Ireland
Austria
common side
national page

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