7/30/2019 Economics Monetary Systems and Its Evolution Final

1/15

Monitory Systems and its Evolution

Wednesday, 01 May 2013

7/30/2019 Economics Monetary Systems and Its Evolution Final

2/15

Agenda

Slide 2

3.Evolution Summary

4. Gold Standard

2. Monitory System Evolution Era

1. Evolution of Money

4. BW System

4. Managed Floating Exchange Rate

7/30/2019 Economics Monetary Systems and Its Evolution Final

3/15

Evolution of Money & Monitory System

Slide 3 ITM XMBA 23

Barter Commo

dity

Metal Money

in formofObjects

Ancient

Coin

Gold

Sliver &CopperCoins

Paper

Money

Monetary

System

7/30/2019 Economics Monetary Systems and Its Evolution Final

4/15

Overview: Modern Monitory System Evolution

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

Before the GoldStandard (550 BC -1870 AD)

The pre WWI financial order Known as the First age of Globalisation

Transactions were facilitated by widespreadparticipation in the gold standard

Gold Standard (1870

1945)

Bretton Woods System(1945- 1971)

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

The post BrettonWoods system: 1971

present

Slide 4 ITM XMBA 23

7/30/2019 Economics Monetary Systems and Its Evolution Final

5/15

Evolution Summary

Date System Reserve assets Leaders

18031873 Bimetallism Gold, silver France, UK

18731914 Gold standard Gold, pound UK

19141924Anchored dollarstandard

Gold, dollar US, UK, France

19241933 Gold standard Gold, dollar, pound US, UK, France

19331971Anchored dollarstandard

Gold, dollar US, G-10

19711973 Dollar standard Dollar US

19731985Flexible exchange

rates

Dollar, mark, poundUS, Germany,

Japan

19851999Managed exchangerates

Dollar, mark, yen US, G7, IMF

1999- Dollar, euro Dollar, euro, yen US, Eurozone, IMF

Slide 5 ITM XMBA 23

http://en.wikipedia.org/wiki/Bimetallismhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Silverhttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Gold_standardhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/Gold_standardhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Group_of_Ten_(economic)http://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Exchange_rate_regimehttp://en.wikipedia.org/wiki/Exchange_rate_regimehttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Deutsche_Markhttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Exchange_rate_regimehttp://en.wikipedia.org/wiki/Exchange_rate_regimehttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Deutsche_Markhttp://en.wikipedia.org/wiki/Japanese_yenhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/G8http://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/Japanese_yenhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Eurozonehttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/Eurozonehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Japanese_yenhttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/G8http://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Japanese_yenhttp://en.wikipedia.org/wiki/Deutsche_Markhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Exchange_rate_regimehttp://en.wikipedia.org/wiki/Exchange_rate_regimehttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/Deutsche_Markhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Exchange_rate_regimehttp://en.wikipedia.org/wiki/Exchange_rate_regimehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Group_of_Ten_(economic)http://en.wikipedia.org/wiki/Group_of_Ten_(economic)http://en.wikipedia.org/wiki/Group_of_Ten_(economic)http://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Gold_standardhttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Gold_standardhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/Silverhttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Bimetallism

7/30/2019 Economics Monetary Systems and Its Evolution Final

6/15

Gold Standard

Slide 6 ITM XMBA 23

The pre WWI financial order: 1870

1914 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 ofpure 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 1816at 113 grains of pure gold.

Exchange rate between the dollar and the pound was

p = 113/23.22 = $4.866

7/30/2019 Economics Monetary Systems and Its Evolution Final

7/15

Gold Standard

Slide 7 ITM XMBA 23

Gold Export Point

Cost of shipping gold fromLondon to New York was$0.026 per pound

Exchange rate was able tofluctuate between limit of$4.866 0.026

$4.892 = gold import point for

UK

$4.840 = gold export pointfor UK

Spot Price

7/30/2019 Economics Monetary Systems and Its Evolution Final

8/15

Gold Standard

Slide 8 ITM XMBA 23

Between the World Wars: 1919

1939 During World War I the international gold standard ceased to function.

By the end of war in June 1918, inflation rates varied greatly, because nationsprinted 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 atits 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 forthe general public.

Most countries that were on the silver standard also pegged silver to the dollar,except China and Hong Kong.

7/30/2019 Economics Monetary Systems and Its Evolution Final

9/15

Gold Standard

Slide 9 ITM XMBA 23

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 - byraising 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

7/30/2019 Economics Monetary Systems and Its Evolution Final

10/15

Bretton Woods System

730 delegates from all 44 Allied nationsgathered at the Mount Washington Hotel in

Bretton Woods, New Hampshire, United States

A desire to reform the intl monetary system toone based on mutual cooperation and freely

convertible currencies.

Fixed ex rate system imposes restriction onmonetary policy of countries. Floating ex rates

were regarded as a cause of speculativeinstability.

Slide 10 ITM XMBA 23

7/30/2019 Economics Monetary Systems and Its Evolution Final

11/15

Bretton Woods Agreement

Slide 11 ITM XMBA 23

International Monetary Fund (IMF)

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

Reserve currency

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

Gold Exchange Standard

Each country fixed its ex rate against the dollarand the value of dollar is defined by theofficial 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 thecountrys BOP was in fundamental disequilibrium.

Subscription

Countries would have to make a payment (subscription) of gold and currency to theIMF in order to become a member.

7/30/2019 Economics Monetary Systems and Its Evolution Final

12/15

Decline and Fall of the BW System

1958-65: Private capital outflows from US1965-68: Johnson Administration

The bad US macroeconomic policy packagecaused considerable damage to the US economyand the intl monetary system.

Involvement in the Vietnam conflict

Great Society program

G Deficit MS P & CA (stagflation)

Slide 12 ITM XMBA 23

7/30/2019 Economics Monetary Systems and Its Evolution Final

13/15

Decline and Fall of the BW System

1971: US CA deficit massive private purchaseof DM Bundesbank intervened in FX market by buyinghuge amount of dollars, then it gave up and allowed theDM 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 eachcountrys currency against the dollars

Freeze on prices and wages

Slide 13 ITM XMBA 23

7/30/2019 Economics Monetary Systems and Its Evolution Final

14/15

Managed Floating Exchange

1971 - Smithsonian Agreement - Stableexchange rates with wider bands

1972 Snake in the Tunnel Europe.

1976 Jamaica Agreement Floating exchangerates

Managed Floating exchange rates

Slide 14 ITM XMBA 23

7/30/2019 Economics Monetary Systems and Its Evolution Final

15/15

References

Sr. No Reference

1 http://en.wikipedia.org/wiki/International_monetary_systems

2 http://www.bcb.gov.br/?originmoney

3 E book (Bretton Woods System)

4 International Economics by M L Jhingan

Slide 15 ITM XMBA 23