3. 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) 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

5. Gold certificates were used as paper currency in the United States from 1882 to 1933. These certificates were freely convertible into gold coins.

6.  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.  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.  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.

11.  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

12.  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.

13. DESIGN The liberal economic system required an accepted vehicle for investment, trade, and payments. Unlike national economies, however, the international economy lacks a central government that can issue currency and manage its use. In the past this problem had been solved through the gold standard, but the architects of Bretton Woods did not consider this option feasible for the postwar political economy. Instead, they set up a system of fixed exchange rates managed by a series of newly created international institutions using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency

14. Previous regimes In the 19th and early 20th centuries gold played a key role in international monetary transactions. The gold standard was used to back currencies; the international value of currency was determined by its fixed relationship to gold; gold was used to settle international accounts. The gold standard maintained fixed exchange rates that were seen as desirable because they reduced the risk of trading with other countries.gold standard Imbalances in international trade were theoretically rectified automatically by the gold standard. A country with a deficit would have depleted gold reserves and would thus have to reduce its money supply. The resulting fall in demand would reduce imports and the lowering of prices would boost exports; thus the deficit would be rectified. Any country experiencing inflationwould lose gold and therefore would have a decrease in the amount of money available to spend. This decrease in the amount of money would act to reduce the inflationary pressure. Supplementing the use of gold in this period was the British pound. Based on the dominant British economy, the pound became a reserve, transaction, and intervention currency. But the pound was not up to the challenge of serving as the primary world currency, given the weakness of the British economy after the Second World War.deficitmoney supplydemandimportsexportsinflationinflationaryBritish pound

15. The architects of Bretton Woods had conceived of a system wherein exchange rate stability was a prime goal. Yet, in an era of more activist economic policy, governments did not seriously consider permanently fixed rates on the model of the classical gold standard of the nineteenth century. Gold production was not even sufficient to meet the demands of growing international trade and investment. And a sizeable share of the world's known gold reserves were located in the Soviet Union, which would later emerge as a Cold War rival to the United States and Western Europe.Soviet UnionCold WarWestern Europe The only currency strong enough to meet the rising demands for international currency transactions was the U.S. dollar. The strength of the U.S. economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold.U.S. dollar Another view is that in the time of discount banks, discount was the interest earned on gold, and that the only way to repay interest on government bonds is by printing more dollars, thus raising the price of gold. If gold is fixed at $35 then other countries will demand gold and not accept dollars. The closing of the gold window in 1971 was the result.

16. The rules of Bretton Woods, set forth in the articles of agreement of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), provided for a system of fixed exchange rates. The rules further sought to encourage an open system by committing members to the convertibility of their respective currencies into other currencies and to free trade.International Monetary FundInternational Bank for Reconstruction and Development What emerged was the "pegged rate" currency regime. Members were required to establish a parity of their national currencies in terms of gold (a "peg") and to maintain exchange rates within plus or minus 1% of parity (a "band") by intervening in their foreign exchange markets (that is, buying or selling foreign money).pegged rate In theory the reserve currency would be the bancor (a World Currency Unit that was never implemented), suggested by John Maynard Keynes; however, the United States objected and their request was granted, making the "reserve currency" the U.S. dollar. This meant that other countries would peg their currencies to the U.S. dollar, and—once convertibility was restored—would buy and sell U.S. dollars to keep market exchange rates within plus or minus 1% of parity. Thus, the U.S. dollar took over the role that gold had played under the gold standard in the international financial system. (Rogue Nation, 2003, Clyde Prestowitz)bancorinternational financial system Fixed exchange rates

17. Meanwhile, to bolster faith in the dollar, the U.S. agreed separately to link the dollar to gold at the rate of $35 per ounce of gold. At this rate, foreign governments and central banks were able to exchange dollars for gold. Bretton Woods established a system of payments based on the dollar, in which all currencies were defined in relation to the dollar, itself convertible into gold, and above all, "as good as gold". The U.S. currency was now effectively the world currency, the standard to which every other currency was pegged. As the world's key currency, most international transactions were denominated in US dollars. The U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Additionally, all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States, a fact that contributed to the supremacy of the United States [citation needed]. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system.purchasing powercitation needed Member countries could only change their par value with IMF approval, which was contingent on IMF determination that its balance of payments was in a "fundamental disequilibrium".par value

18. 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.

19.  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

20. 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

21. 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

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

23. 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.

24. Marshall Plan (1947-1958) Dollar shortages and the Marshall Plan The Bretton Wood arrangements were largely adhered to and ratified by the participating governments. It was expected that national monetary reserves, supplemented with necessary IMF credits, would finance any temporary balance of payments disequilibria. But this did not prove sufficient to get Europe out of its doldrums.balance of payments Postwar world capitalism suffered from a huge dollar shortage. The United States was running huge balance of trade surpluses, and the U.S. reserves were immense and growing. It was necessary to reverse this flow. Dollars had to leave the United States and become available for international use. In other words, the United States would have to reverse the natural economic processes and run a balance of payments deficit. The modest credit facilities of the IMF were clearly insufficient to deal with Western Europe's huge balance of payments deficits. The problem was further aggravated by the reaffirmation by the IMF Board of Governors in the provision in the Bretton Woods Articles of Agreement that the IMF could make loans only for current account deficits and not for capital and reconstruction purposes. Only the United States contribution of $570 million was actually available for IBRD lending. In addition, because the only available market for IBRD bonds was the conservative Wall Street banking market, the IBRD was forced to adopt a conservative lending policy, granting loans only when repayment was assured. Given these problems, by 1947 the IMF and the IBRD themselves were admitting that they could not deal with the international monetary system's economic problems. [8]Wall Street [8] The United States set up the European Recovery Program (Marshall Plan) to provide large-scale financial and economic aid for rebuilding Europe largely through grants rather than loans. This included countries belonging to the Soviet bloc, e.g., Poland. In a speech at Harvard University on June 5, 1947, U.S. Secretary of State George Marshall stated:Marshall PlanHarvard UniversityGeorge Marshall The breakdown of the business structure of Europe during the war was complete. …Europe's requirements for the next three or four years of foreign food and other essential products… principally from the United States… are so much greater than her present ability to pay that she must have substantial help or face economic, social and political deterioration of a very grave character. — [Notes 4] [Notes 4]

25. From 1947 until 1958, the U.S. deliberately encouraged an outflow of dollars, and, from 1950 on, the United States ran a balance of payments deficit with the intent of providing liquidity for the international economy. Dollars flowed out through various U.S. aid programs: the Truman Doctrine entailing aid to the pro-U.S. Greek and Turkish regimes, which were struggling to suppress communist revolution, aid to various pro-U.S. regimes in the Third World, and most important, the Marshall Plan. From 1948 to 1954 the United States provided 16 Western European countries $17 billion in grants.Truman DoctrineGreekTurkish To encourage long-term adjustment, the United States promoted European and Japanese trade competitiveness. Policies for economic controls on the defeated former Axis countries were scrapped. Aid to Europe and Japan was designed to rebuild productivity and export capacity. In the long run it was expected that such European and Japanese recovery would benefit the United States by widening markets for U.S. exports, and providing locations for U.S. capital expansion.Axis In 1956, the World Bank created the International Finance Corporation and in 1960 it created the International Development Association (IDA). Both have been controversial. Critics of the IDA argue that it was designed to head off a broader based system headed by the United Nations, and that the IDA lends without consideration for the effectiveness of the program. Critics also point out that the pressure to keep developing economies "open" has led to their having difficulties obtaining funds through ordinary channels, and a continual cycle of asset buy up by foreign investors and capital flight by locals. Defenders of the IDA pointed to its ability to make large loans for agricultural programs which aided the "Green Revolution" of the 1960s, and its functioning to stabilize and occasionally subsidize Third World governments, particularly in Latin America.International Finance CorporationInternational Development Associationcapital flightGreen Revolution Bretton Woods, then, created a system of triangular trade: the United States would use the convertible financial system to trade at a tremendous profit with developing nations, expanding industry and acquiring raw materials. It would use this surplus to send dollars to Europe, which would then be used to rebuild their economies, and make the United States the market for their products. This would allow the other industrialized nations to purchase products from the Third World, which reinforced the American role as the guarantor of stability. When this triangle became destabilized, Bretton Woods entered a period of crisis that ultimately led to its collapse.

26. 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

27. 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.

28. Floating-rate Bretton Woods system 1968–1972 By 1968, the attempt to defend the dollar at a fixed peg of $35/ounce, the policy of the Eisenhower, Kennedy and Johnson administrations, had become increasingly untenable. Gold outflows from the U.S. accelerated, and despite gaining assurances from Germany and other nations to hold gold, the unbalanced fiscal spending of the Johnson administration had transformed the dollar shortage of the 1940s and 1950s into a dollar glut by the 1960s. In 1967, the IMF agreed in Rio de Janeiro to replace the tranche division set up in 1946. Special Drawing Rights were set as equal to one U.S. dollar, but were not usable for transactions other than between banks and the IMF. Nations were required to accept holding Special Drawing Rights (SDRs) equal to three times their allotment, and interest would be charged, or credited, to each nation based on their SDR holding. The original interest rate was 1.5%.dollar glutRio de JaneirotrancheSpecial Drawing Rights

29. The intent of the SDR system was to prevent nations from buying pegged gold and selling it at the higher free market price, and give nations a reason to hold dollars by crediting interest, at the same time setting a clear limit to the amount of dollars that could be held. The essential conflict was that the American role as military defender of the capitalist world's economic system was recognized, but not given a specific monetary value. In effect, other nations "purchased" American defense policy by taking a loss in holding dollars. They were only willing to do this as long as they supported U.S. military policy. Because of the Vietnam War and other unpopular actions, the pro-U.S. consensus began to evaporate. The SDR agreement, in effect, monetized the value of this relationship, but did not create a market for it. The use of SDRs as paper gold seemed to offer a way to balance the system, turning the IMF, rather than the U.S., into the world's central banker. The U.S. tightened controls over foreign investment and currency, including mandatory investment controls in 1968. In 1970, U.S. President Richard Nixon lifted import quotas on oil in an attempt to reduce energy costs; instead, however, this exacerbated dollar flight, and created pressure from petro-dollars. Still, the U.S. continued to draw down reserves. In 1971 it had a reserve deficit of $56 billion; as well, it had depleted most of its non-gold reserves and had only 22% gold coverage of foreign reserves. In short, the dollar was tremendously overvalued with respect to gold.Richard Nixonpetro-dollars

30. 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

31. Nixon Shock Background By the early 1970s, as the costs of the Vietnam War and increased domestic spending accelerated inflation, [1] the U.S. was running a balance of payments deficit and a trade deficit, the first in the 20th century. The year 1970 was the crucial turning point, which, because of foreign arbitrage of the U.S. dollar, caused governmental gold coverage of the paper dollar to decline 33 percentage points, from 55% to 22%. That, in the view of Neoclassical Economists and the Austrian School, represented the point where holders of the U.S. dollar lost faith in the U.S. government’s ability to cut its budget and trade deficits.Vietnam War [1]arbitrageNeoclassical EconomistsAustrian School In 1971, the U.S. government again printed more dollars (a 10% increase) [1] and then sent them overseas, to pay for the nation's military spending and private investments. In the first six months of 1971, $22 billion dollars in assets left the U.S. [citation needed] In May 1971, inflation-wary West Germany was the first member country to leave the Bretton Woods system — unwilling to deflate the Deutsche Mark to prop up the dollar. [1] In order to prevent the dumping of the Deutsche Mark on the open market, West Germany did not consult with the international monetary community before making the change. In the next three months, West Germany’s move strengthened their economy; simultaneously, the dollar dropped 7.5% against the Deutsche Mark. [1] [1]citation neededWest GermanyDeutsche Mark [1] Because of the excess printed dollars, and the negative U.S. trade balance, other nations began demanding fulfillment of America’s “promise to pay” - that is, the redemption of their dollars for gold. Switzerland redeemed $50 million of paper for gold in July. [1] France, in particular, repeatedly made aggressive demands, and acquired $191 million in gold, further depleting the gold reserves of the U.S. [1] On 5 August 1971, Congress released a report recommending devaluation of the dollar, in an effort to protect the dollar against foreign price-gougers. [1] Still, on 9 August 1971, as the dollar dropped in value against European currencies, Switzerland withdrew the Swiss franc from the Bretton Woods system. [1]Switzerland [1] devaluation [1]Swiss franc [1] [

32. Nixon Shock The shock To stabilize the economy and combat runaway inflation, on August 15, 1971, President Nixon imposed a 90-day wage and price freeze, a 10 percent import surcharge, and, most importantly, “closed the gold window”, ending convertibility between US dollars and gold. The President and fifteen advisors made that decision without consulting the members of the international monetary system, so the international community informally named it the Nixon shock. Given the importance of the announcement — and its impact upon foreign currencies — presidential advisors recalled that they spent more time deciding when to announce publicly the controversial plan, than they spent creating the plan. [2] He was advised that the practical decision was to make an announcement before the stock markets opened on Monday (and just when Asian markets also were opening trading for the day). On August 15, 1971, that speech and the price-control plans proved very popular and raised the public's spirit. The President was credited with finally rescuing the American public from price- gougers, and from a foreign-caused exchange crisis. [2][3] [2]stock markets [2][3] By December 1971, the import surcharge was dropped, as part of a general revaluation of the major currencies, which thereafter were allowed 2.25% devaluations from the agreed exchange rate. By March 1976, the world’s major currencies were floating — in other words, the currency exchange rates no longer were governments' principal means of administering monetary policy.floating

33. 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.

34. When Special Drawing Rights were created in 1969 one SDR was defined as having a value of 0.888671 grams of gold, the value of one US dollar at that time. [1] After the breakdown of the Bretton Woods system in the early 1970s, the SDR was redefined in terms of a basket of currencies. [9][12] Today, this basket is composed of Japanese Yen, US Dollars, British Pounds and Euros, and the proportion each of these four currencies contribute to the nominal value of a SDR is reevaluated every five years. [1] [1]Bretton Woods system [9][12]Japanese YenUS DollarsBritish PoundsEuros [1] For the period of 2006-2010, one SDR is the sum of 0.6320 US Dollars, 0.4100 euro, 18.4 Japanese yen and 0.0903 pound sterling.US DollarseuroJapanese yenpound sterling

38. 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”

39. 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.

42. 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

43. 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

44. 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.

45. IMF Exchange Rate Regime Classifications

46.  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.

47. – 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

48. – 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

49. 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.

51. 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

56. 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

57. 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

58. 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

59. 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

60. CurrencyPegged/ Current Conversion Bahrain Dinar (second highest valued) 1 USD = 0.376 Egyptian Pound Not Pegged ( 1USD = 5.7009) 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 = 0.7078 Kuwaiti Dinar ( Highest Valued currency unit) 1 USD = 0.2285 (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 = 46.95 ( Not Pegged) Turkish Lira 1 USD = 1.506 (Not Pegged) UAE Dirham 1 USD = 3.67 Yemeni Rial 1 USD = 236.8 ( Not Pegged)

61. 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.

62. The Path to a Flexible Economy

63. 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

64. 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

65. 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

66. 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)

67. 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

68. 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

69. 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%