International Monetary System in the 21st Century:Could Gold make a come back?

Mehreen Altaf MB-08-106Awais Ali MB-08-114

Institute of Management Sciences,

Bahauddin Zakariya University,

Multan, Pakistan.

History:

ElectrumLydia:7th Century B.C.

BimetallismLydia:5th Century B.C.

Roman Monetary System46 B.C.

Bimetallism (1815-1873)

Populists (1873-1896)

European Countries went off Gold (1914)

Anchored Dollar Standard (1914-1924)

HistoryHistory (Cont…)(Cont…)

Gold vs Silver

History (Cont…)

Went back to Gold German 1924 Britain 1925 France 1926

LEAD TO DEFLATION

Because of the restoration of internal gold standard with gold undervalued.

0

2

4

6

8

10

12

14

1928 1929 1930 1931 1932 1933

Unemployment (in millions)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1928 1929 1930 1931 1932 1933

Bank FailuresIn thousands

0

5

10

15

20

25

30

35

1928 1929 1930 1931 1932 1933

Business failures (In thousands)

Idle Idle FactoryFactory

Bread lineBread line

Employment Employment LineLine

Reasons for Great Depression:Keynesian Explanation

The Great Depression was caused primarily by a fall in total demand

The decline in demand was so severe that adequate demand could be restored only by large increases in government spending.

Monetarist Explanation

The Great Depression may have originated in a fall in total demand, but its length and severity resulted primarily from the unwillingness of the Federal Reserve System to prevent bank failure and maintain a large enough supply of money.

International Explanation

The Americans depression was part of a larger global depression

The depression was particularly severe in the United States because the Federal Reserve System was obligated to follow the rules of the gold standard.

Went off the Gold:

Britain 1931 America 1933 France 1936

Tripartite Monetary Agreement (1936-1971) Dollar Anchored to Gold and Currencies pegged to Dollar. Referred to as Bretton-Woods System

Bretton Woods System

German markBritish

poundFrench franc

U.S. dollar

Gold

Pegged at $35/oz.

Par Value

Par ValuePar

Value

Dollar went off the Gold (1971)

Flexible Exchange Rates (1973)

European Monetary Integration (1978)

Managed Dollar System (Plaza Accord,1985)

Theory of Superpower Influence

International Monetary Reform Britain Refused in 19th Century US Refused in 1933

Bretton Woods (1944) Unitas (US) Bancor (Britain)

IMF and World Bank.

World official gold holding (June 2008)

World 29,822.6 -

USA 8,133.5 78.2% Germany 3,417.4 66.3% IMF 3,217.3 - France 2,562.3 59.4% Italy 2,451.8 68.1%

The Story Of Gold…

Mehreen Altaf MB-08-106

Gold…The People's Money

gold has also been used as a way to hold or store wealth as well.

special gold deposit warehouses

gold deposit receipts issued by banks

one ounce of gold was indeed one ounce of gold

THE PROBLEM WITH GOVERNMENTS AND POLITICIANS  

Politicians of course got the bright idea that THEY alone should control, regulate and issue the coinage process

Romans were of course the first to do this

got the idea of slightly reducing the gold content

the Roman Emperors became bolder and bolder

result of this was that the coin still could weigh one ounce, but it was NOT one ounce of pure gold.

the state figured out a way to cheat the general public and debase the money supply - making it less valuable and thus creating price inflation as a result.

problem was not the use of gold, but rather the state and how they were tempted to debase the money supply - which is the same problem we have today as well

All modern currencies are fiat money. This was agreed during the Bretton Wood Agreements of July 1944. Following the events of World War Two, all currencies would trade against the US Dollar, moving within a defined trading band. Countries would maintain their currency within this trading band by purchasing or selling US securities. Only the US Dollar was then directly convertible into Gold – previously the direct backing for all major currencies – at the rate of $35 to the troy ounce

This of course is a very important point in terms of governments, central banks, politicians, and when government has a monopoly over the issuance of money, be it gold or paper.

the tendency of government is almost always to change the money supply in order to pay its own debts or expenses.

 governments are usually the culprits of inflation

Gold…Hedge against paper money inflation.

difficult to experience high inflation under a gold standard

not so easy to produce new quantities of it. 

incur an expense to explore for gold

Under a fiat paper money system,

-simply run the printing presses.

How and Why Dollar get That Much Importance

$

The reasons for this acceptance of the US Dollar as the world's "anchor currency" was because American soil was largely untouched by destruction from the war, leaving most of its manufacturing capacity intact. The arrival of the atomic bomb also helped establish US power – and US vaults also held an estimated 65% of the world's gold reserves by the end of WWII.

Because of their strength in Weapon Industry and its sale against Gold.

Supply of Domestic Currency backing the Anchor Currency

central bank issues notes in exchange for interest-paying bonds by the government

So the Money that circulated is a type of credit money through which a country run its economy.

The system collapses – once the fiat money becomes worthless – when the government is unable or unwilling to support its value through taxation. Until then, the government creditors are able to accumulate extreme amounts of wealth. Put another way, "by a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens

Countries like Brazil have destroyed their currencies four or five times since 1960 and they've never seriously considered gold as a currency corner-stone yet.

Problem in International Monetary System

When the international monetary system was linked to gold, the latter managed the interdependence of the currency system, established an anchor for fixed exchange rates and stabilized inflation.

A country can move fix its currency to one of the major currencies, such as the dollar.

established to defend the anchored dollar system of fixed exchange rates, the IMF lost its sense of purpose as guardian of the international monetary system after 1971 , the year the IMS was scrapped for flexible exchange rates.

The Fund was then shifted from its role at the center of the IMS to a new role of ad hoc macroeconomic consultant and debt monitor.

An international monetary system in the strict sense of the world does not presently exist. Every country has it own system.

For thousands of years countries have anchored their currencies to one of the precious metals or to another currency. But in the quarter century since the international monetary system broke down, countries have been on their own, a phenomenon that has no historical precedent in the cooperative game known as the international monetary system.

a collection of nearly 200 countries with individual currencies and flexible exchange rates would appear to result in incredible confusion.

There is an important coherence in the world financial structure due to the configuration of powers in the world economy and the special role played by the currency of the superpower.

The result was pandemic inflation

Germany and Japan, whose currencies have appreciated strongly against the dollar, the price levels have increased by 240% and 290% respectively between 1971 and 1976. Because the Golden Anchor was lifted.

A Decline in Dollar…

nations around the world became increasingly concerned about the ability of the United States to keep the price of Gold at $35.

But America's involvement in the Vietnam War and spiraling costs for Lyndon B. Johnson's Great Society programs meant that, by 1970, the US gold reserve had shrunk to 16% of the world total. The US trade balance swung negative for the first time, threatening a still greater loss of Gold from America's vaults.

  .

THE ARGUMENT FOR GOLD TODAY

Those nations producing oil were not very pleased with the idea of accepting paper in exchange for the commodity (oil) they were selling.  They wanted something of value for their oil and not paper, but rather gold. 

The agreement that oil prices could rise in order to offset the paper inflation that would result.  So, just so you know, the so-called oil shortage of the 1970s was no shortage and it was not about oil - it was about gold, or a change in payment taking gold out of the picture..

Hubert's peak

very important commodity, such as oil, is now reaching a point of depletion, and if demand remains high, the ultimate result will be higher and higher prices for petroleum going forward. 

So inflation is inevitable.

 The death of currencies… The death of countries.

The total re-drawing of the world map

DOLLAR FUTURE

Reasons

There are, then, good reasons to expect a dollar decline,

Today, the U.S. current account deficit is much larger than in the mid-1980s.

The United States is currently borrowing $665 billion annually from foreign lenders to finance the gap between payments to and receipts from the rest of the world

The longer the debt is allowed to grow, the more significant is the loss of future income claims and the more intense the pressure on American living standards.

shows the magnitude of the deterioration of the dollar in the United States by projecting it 10 years into the future under the assumptions

that the current account deficit does not improve (or worsen)

Remember that in 1985, when the U.S. current account deficit was about the same share of GDP as it is today, a revision of market perceptions caused a drop from 240 to 140 yen, from 3.3 to 1.8 Deutsche marks

U.S. dollar depreciation against a select group of currencies, especially the euro, is a welcome first step.

Europeans have been stabalizing Euro when ever dollar depriciate against Gold.

Point to Ponder…

Do The politicians seriously want to tackle the problem today, or will they push it off until it is too late?  Will they simply elect to print even more worthless paper to solve the problem at a later date?

Ends

If the whole world economy falls to one-fifth (or less) of its current

level, then you might (just might) see a gold currency develop.  But if we go THAT low, silver might be more useful

Gold is Global.  It trades virtually round the clock, all over the world.  It is liquid, and is accepted everywhere.  It can be difficult to have your current fiat paper money accepted in another country - but gold truly is universal and if the one form of money accepted in all countries.

Questions & Answers