The Gold Standard
- Countries agree to buy or sell their paper currencies in exchange for gold on the request of any individual or firm and to allow the free export to gold bullion and coins
- Adopted by the U.K. in 1821
- Created a fixed exchange rate
Exchange rates
- Exchange rate: price of one currency in terms of a second currency
- Fixed exchange rate system: price of a given currency does not change relative to each other currency. - Under the gold standard, each country pegged the value its currency to gold
The Collapse of the Gold Standard
- Economic pressures of WWI
- Countries suspended pledged to buy or sell gold at currencies' par values
- Gold standard readopted in 1920s
- Dropped during Great Depression
- British pound allowed to float in 1931. - Float value determined by supply and demand
The Bretton Woods Era
- 44 countries met in Bretton Woods, New Hampshire in 1944
- Goal: to create a postwar economic environment to promote worldwide peace and prosperity
- Renewed gold stadard on modified basis (dollar-based)
- Created International Bank for Reconstruction and Development and International Monetary Fund
International Bank for Reconstruction and Development
- World Bank
- Goal 1: to help finance reconstruction of European economies. - Accomplished in mid 1950s
- Goal 2: to build economies of the world's developing countries
Objectives of the International Monetary Fund
- To promote international monetary cooperation
- To facilitate the expansion and balanced growth of international trade
- To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation
- To assist in the establishment of a multilateral system of payments
Membership in the IMF
- Open to any country willing to agree to rules and regulations
- 184 country members as of August 2003
- Membership requires payment of a quota
Relevance of the IMF Quota
- Quota size reflects global importance of country's economy and political considerations
- The quota. - determines voting power. - serves as part of official reserves. - determines country's borrowing power
End of The Bretton Woods System
- Susceptible to speculative "runs of the bank"
- U.S. $ became only source of liquidity necessary to expand international trade
- Triffin Paradox: - foreigners increased holdings of dollars. - Increased holdings decreased faith in U.S ability. - Increased demand for redeeming dollars for golds
- IMF created special drawing rights (SDRs) - paper gold
- Bretton Woods system ended August 15, 1971
Post - Bretton Woods System
- Most currencies began to float
- Value of U.S. $ fell relative to most currencies
- Group of ten aggred to restore fixed exchance rate system restructured rate of exchane
International Monetary System Since 1971
- Development of floating exchange system
- Supply and demand for a currency determine its price in the world market
- Manage floats - Central Banks can affect supply and demand
- Legitimized in 1976 with the jamaica agreement
European Union
- Believed flexible system would hindle ability to create integrated economy
- Created European Monetary System to manage currency relationships
- ERM participants maintained fixed exchange rates among their currencies
- Facilitated creation and adoption of Euro
Other Post - World War II
- Plaza Accord
- Louvre Accord
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