This document provides a summary of the history of international monetary systems from ancient times to the present. It discusses the gold standard period, the collapse of the gold standard after World War I, the Bretton Woods system established in 1944, and the eventual collapse of the Bretton Woods system in the early 1970s. The document analyzes the shortcomings of each system and the economic and political factors that led to changes in the international monetary system over time.
Currency derivatives is a kind of new class of assets available for investment. Please go through this PPT which will give you some idea about currency & Currency derivatives.
A bond issued in a country or currency other than that of the investor or broker. They include Eurobonds, which are issued in a foreign currency, foreign bonds, which are issued by a foreign government or corporation in the domestic market, and global bonds, which are issued in both domestic and international markets.
Currency derivatives is a kind of new class of assets available for investment. Please go through this PPT which will give you some idea about currency & Currency derivatives.
A bond issued in a country or currency other than that of the investor or broker. They include Eurobonds, which are issued in a foreign currency, foreign bonds, which are issued by a foreign government or corporation in the domestic market, and global bonds, which are issued in both domestic and international markets.
Monetary policy is how a central bank acts in its economic environment. A central bank is a national (or, in the case of the European Central Bank, a supranational) institution. Mostly the primary goal is to maintain price stability. Another common goal is to support the economy if it does not inhibit the achievement of price stability to a risky extent. This chapter examines what different costs arise due to inflation (increasing prices) and why it makes sense to keep inflation at a moderate level, to maintain price stability respectively
Real Options, Investment Analysis and Process PANKAJ PANDEY
Understand the capital budgeting process:
Document the policies and practices of companies in India and compare them with that of the companies in developed countries.
Understand the linkage between corporate strategy and investment decisions.
Define strategic real options.
Show the valuation of real options.
An investment bank is a financial institution that assists individuals, corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities (or both).
Monetary policy is how a central bank acts in its economic environment. A central bank is a national (or, in the case of the European Central Bank, a supranational) institution. Mostly the primary goal is to maintain price stability. Another common goal is to support the economy if it does not inhibit the achievement of price stability to a risky extent. This chapter examines what different costs arise due to inflation (increasing prices) and why it makes sense to keep inflation at a moderate level, to maintain price stability respectively
Real Options, Investment Analysis and Process PANKAJ PANDEY
Understand the capital budgeting process:
Document the policies and practices of companies in India and compare them with that of the companies in developed countries.
Understand the linkage between corporate strategy and investment decisions.
Define strategic real options.
Show the valuation of real options.
An investment bank is a financial institution that assists individuals, corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities (or both).
international monetary system are sets of internationally agreed rules, conventions and supporting institutions, that facilitate international trade, cross border investment and generally there allocation of capital between nation states.
Jin
ce-
\fter
ta&
rrket
yin
rajor
T3:* Es:rerffiaticnal
M3*ffi*effiry SysCcr::
The price of every thing rises and falls from time to time
anrl place to place; and with every such change the
purchasing pou,er of money changes so .far us tlzat
thing goes. -Alfred Marshall.
s= L:AR Fi i FJ il * F.i E {r"i" r V E 5
@ Learn how the international monetary system has evoiled from the days of the gold
standard to today's eclectic currency arrangement.
& Analyze the characteristics of an ideal currency.
@ Explain the currency regime choices faced by emerging markel countries.
& Examine how the euro, a single currency for the European Union, was created.
This chapter begins with a brief historv of the international monetary system from the days of
the classical gold standard to the present time. The next section describes contemporary cur-
rency regimes, fixed versus flexible exchange rates. and the attributes of the ideal currency.
The next section analyzes emerging markets and regime choices, including currency boards
and dollarization. The following section describes the birth of the euro and the path toward
monetary unification, including the expansion of the European Union on May 1,2004.The
final section analyzes the trade-offs betrveen exchange rate regimes based on rules, discre-
tion, cooperation, and independence. The chapter concludes with the Mini-Case, First Steps
in the Globelization of the Yuan, which details the evolution of the Chinese yuan from a
purely domestic to an increasingly giobal currencv.
F-$ist*e"y cfl the XerCer"p:aticnal fo{cnetary Systenei
Over the ages currencies have been defined in terrns of gold and other items of value, and the
international monetary system has been subject to a variety of international agreements.
A review of these systems provides a useful perspective against which to understand today's
system and to evaiuate weaknesses and proposed changes in the present system.
Ti*e Gsld $t*n"s*ard. T*76*1S"!3
Since the days of the pharaohs (about 3000 e.c.), goid has served as a medium of exchange
and a store of value. The Greeks and Romans used gold coins and passed on this tradition
through the mercantile era to the nineteenth century. The great increase in trade during
the free-trade period of the late nineteenth century led to a need for a more formalized
system tor settling international trade balances. One countrv after another set a par value
for its currency in terms of gold and then tried to adhere to the so-called rules of the game.
,ti
i
*!
;.
t;
I
.l
:.::
i;,
i
:1,
f
ii
t,
ii
1ii
i:r
,?.
,tr'
i
59
60 i:,;r :; l. : Global Financial Environment
This larer came to be known as the classical gold standard. The gotd standard as an inter-
:iarional monetary system gained acceptance in Western Europe-in the 1870s. The Unitecl
States rr,'as something of a latecomer to the system, not officially aclopting the standard
urrit 1979.
Ilnder the gold standard, the "rules of the game" were cie ...
had a damaging effect on employment abroad. The foreign respon.docxwhittemorelucilla
had a damaging effect on employment abroad. The foreign response involved retaliatory
trade restrictions and preferential trading agreements among groups of countries. A meas-
ure that raises domestic welfare is called a beggar-thy-neighbor policy when it benefits the
home country at the cost of worsening economic conditions abroad.
Uncertainty about government policies led to sharp reserve movements for countries
with pegged exchange rates and sharp exchange rate movements for those with floating
rates. Many countries imposed prohibitions on private financial account transactions to
limit these effects of foreign exchange market developments. This was another way of
addressing the trilemma. Trade barriers and deflation in the industrial economies of
America and Europe led to widespread repudiations of international debts, particularly by
Latin American countries, whose export markets were disappearing. In short, the world
economy disintegrated into increasingly autarkic (that is, self-sufficient) national units in
the early 1930s.
In the face of the Great Depression, most countries resolved the choice between
external and internal balance by curtailing their trading links with the rest of the world and
eliminating, by government decree, the possibility of any significant external imbalance.
By reducing the gains from trade, that approach imposed high costs on the world econ-
omy and contributed to the slow recovery from depression, which in many countries was
still incomplete in 1939. All countries would have been better off in a world with freer
international trade, provided international cooperation had helped each country preserve
its external balance and financial stability without sacrificing internal policy goals. It
was this realization that inspired the blueprint for the postwar international monetary
system, the Bretton Woods agreement.
Case Study
The International Gold Standard and the Great Depression
One of the most striking features of the decade-long Great Depression that started in 1929
was its global nature. Rather than being confined to the United States and its main trading
partners, the downturn spread rapidly and forcefully to Europe, Latin America, and else-
where. What explains the Great Depression’s nearly universal scope? Recent scholarship
shows that the international gold standard played a central role in starting, deepening, and
spreading the 20th century’s greatest economic crisis.8
In 1929, most market economies were once again on the gold standard. At the time,
however, the United States, attempting to slow its overheated economy through mone-
tary contraction, and France, having just ended an inflationary period and returned to
gold, faced large financial inflows. Through the resulting balance of payments sur-
pluses, both countries were absorbing the world’s monetary gold at a startling rate. (By
1932 the two countries alone held more than 70 percent of it!) Other countries on the
gold standard had no cho ...
An introduction to the cryptocurrency investment platform Binance Savings.Any kyc Account
Learn how to use Binance Savings to expand your bitcoin holdings. Discover how to maximize your earnings on one of the most reliable cryptocurrency exchange platforms, as well as how to earn interest on your cryptocurrency holdings and the various savings choices available.
Building Your Employer Brand with Social MediaLuanWise
Presented at The Global HR Summit, 6th June 2024
In this keynote, Luan Wise will provide invaluable insights to elevate your employer brand on social media platforms including LinkedIn, Facebook, Instagram, X (formerly Twitter) and TikTok. You'll learn how compelling content can authentically showcase your company culture, values, and employee experiences to support your talent acquisition and retention objectives. Additionally, you'll understand the power of employee advocacy to amplify reach and engagement – helping to position your organization as an employer of choice in today's competitive talent landscape.
Personal Brand Statement:
As an Army veteran dedicated to lifelong learning, I bring a disciplined, strategic mindset to my pursuits. I am constantly expanding my knowledge to innovate and lead effectively. My journey is driven by a commitment to excellence, and to make a meaningful impact in the world.
Discover the innovative and creative projects that highlight my journey throu...dylandmeas
Discover the innovative and creative projects that highlight my journey through Full Sail University. Below, you’ll find a collection of my work showcasing my skills and expertise in digital marketing, event planning, and media production.
Event Report - SAP Sapphire 2024 Orlando - lots of innovation and old challengesHolger Mueller
Holger Mueller of Constellation Research shares his key takeaways from SAP's Sapphire confernece, held in Orlando, June 3rd till 5th 2024, in the Orange Convention Center.
Buy Verified PayPal Account | Buy Google 5 Star Reviewsusawebmarket
Buy Verified PayPal Account
Looking to buy verified PayPal accounts? Discover 7 expert tips for safely purchasing a verified PayPal account in 2024. Ensure security and reliability for your transactions.
PayPal Services Features-
🟢 Email Access
🟢 Bank Added
🟢 Card Verified
🟢 Full SSN Provided
🟢 Phone Number Access
🟢 Driving License Copy
🟢 Fasted Delivery
Client Satisfaction is Our First priority. Our services is very appropriate to buy. We assume that the first-rate way to purchase our offerings is to order on the website. If you have any worry in our cooperation usually You can order us on Skype or Telegram.
24/7 Hours Reply/Please Contact
usawebmarketEmail: support@usawebmarket.com
Skype: usawebmarket
Telegram: @usawebmarket
WhatsApp: +1(218) 203-5951
USA WEB MARKET is the Best Verified PayPal, Payoneer, Cash App, Skrill, Neteller, Stripe Account and SEO, SMM Service provider.100%Satisfection granted.100% replacement Granted.
Top mailing list providers in the USA.pptxJeremyPeirce1
Discover the top mailing list providers in the USA, offering targeted lists, segmentation, and analytics to optimize your marketing campaigns and drive engagement.
VAT Registration Outlined In UAE: Benefits and Requirementsuae taxgpt
Vat Registration is a legal obligation for businesses meeting the threshold requirement, helping companies avoid fines and ramifications. Contact now!
https://viralsocialtrends.com/vat-registration-outlined-in-uae/
3.0 Project 2_ Developing My Brand Identity Kit.pptxtanyjahb
A personal brand exploration presentation summarizes an individual's unique qualities and goals, covering strengths, values, passions, and target audience. It helps individuals understand what makes them stand out, their desired image, and how they aim to achieve it.
Kseniya Leshchenko: Shared development support service model as the way to ma...Lviv Startup Club
Kseniya Leshchenko: Shared development support service model as the way to make small projects with small budgets profitable for the company (UA)
Kyiv PMDay 2024 Summer
Website – www.pmday.org
Youtube – https://www.youtube.com/startuplviv
FB – https://www.facebook.com/pmdayconference
[Note: This is a partial preview. To download this presentation, visit:
https://www.oeconsulting.com.sg/training-presentations]
Sustainability has become an increasingly critical topic as the world recognizes the need to protect our planet and its resources for future generations. Sustainability means meeting our current needs without compromising the ability of future generations to meet theirs. It involves long-term planning and consideration of the consequences of our actions. The goal is to create strategies that ensure the long-term viability of People, Planet, and Profit.
Leading companies such as Nike, Toyota, and Siemens are prioritizing sustainable innovation in their business models, setting an example for others to follow. In this Sustainability training presentation, you will learn key concepts, principles, and practices of sustainability applicable across industries. This training aims to create awareness and educate employees, senior executives, consultants, and other key stakeholders, including investors, policymakers, and supply chain partners, on the importance and implementation of sustainability.
LEARNING OBJECTIVES
1. Develop a comprehensive understanding of the fundamental principles and concepts that form the foundation of sustainability within corporate environments.
2. Explore the sustainability implementation model, focusing on effective measures and reporting strategies to track and communicate sustainability efforts.
3. Identify and define best practices and critical success factors essential for achieving sustainability goals within organizations.
CONTENTS
1. Introduction and Key Concepts of Sustainability
2. Principles and Practices of Sustainability
3. Measures and Reporting in Sustainability
4. Sustainability Implementation & Best Practices
To download the complete presentation, visit: https://www.oeconsulting.com.sg/training-presentations
2. Page | 1
Assignment on--
History of International Monetary System
Prepared For-
Md. Shariat Ullah
Lecturer, Dept. Management Studies
Faculty of Business Studies
University of Dhaka
Prepared By-
Md. Azim Ferdous
Roll No: 121, Section: B, Batch: 11th
Dept. of Management Studies
University of Dhaka
Date of Submission-
May 7, 2008
3. Page | 2
The international monetary system establishes the rules by which countries value and
exchange their currencies. It also provides a mechanism for correcting imbalances
between a country’s international payments and its receipts. Further, the cost of
converting foreign money into firm’s home currency-a variable critical to the
profitability of international operations depends on the smooth functioning of the
international monetary system.
The history of monetary system started when in ancient time (seventh century B.C.1)
tribes & city-states of India, Babylon & Phoenicia used gold & silver as media of exchange
in trade. The total history of international monetary system is discussed below in a
chronological order.
1. The Gold Standard
Meaning: Buying and selling of paper currency in exchange for gold on the request of
any individual of firm2. The theory of the gold standard rests on the idea that inflation is
caused by an increase in the supply of money, an idea advocated by David Hume, and
that uncertainty over the future purchasing power of currency depresses business
confidence and leads to reduced trade and capital3.
First to Adopt: In United Kingdom at 1821.
Upshot: It created a fixed exchange rate system because each country tied the value of
its currency.
Advantage: The gold standard created a fixed exchange rate system.
For example, the United Kingdom pledged to buy or sell an ounce of
gold for 4.247 pounds sterling, thereby establishing the pound per
value or official price in terms of gold. The United States agreed
to buy or sell an ounce of gold to a par value of $20.67. The two
currencies could be freely exchanged for the stated amount of
gold making £4.247 = 1 ounce of gold = $20.67. This implied a fixed
exchanging rate between the pound and the dollar of £1= $4.867,
or $20.67/ £4.247.
Representative money and the Gold Standard protect citizens from hyperinflation and
other abuses of monetary policy, as were seen in some countries during the Great
Depression. However, they were not without their problems and critics, and so were
partially abandoned via the international adoption of the Bretton Woods System. That
system eventually collapsed in 1971, at which time all nations had switched to full fiat
money4.
1 Del Mar, A History of Money in Ancient Countries (New York: Burt Franklin, 1968), p.71.
2 I. Drummond, The Gold Standard and the International Monetary System 1900-1939 (London:
McMillan Education Group, 1987), pp.10-11.
3 http://en.wikipedia.org/wiki/Gold_standard
4 In which paper notes are backed only by the traders' "full faith and credit" in the government, in
particular by its acceptability for payments of debts to the government (usually taxes).
4. Page | 3
The Gold Standard variously specified how the gold backing would be implemented,
including the amount of specie per currency unit. The currency itself is just paper and so
has no innate value, but is accepted by traders because it can be redeemed any time for
the equivalent specie. A US silver certificate, for example, could be redeemed for an
actual piece of silver5.
Difficulty: Transacting in gold was expensive. For example, suppose Jardine
Matheson, a Hong Kong trading company, sold £100,000 worth of tea to Twining &
Company, a London distributor of fine teas. If it wanted to be paid in gold by Twining &
Company upon delivery of the tea, Jardine Matheson had to bear the costs of
loading the gold into the cargo hold of a ship, guarding it against theft,
transporting it, and insuring it against possible disasters. Moreover, because of the
slowness of sailing ships, Jardine Matheson would be unable to earn interest on
the £100,000 payment while the gold was in transit from London to Hong-Kong. On
the other hand, if Jardine Matheson was willing to he paid in British pounds, Twining
could draft a check to Jardine Matheson and give it to the firms London agent. The
London agent could then either immediately deposit the check in Jardine
Matheson's interest-bearing London bank account or transfer the funds telegraph
of the firm's account at its Hong Kong bank.
Starling-Based Gold Standard: From 1821 until the end of 1918, the most important
currency in international commerce was the British pound sterling because of the United
Kingdom’s large territory6 due to dominant economic and military power. So, most of the
people relayed on pound that time. As a result international monetary system during this
period is also called starling-based gold standard7. Because of the international trust
London became a dominant international center in the 19th century, a position it still
holds8.
2. The Collapse of Gold Standard
World War I: During World War 1, the sterling-based gold standard unraveled. With the
outbreak of war, normal commercial transactions between the Allies (France, Russia, and
the United Kingdom) and the Central Powers (Austria-Hungary, Germany, and the
Ottoman Empire) ceased. The economic pressures of war caused country after country
to suspend their pledges to buy or sell gold at their currencies' par values.
Post-War Conferences & Re-adaptation of Gold Standard: After the war, conferences
at Brussels (1920) and Genoa (1922) yielded genera agreements among the major
economic powers to return to the prewar gold standard. Most countries, including the
United States, the United Kingdom, and France, readopted the gold standard in the 1920s
5 http://en.wikipedia.org/wiki/Gold_standard
6 United Kingdom’s territory that time was consisted of Canada, Australia, New Zealand, Hong
Kong, Singapore, India, Pakistan, Bangladesh, Kenya, Zimbabwe, South Africa, Gibraltar,
Bermuda, and Belize.
7 At the turn of the century, the French franc & the German mark were used in addition to
sterling for setting private international transactions.
8 B. Cohen, The Future of Sterling as an international Currency (London: McMillan, 1971), pp.60-
61.
5. Page | 4
despite the high levels of inflation, unemployment, and political instability that were
wracking Europe.9
Implementation of Floating Rate System By Bank of England: The standard of gold
standard was doomed by economic stresses triggered by the worldwide Great
Depression. The Bank of England, the United Kingdom's central bank, was unable to
maintain its new pledges under the gold standard. On September 21, 1931, it allowed the
pound to float, meaning that the pound's value would be determined by the forces of
supply and demand and the Bank of England would no longer guarantee to redeem
British paper currency for gold at par value10.
Competitive Devaluation of Currencies & Increased Tariff Rate: After the United
Kingdom abandoned the gold standard, a "sterling area” emerged as some countries,
primarily members of the British Commonwealth, pegged their currencies to the
pound and relied on sterling balances held in London as their international
reserves.11 Other countries tied the value of their currencies to the U.S. dollar or the
French franc. Some countries (United States, France, United Kingdom, Belgium, Latvia,
the Netherlands, Switzerland & Italy) were deliberately & artificially devaluating their
official value of currencies to make their goods cheaper in the international
markets, which is stimulating its exports and reducing its imports. But, none were
getting the benefit due to competitive devaluation at almost same percentage that is
each currency's value relative to the other remains the same. Most countries also raised
the tariffs they imposed on imported goods in the hope of protecting domestic jobs in
import-competing industries. Nations adversely affected by trade barriers of any kind
are quite likely to impose retaliatory or reciprocal tariffs12.
Effect of beggar-thy-neighbor policies (World War II): As more and more countries
adopted beggar-thy-neighbor policies like devaluation of currencies and increasing the
tariff rate on imported goods, international trade contracted that hurt employment in
each country's export industries. More ominously, this international economic conflict
was soon replaced by international military conflict that was the outbreak of World War
II in 1939.
3. The Bretton Woods Era
Post-War Situation: World War II created inflation, unemployment and an instable
political situation. Every country was struggling to rebuild their war-torn economy.
Bretton Woods Conference: Not to repeat the mistakes that had caused World War II,
to promote worldwide peace & prosperity and to construct the postwar international
monetary system representatives of 44 countries met at a resort in Bretton Woods, New
Hampshire in 1944.
9 I. Drummond, The Gold Standard and the International Monetary System 1900-1939 (London:
McMillan Education Group, 1987), p.31
10 Ibid., pp.40.
11 B. Cohen, The Future of Sterling as an international Currency (London: McMillan, 1971), p.68.
12 http://www.csusm.edu/politicalscience/golich/money-module/
6. Page | 5
Decisions & Outcome of the Bretton Woods Conference: The Bretton Woods
Conference has presented the world two historic agreements. These are as follows:
A. Agreement of conferees to renew the gold standard on a modified basis.
B. Agreement to create two new international organizations to assist the rebuilding
of the world economy and the international monetary system. These are-
a. International Bank for Reconstruction and Development (IBRD)
b. International Monetary Fund (IMF)
a. The International Bank for Reconstruction and Development (IBRD)
The International Bank for Reconstruction and Development (IBRD) is the official name
of the World Bank. Established in 1945, the World Bank's initial goal was to help finance
reconstruction of the war-torn European economics. With the assistance of the
Marshall Plan, the World Bank accomplished this task by the mid-1950s. The Bank
then adopted a new mission—to build the economies of the world's developing
countries.
As its mission has expanded over time, the World Bank created three affiliated
organizations:
a. International Development Association (IDA)
b. International Finance Corporation (IFC)
c. Multilateral Investment Guarantee Agency (MIGA)
Together with the World Bank, these constitute the World Bank Group. The World Bank
is currently owned by the 185 member countries. The World Bank’s activities are
focused on the reduction of global poverty, focusing on the achievement of the
Millennium Development Goals (MDGs), goals calling for the elimination of poverty and
the implementation of sustainable development. United States is the bank’s largest
shareholder.
International Bank for
Reconstruction and
Development (IBRD)
International
Development
Association (IDA)
Offers soft loans
International Finance
Corporation (IFC)
Promotes private
sector development
Multilateral
Investment Guarantee
Agency (MIGA)
Provides political risk
insurance
7. Page | 6
b. International Monetary Fund (IMF)
International Monetary Fund (IMF) was created to monitor and
control the functioning of the international monetary system. It is an
international organization that oversees the global financial system
by observing exchange rates and balance of payments, as well as
offering financial and technical assistance. Its objectives are as
follows:
i. To promote international monetary cooperation.
ii. To facilitate the expansion and balanced growth of international trade.
iii. To promote exchange stability, to maintain orderly exchange arrangements
among members, and to avoid competitive exchange depreciation.
iv. To assist in the establishment of a multilateral system of payments.
v. To give confidence to members by making the general resources of the Fund
temporarily available to them and to correct maladjustments in their balances
of payments.
vi. To shorten the duration and lessen the degree of disequilibrium in the
interactional balances of payments of members.
At first 29 countries signed its Articles of Agreement of IMF. But now it has 186
Members. Its Headquarters are at Washington, D.C., USA. Current Managing Director is
Dominique Strauss-Kahn. Its Central Bank of Base borrowing rate 5.50%.
A Dollar-Based Gold Standard: The IMF and the World Bank provided the institutional
framework for the postwar international monetary system. All countries agreed to peg
the value of their currencies to gold. However, only the United States pledged to redeem
its currency for gold at the request of a foreign central bank. Thus the U.S. dollar
became the key-stone of the Bretton Woods system.
In the early postwar years, only the U.S. and Canadian dollars were convertible
currencies, that is, ones that could be freely exchanged for other currencies without
legal restrictions. Countries had faith in the U.S. economy and so were willing to accept
U.S. dollars to settle their transactions. As the British pound sterling had been in the
nineteenth century, the U.S. dollar became the preferred vehicle for settling most
international transactions. The effect of the Bretton Woods conference was thus to
establish a U.S. dollar-based gold standard.
Under the Bretton Woods Agreement each country pledged to maintain the value of its
currency within ±1% of its par value. If the market value of its currency fell outside that
range, a country was obligated to intervene in the foreign-exchange market to bring the
value back within ±1% of par value. This stability in exchange rates benefited
international businesses, since the Bretton Woods system generally provided an
assurance that the value of each currency would remain stable.
Bretton Woods System as Adjustable Peg : The Bretton Woods system is often
described as using an adjustable peg because currencies were pegged to gold but the
pegs themselves could be altered under certain conditions. The arrangement of Bretton
Woods System worked well as long as pessimism about a country’s economy was
8. Page | 7
temporary. But, if a country suffered from structural macroeconomic problems, major
difficulties could arise.
4. The End of the Bretton Woods System
Shortcoming of Dollar-Based Gold Standard Under Bretton Woods System & Triffin
Paradox: The British and French central banks were a precursor to a run on the most
important bank in the Bretton Woods system—the U.S. Federal Reserve Bank. Ironically,
the reliance of the Bretton Woods system on the dollar ultimately led to the system's
undoing. Because the supply of gold did not expand in the short run, the only source of
the liquidity needed to expand international trade was the U.S. dollar. Under the Bretton
Woods system, the expansion of international liquidity depended on foreigners'
willingness to continually increase their holdings of dollars. Foreigners were perfectly
happy to hold dollars as long as they trusted the integrity of the U.S. currency, and during
the 1950s and 1960s the number of dollars held by foreigners rose steadily.
As foreign dollar holdings increased, however, people began to question the ability of the
United States to live up to its Bretton Woods obligation. This led to the Triffin paradox,
named after Robert Triffin13, who first identified the problem. The paradox arose because
foreigners needed to increase their holdings of dollars to finance expansion of
international trade. But the more dollars they owned, the less faith they had in the ability
of the United States to redeem those dollars for gold. The less faith foreigners had in the
United States, the more they wanted to rid themselves of dollars and get gold in return.
But if they did this, international trade and the international monetary system might
collapse because the United States didn't have enough gold to redeem all the dollars held
by foreigners. The shortcomings are listed below in brief-
Limited gold.
Liquidity problem.
Foreigners’ behavior of continuous increasing in dollar holding.
Foreigners’ less faith on United States.
Agreement to Create Special Drawing Rights (SDRs): To inject more liquidity into the
international monetary system while reducing the demands placed on the dollar as a
reserve currency, IMF members created the special drawing rights in 1967. SDR is a
credit granted by the IMF that can be used to settle official transactions among central
banks. Thus SDRs are sometimes called "paper gold".
As of 1993, approximately 21.4 billion SDRs, representing about 2% of the world's
total reserves, had been distributed to IMF members in proportion to their IMF
quotas. The value of an SDR is a function of the current value of five different currencies
from which it is comprised. They include the U.S. dollar, the Japanese yen, the United
Kingdom pound sterling, and the respective euro values of Germany and France. An
SDR's value is currently calculated daily as a weighted average of the market value of
five major currencies (U.S. dollar, German mark, French franc, Japanese yen, and
13 A Belgian-born Yale University economist
9. Page | 8
pound sterling) with the weights revised every five years14. As of May 1995, the SDR
was worth $1.54 in U.S. dollars.
Outcome of Creating SDRs: SDRs solved the liquidity problem for the international
monetary system, but if failed to solve the problem related to the glut of dollars held
by foreigners & faith. By mid 1971, the Bretton Woods system was tottering, the
victim of fears about the dollar's instability. In the first seven months of 1971, the
United States sold one third of its gold reserves15. It became clear to the marketplace that
the United States did not have sufficient gold on hand to meet the demands of those who
still wanted to exchange their dollars for gold.
Official Ending of Bretton Woods System: The Bretton Woods system officially ended
when in a dramatic address on August 15, 1971, President Richard M. Nixon announced
that the United States would no longer redeem gold at $35 per ounce.
5. Post Bretton Woods System & the Floating Rate Era
After President Nixon's speech, most foreign currencies began to float, their values being
determined by supply and demand in the foreign-exchange market. The value of the U.S.
dollar fell relative to most of the world's major currencies. But the nations of the world
were not yet ready to abandon the fixed exchange-rate system.
At the Smithsonian Conference, held in Washington, D.C. in December 1971, central
bank representatives from the Group of Ten16 agreed to restore the fixed exchange-rate
system but with restructured rates of exchange between the major trading currencies.
The U.S. dollar was devalued to $38 per ounce but remained inconvertible into gold, and
the par values of strong currencies such as the yen were revalued upward. Currencies
were allowed to fluctuate around their new par values by =2.25%, which replaced the
narrower ± 1.00% range authorized by the Bretton Woods Agreement.
Recent changes in international monetary policy17:
US$ 100 Trillion estimated total world assets, including real estate.
US$ 30 Trillion worldwide liquidity held by pension funds which traditionally
invest in long term assets: formerly gold, today government bonds.
US$ 15-18 Trillion cash, mainly in Japan.
US$ 3-4 Trillion "hot money" in offshore trusts.
14 International Monetary Fund, 1990 Annual Report, p.133.
15 The European Financial Common Market (Luxembourg: Office for Official Publications of the
European Communities, 1989), pp. 43ff.; The European Community in the nineties
(Washington, D.C.: EC Delegation to the United States, 1992), pp.12ff.; Directorate-General for
Economic and Financial Affairs, European Economy, No. 44 (October 1990), p. 42.
16 Group of Ten means the group consists of following countries who have world’s top most GDP
shares: United States, Japan, Germany, France, Italy, United Kingdom, Canada, Netherlands,
Belgium & Sweden.
17 http://www.gold-eagle.com