1. International MONETARY SYSTEM

2. Introduction and evolution

3. Gold standard
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.

4. 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)
Byzantine Empire
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)

5. Gold certificates were used as paper currency in the United States from 1882 to These certificates were freely convertible into gold coins.

6. advantages
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.

7. Dis-advantages
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.

8. Inter War Period ( )
The gold standard broke down in country after country soon after its rehabilitation during the post 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.

9. Predatory depreciation
A country can increase its money, supply which will cause the price of its currency to decrease. Goods manufactured in this country then become less expensive on the world market, which attracts foreign investment (Germany was hit hardest).

10. Images of post war Germany

11. The Great Depression
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

12. The System of Bretton Woods
Goal:
Avoid a recurrence of the closed markets and economic warfare that had characterized the 1930s.
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

13. Bretton Woods Contd. Developed by
Harry Dexter White John 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.

14. IMF Purpose Officially established on December 27, 1945
Commenced its financial operations on
March 1, 1947
Purpose
Promote international monetary cooperation
Facilitates world trade expansion
Ensures exchange rate stability
Provide funds to member countries to bring their BOP to equilibrium

15. IMF-Operations IMF- Organization Source of Money: Quota subscription
Highest authority is the Board of Governors
Day-to-day work is managed by the Executive Board formed
by 24 Executive Directors

16. International Bank for Reconstruction & Development
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

17. World bank: Organization
The highest authority: Council of Governors
Executive Board: five Directors to whom the Council of Governors transfers responsibility for nearly all issues.

18. Adjustments and reactions to the changing environment
Integration of developing countries
Affiliated organizations of the World Bank:
International Finance Cooperation (IFC) Function: grant credits to private organizations that
lack capital for projects in the developing world
International Development Association (IDA)- 1961
Function: grant credits to especially poor countries
at very favorable conditions.

19. 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 world’s major currencies.
These were the U.S. dollar, the French franc, the pound sterling, the Japanese yen, and the German mark.

20. Fall of Bretton Wood System
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

21. FLOATING EXCHANGE RATE REGIME
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.

22. 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

23. Floating Exchange rate
QUESTION ARISES
Which is better?
Fixed Exchange rate or
Floating Exchange rate

24. Advantages of Floating Exchange Rate
Automatic Balance of Payments Adjustment: Any BOP disequilibrium will be rectified by a change in the exchange rates.
Eg: if a country’s BOP is deficit then its currency should depreciate because imports will be greater than exports.
Absence of Crisis: No pressure on the currency to revalue or devalue as the changes are automatic.
Reduced need for holding currency reserves for use in intervention in the currency market. These reserves have opportunity costs.
Freedom for domestic monetary policy- eg freedom to set interest rates to control inflation rather than exchange rate.

25. Advantages of Fixed Exchange Rate
Limits Speculation: A vital risk in running a stable market.
Helps in future planning of amount of investments and the amount of business a company can undertake.
Fixed Rates provides a discipline on the domestic producers to keep their prices and costs down.
Reinforces gains in comparative advantage
- if one country has a fixed rate with another, then differences in relative costs will quite easily be reflected in changes in the rate of growth of exports and imports.

26. New Bretton Woods System
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”

27. New Bretton Woods System
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.

28. US Current Account Balance

29. China Current Account Balance

30. Post 2008 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

31. Post 2008 Crisis
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

32. Post 2008 Crisis
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 Bancor’s.

33. Contemporary Currency Regimes
IMF Exchange Rate Regime Classifications
Contemporary Currency Regimes

34. 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.

35. 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

36. 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

37. Dollarization
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.

38. Ideal currency

39. Attributes of the “Ideal” Currency
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

40. The Impossible Trinity

41. Emerging Markets & Regime Choices

44. Currencies at a Glance Country Currency Bahrain Bahrain Dinar Egypt
Egyptian Pound
Irag
Iraqi Dinar
Iran
Iranian Rial
Israel
New Shekel
Jordan
Jordanian Dinar
Kuwait
Kuwaiti Dinar
Lebanon
Lebanese Pound
Oman
Rial Omani
Palestinian   West Bank-Gaza
New Israeli Shekel/ Jordanian Dinar
Qatar
Qatar Riyal
Saudi Arabia
Saudi Riyal
Syria
Syrian Pound
Turkey
Turkish Lira
United Arab Emirates
UAE Dirham
Yemen
Yemeni Rial

45. How it all began 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
 The situation in the British territories of the Middle East was however somewhat complicated, because it involved a situation in which Indian rupees, Turkish piastres, and Egyptian piastresgradually gave way to systems based on units of the sterling system, but without ever involving the introduction of the full sterling coinage.
After the first world war, the Indian rupee in British East Africa was replaced by aflorin and then a shilling, which eventually replaced the Indian Rupee in Aden by Meanwhile in 1927 a new Palestine pound at par with the pound sterling was introduced in the mandated territories of Palestine and Transjordan to replace the Turkish and Egyptian currencies. The East African Shilling in Aden was replaced in 1965 with the South Arabian Dinar at par with the pound sterling.

46. 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

47. Differences in Valuation
Sterling Devaluation in 1970
Value of other Dinars rose, Omani rial was less in value
Pound Sterling Unit
Maria 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
At the outbreak of the second world war, the sterling area was formed as an emergency measure in order to protect the external value of the pound sterling, mainly against the US dollar. All the territories mentioned above joined the sterling area since their respective pounds, dinars, shillings, or rupees were pegged at a fixed value to the pound sterling. The Indian rupee at that time was pegged to the pound sterling at a fixed value of one shilling and six pence sterling. In the years after the second world war, Egypt, Palestine, the Sudan and Iraq left the sterling area.
As a result of the sterling devaluation of November 1967, the floating of the pound sterling in June 1972, and the ending of the Bretton Woods system of fixed exchange rates that was introduced in 1944, none of the currencies mentioned above retain any fixed parity to any of the sterling units of account. There is no visible relationship between these currencies today and the currency that is used in the United Kingdom.

48. Current Currency Conversions
Pegged/ Current Conversion
Bahrain Dinar (second highest valued)
1 USD = 0.376
Egyptian Pound
Not Pegged ( 1USD = )
Iraqi Dinar
Not Pegged ( 1 USD = 1168)
Iranian Rial
Not Pegged (1 USD = 10000)
New Shekel
Not Pegged ( 1USD = 3.791)
Jordanian Dinar
1 USD =
Kuwaiti Dinar ( Highest Valued currency unit)
1 USD = (Basket of Currencies)
Lebanese Pound
1 USD = 1501
Rial Omani (third highest valued)
1 USD = 0.385
Qatar Riyal
1 USD = 3.64
Saudi Riyal
1 USD = 3.75
Syrian Pound
1 USD = ( Not Pegged)
Turkish Lira
1 USD = (Not Pegged)
UAE Dirham
1 USD = 3.67
Yemeni Rial
1 USD = ( Not Pegged)

49. Latest Buzz
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. 
Few have ever heard of it, but most Swiss businesses are members of the Wirtschaftsring-Genossenschaft or WIR. Since 1934, small and medium-sized businesses in Switzerland have routinely extended each other credit - for many years interest-free - and settled this credit in goods and services, rather than in Swiss francs. So transactions are not settled conventionally in Swiss francs created as interest-bearing credit by Swiss banks, or as non interest-bearing Swiss francs minted by the Swiss central bank. In fact, no Swiss francs change hands at all: transactions take place by reference to the Swiss franc as a value unit.  The pragmatic Swiss are not prepared to rely purely on trust in the ability or willingness of their members to settle debit balances. WIR members are obliged to give security over their property by way of collateral. In other words, the WIR is a monetary system that is "property-backed". It is but a short step from the WIR to a Gulf Clearing Union. 

50. Euro
The Path to a Flexible Economy
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51. Need for a Stable Currency Worldwide
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

52. European Monetary System (1979)
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

53. Delors Report
The European Commission President, Jacques Delors, and The Central Bank Governors of the EU Member states commitment towards EMU
Stage – I ( )
Completing Internal Market
Free Movement of Capital
Stage – II ( )
The ECB, ESCB & Economic Convergence
Stage – III (1999 onwards)
Fixing Exchange Rates & Launching of Euro
The European Central Bank (ECB) and the European System of Central Banks (ESCB)
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54. Maastricht Treaty (Dec, 1991)
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)
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55. The Maastricht Convergence Criterion
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

56. Euro –Journey & Governing Bodies
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
Year
Countries Involved/ Milestone
1999
Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland
2001
Greece
2002
Introduction of euro banknotes and coins
2007
Slovenia
2008
Cyprus, Malta
2009
Slovakia

57. Euro Benefits 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%