Gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. Silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver.
Gold specie standard is a system in which the monetary unit is associated with circulating gold coins, or with the unit of value defined in terms of one particular circulating gold coin in conjunction with subsidiary coinage made from a lesser valuable metal. (till late WW I – 1925 in Britain) Gold exchange standard typically involves only the circulation of silver coins, or coins made of other metals(during the silver standard ie period from 1600 to 1800) Gold bullion standard is a system in which gold coins do not actually circulate as such, but in which the authorities have agreed to sell gold bullion on demand at a fixed price in exchange for the circulating currency. (till 1931) Byzantine Empire
Gold certificates were used as paper currency in the United States from 1882 to 1933. These certificates were freely convertible into gold coins.
The gold standard limits the power of governments to inflate prices through excessive issuance of paper currency; The gold standard makes chronic deficit spending by governments more difficult; and High levels of inflation are rare and hyperinflation is impossible as the money supply can only grow at the rate that the gold supply increases.
A gold standard leads to deflation whenever an economy using the gold standard grows faster than the gold supply; Deflation rewards savers and punishes debtors; recessions can be largely mitigated by increasing money supply during economic downturns; and Fluctuations in the amount of gold that is mined could cause inflation if there is an increase, or deflation if there is a decrease.
The gold standard broke down in country after country soon after its rehabilitation during the post-1914-18 war decade. There were several reasons for this development: Gold was very unevenly distributed among the countries in the inter-war period. While the U.S.A. and France came to possess the bulk of it, other countries did not have enough to maintain a monetary system based in gold. International trade was not free. Some countries often imposed stringent restrictions on imports, which created serious balance of payments problems for other countries. Not having enough gold to cover the gap, they threw the gold standard overboard.
In 1929 after the stock market crash banks in Austria, England,and The United States experienced large declines in portfolio values. This set off a series of bank runs. Most countries focused on stabilizing their own national economies. They hoarded gold reserves which constrained monetary supply and hampered international trade. Britain especially experience severe outflows of gold (why ?) The British Pound was still the dominant international currency and Britain had exploited that fact incurring large trade deficits on currency backed by their own gold reserves. British gold reserves were devastated causing a general loss in confidence in the pound, which ended its use as the dominant international currency Hoarding of gold became such a problem in the U.S. that in 1933 Franklin D. Roosevelt made it illegal to own more that $100 worth of gold. The government could confiscate gold in exchange for paper money Britain was forced off the gold standard in 1931 Canada, Sweden, Austria, Japan, the US, and finally France followed between 1933 - 1936
Held in 1944. 44 Countries participated. Birth of IMF Birth of International Bank for Reconstruction and Development (IBRD) Implemented a system of fixed exchange rates with the $ as the key currency Goal: Avoid a recurrence of the closed markets and economic warfare that had characterized the 1930s.
Developed by Harry Dexter WhiteJohn Maynard Keynes US defined 1 ounce of Gold as $35 All other nations had to define the value of their money according to par value system in terms of U.S. dollars or gold.
Officially established on December 27, 1945 Commenced its financial operations on March 1, 1947 Purpose o Promote international monetary cooperation o Facilitates world trade expansion o Ensures exchange rate stability o Provide funds to member countries to bring their BOP to equilibrium
IMF-Operations Source of Money: Quota subscription IMF- Organization Highest authority is the Board of Governors Day-to-day work is managed by the Executive Board formed by 24 Executive Directors
Goal: Original mission was to finance the reconstruction of nations devastated by WW-2 Improve living standards and to eliminate the worst forms of poverty Supports the restructuring process of economies and provides capital for productive investments Encourages foreign direct investment by making guarantees or accepting partnerships with investors. Aims to keep payments in developing countries balanced and fosters international trade
The highest authority: Council of Governors Executive Board: five Directors to whom the Council of Governors transfers responsibility for nearly all issues.
1.Integration of developing countries Affiliated organizations of the World Bank: i.International Finance Cooperation (IFC)-1956 Function: grant credits to private organizations that lack capital for projects in the developing world ii.International Development Association (IDA)- 1961 Function: grant credits to especially poor countries at very favorable conditions.
2. Special Drawing Rights In 1960s substantial economic expansion lead to weakening of the position of the USA and a devaluation of the U.S. dollar. IMF reacted by issuing SDRs which member countries could add to their holdings of foreign currencies and gold. SDRs were assigned with a value based on the average worth of the worlds major currencies. These were the U.S. dollar, the French franc, the pound sterling, the Japanese yen, and the German mark.
One national currency (the U.S. dollar) had to be an international reserve currency at the same time. As a result US were free from external economic pressures, while heavily influencing those external economies. To ensure international liquidity USA were forced to run deficits in their balance of payments This, together with the emergence of a parallel market for gold where the price soared above the official US mandated price, led to speculators running down the US gold reserves. The system of Bretton Woods collapsed on 15 August 1971
Collapse of Bretton Woods Agreement- Floating Exchange Rate Regime was formalized in 1976 in Jamaica. At the Jamaica meeting, the International Monetary Fund's (IMF) Articles of Agreement were revised to reflect reality of floating exchange rates. Under the Jamaican agreement floating rates were declared acceptable gold was abandoned as a reserve asset total annual IMF quotas - the amount member countries contribute to the IMF - were increased to $41 billion (today, this number is $311 billion) The rules for the International Monetary System that were agreed upon at the meeting are still in place today.
Since 1973, exchange rates have become more volatile and less predictable because of – the oil crisis in 1971 – the loss of confidence in the dollar after U.S. inflation jumped between 1977 and 1978 – the oil crisis of 1979 – the rise in the dollar between 1980 and 1985 – the partial collapse of the European Monetary System in 1992 – the 1997 Asian currency crisis – the decline in the dollar in the mid to late 2000s
2003 - Michael P. Dooley, Peter M. Garber, and David Folkerts-Landau the emergence of a new international system involving an interdependency between states with generally high savings in Asia lending and exporting to western states with generally high spending
Asian currencies were being pegged to the dollar Result - Unilateral intervention of Asian governments in the currency market to stop their currencies appreciating Led to the developing world as a whole preventing current account deficits in 1999 It was in response to unsympathetic treatment following the 1997 Asian Financial Crisis.
The call for the a New Bretton Woods System was strengthened post the 2008 crisis. Brown and Sarkozy have been pushing for a New Bretton Woods System for a significant time now But they differ for a fact that – Brown – favors free trade and globalization – Sarkozy – Argues that unrestricted has failed
But the European Leaders were unanimous in calling for a the development of a New International Financial Order that succeeds the one present now. Probably here the dollar will be superseded as a base currency and may be replaced by probably a pool of currencies or pool of commodities. Triffin dilemma - conflicts of interest between short-term domestic and long-term international economic objectives Bancor – John Maynard Keynes – Bretton Woods I
This has gained significance as it started gaining support from the economic giant China. Chinese Proposal – Based on SDR The call for a New Order has been gaining momentum starting from the 2008 G 20 Washington Summit, 2009 G 20 London summit and the 2010 World Economic Forum Davos Summit. ASEAN, NAFTA – have their own cusotmized Bancors.
Exchange Arrangements with No Separate Legal Tender: Currency of another country circulates as sole legal tender or member belongs to a monetary or currency union in which same legal tender is shared by members of the union eg. Euro Currency Board Arrangements: Monetary regime based on implicit national commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate.ie. Pegging.
– Other Conventional Fixed Peg Arrangements: Country pegs its currency (formal or de facto) at a fixed rate to a major currency or a basket of currencies where exchange rate fluctuates within a narrow margin or at most ± 1% around central rate – Pegged Exchange Rates w/in Horizontal Bands: Value of the currency is maintained within margins of fluctuation around a formal or de facto fixed peg that are wider than ± 1% around central rate – Crawling Peg: Currency is adjusted periodically in small amounts at a fixed, preannounced rate in response to changes in certain quantitative measures
– Exchange Rates w/in Crawling Peg: Currency is maintained within certain fluctuation margins around a central rate that is adjusted periodically – Managed Floating w/ No Preannounced Path for Exchange Rate: Monetary authority influences the movements of the exchange rate through active intervention in foreign exchange markets without specifying a pre-announced path for the exchange rate – Independent Floating: Exchange rate is market determined, with any foreign exchange intervention aimed at moderating the rate of change and preventing undue fluctuations in the exchange rate, rather than at establishing a level for it
Dollarization refers to the replacement of a foreign currency with U.S. dollars. Dollarization goes beyond a currency board, as the country no longer has a local currency. For example, Ecuador implemented dollarization in 2000.
Exchange rate stability – the value of the currency would be fixed in relationship to other currencies so traders and investors could be relatively certain of the foreign exchange value of each currency in the present and near future Full financial integration – complete freedom of monetary flows would be allowed, so traders and investors could willingly and easily move funds from one country to another in response to perceived economic opportunities or risk Monetary independence – domestic monetary and interest rate policies would be set by each individual country to pursue desired national economic policies, especially as they might relate to limiting inflation, combating recessions and fostering prosperity and full employment
CountryCurrency BahrainBahrain Dinar EgyptEgyptian Pound IragIraqi Dinar IranIranian Rial IsraelNew Shekel JordanJordanian Dinar KuwaitKuwaiti Dinar LebanonLebanese Pound OmanRial Omani Palestinian West Bank-Gaza New Israeli Shekel/ Jordanian Dinar QatarQatar Riyal Saudi ArabiaSaudi Riyal SyriaSyrian Pound TurkeyTurkish Lira United Arab EmiratesUAE Dirham YemenYemeni Rial
The British were in the Middle East by 1838 At first, the Indian Rupee was introduced in the Gulf States After the first World War: British East Africa – Florin and then a Shilling TransJordan and Palestine- Palestinian Pound at par with pound sterling East African Shilling - Arabian Dinar in 1965 The system gradually gave away to a systems based on units of the sterling system, but without ever involving the introduction of the full sterling coinage
1951 : East African Shilling replaced the Rupee in Aden 1961 : Dinar was adopted in Aden and Kuwait – 1 Dinar = 20 Shillings 1966 : Bahrain and Abu Dhabi adopted Dinar 1966 : Qatar, Dubai and other States adopted Saudi Riyal 1970 : Oman adopted the Rial Difference arose due to the Maria Theresa Thaler Coinage System
Sterling Devaluation in 1970 Value of other Dinars rose, Omani rial was less in value Pound Sterling UnitMaria Theresa Thaler Israel, Jordan, Iraq, Kuwait, Bahrain, Oman, and the Yemen Saudi Arabia, UAE and Qatar After World War II, Sterling Area was formed All the Middle East Territories were pegged at a fixed value to the pound sterling After the devaluation in 1967, and other issues, none of the currencies retained any fixed parity
Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. A new concept of financing- Gulf Clearing Union functioning on the lines of Swiss WIR creating - within a suitable legal framework - a "petro" unit redeemable in a constant amount of energy value provides a straightforward benchmark for both domestic and international buyers of oil, gas, petroleum products, and even electricity, to use petros - as well as, or instead of, US dollars - in settlement for purchases of GCC production.
As early as World War - II The Bretton Woods System - Fixed exchange rates Collapse of BWS in 1970s The US moved towards Floating Exchange Rates The Europe held to its path of Stable Exchange Rates
15 members of European Union Used Exchange Rate Mechanism (ERM) Helped to create Stable Exchange Rates Member Govts. commitment Exchange Rate Fluctuation < 2.25% from central point Created European Currency Unit (ECU) – An unit of Account – Weighted average of EMS Countries – Not a real currency – A basis for the idea though – Idea – Realized with launching of Euro (1999) – Designed to create stable commerce & encourage trade between member states – Unprecedented co-ordination of monetary policies between member states – Operated successfully over a decade – Provided impetus for more
The European Commission President, Jacques Delors, and The Central Bank Governors of the EU Member states commitment towards EMU Stage – I (1990-1994) Completing Internal Market » Free Movement of Capital Stage – II (1994-1999) The ECB, ESCB & Economic Convergence Stage – III (1999 onwards) Fixing Exchange Rates & Launching of Euro
Acceptance of the Delors report Replace all individual ECU Currencies with a single currency called Euro Laid down the steps for a complete European Economic Monetary Union(EMU)
Nominal Inflation <1.5% above the average for the three members of the EU with the lowest inflation rates Long term interest rate <2% above the average of the for the three members with the lowest interest rate The fiscal deficit <3% of the GDP Government debt <60% of GDP
1999 – Virtual Currency Official currency of 11 member states For cashless payments & accounting purposes 2002 – Physical form As bank notes & coins Monetary policy Independent European Central Bank (ECB) National Central Banks of the Member States Fiscal policy Stability & Growth Pact Full responsibility for Structural Policies Common goals - Stability, Growth & Employment YearCountries Involved/ Milestone 1999 Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland 2001Greece 2002Introduction of euro banknotes and coins 2007Slovenia 2008Cyprus, Malta 2009Slovakia
Stable Prices Inflation rate fallen from 20% (1980s) to 2% – Better purchasing power & value of savings – Future more certain Easier, Safer & Cheaper Borrowing – As inflation is low, interest rates are low too – Cheaper consumer loans – Mortgage rates fallen from 8- 14%(1980s) to 5%