History of International Monetory System

7/29/2019 History of International Monetory System

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International Monetary

System With Special FocusOn China Japan Exchange

Rate DeterminationGroup

members

Bawa Suneja

Neha Chhabra

Rajpal Singh

Shruti bansal


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HISTORY OF INTERNATIONAL

MONETARY SYSTEM

The International monetary System establishes

the rules by which countries value and exchange

their currencies

It also provides a mechanism for correcting

imbalances between countries international

payments and receipts.


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The history of monetary system started when in

ancient time (17th century B.C.) tribes & city-

states of India, Babylon & Phoenicia used gold

and silver as medium of exchange in trade.


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THE GOLD STANDARD

MEANING:

Buying and selling of paper currency in exchange for gold on the

request of any individual of firm.

FIRST ADOPTED BY UNITED KINGDOM IN 1821.

It created a fixed exchange rate system because each country

tied the value of its currency.

DIFFICULTY Transacting in gold was expensive.

Guarding it against theft.

Insuring it against possible disasters.


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For e.g.

U.K. buys or sell 1 ounce of gold for 4.247 pounds sterling

(establishing official value of pound sterling in terms of gold)

&

Unites states agreed to buy or sell an ounce of gold to a par value

of $ 20.67

pound sterling 4.247 = 1 ounce of gold = $ 20.67

This implied a fixed exchange rate between the pound & dollar;1 pound sterling = $ 4.247.


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STERLING BASED GOLD

STANDARD

From 1821 until the end of 1918, the most

important currency in international commerce

was the British pound Sterling because ofunited kingdom large territory due to

dominant economic and military power.


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THE COLLAPSE OF GOLD

STANDARD

World war 1: With the outbreak of war,

normal commercial transactions between the

allies (France, Russia & U.K) and the centralpowers (Austria-Hungary, Germany & the

ottoman Empire) ceased.

The economic pressures of war caused countryafter country to pledges to buy or sell gold at

their currencies par value.


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Post War Conferences & Re-

adaptation Of Gold Standard

After war, conferences at Brussels (1920)Genoa (1992) yielded genera agreements

among the economic powers to return to thepre-war gold standard.

Most countries included united states, the

U.K, the France, readopted the gold standardin 1920s despite the high level of inflation,unemployment and political instability thatwere racking Europe.


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Implementation of floating rate system by

bank of England. Competitive devaluation of

currencies & increased tariff rate.

Effect of beggar-thy-neighbor policies (world war -2)

Cont..


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THE BRETTON WOODS ERA

Post war situation

Breton woods conference

A. Agreements of conferees to renew the goldstandard on modified basis

B. Agreement to create two new internationalorganizations to assist

a) International bank for reconstruction anddevelopment

b) International monetary fund


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International Bank For

Reconstruction And Development

It is the official name of the world bank.

Established in 1945

Initial goal was to help finance reconstruction

of the war torn European economies &

completed this task by the mid 1950s.

Then, bank adopted new mission i.e. to build

the economies of the worlds developing

countries.


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As the mission expanded over, the world

bank created three official organizations

a. International development association (IDA)-

provides soft loans.

b. International finance corporation (IFC)-

promotes private sector development.

c. Multilateral investment guarantee agency

(MIGA)- provides political risk insurance.


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International monetary fund

Objectives are-

a. To promote international monetary

cooperation.

b. To facilitate the expansion and balance

growth of international trade.

c. To promote exchange stability

d. To assist in establishment of a multilateral

system payments.


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A DOLLAR BASED GOLD STANDARD

BRETTON WOOD SYSTEM AS ADJUSTABLE PEG


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THE END OF BRETTON WOODS

SYSTEM

Shortcoming of dollar based gold standard

under Bretton woods system & triffin paradox Agreement to create special drawing rights

(SDRs)

Outcome of creating SDRs

Official ending of bretton woods system


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POST BRETTON WOODS SYSTEM &

THE FLOATING RATE ERA

After president speech Nixons speech, most

foreign currencies began to float ,their valuesare determined by demand and supply in

foreign exchange market.


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Exchange Rate Systems

Fixed exchange rate system.

Floating exchange rate system.

A fixed exchange-rate system (also known aspegged exchange rate system) - in whichgovernments try to keep the value of their

currencies constant against one another.

A countrys government decides the worth of itscurrency in terms of either a fixed weight of gold,a fixed amount ofanother currency or a basket of

other currencies.
http://en.wikipedia.org/wiki/Reserve_currencyhttp://en.wikipedia.org/wiki/Reserve_currencyhttp://en.wikipedia.org/wiki/Reserve_currency


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CONT

A floating currency is one where targets other

than the exchange rate itself are used to

administer monetary policy.


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Focus On Japan & China Exchange

Rate Determination

Th F t Of Th I t ti l


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The Future Of The International

Currency System And Chinas RMB

The global financial crisis could mark the

beginning of the end for the US dollars

dominance over the global economy.

The first scenario is continuation of the US dollaras the dominant global currency.

The second scenario involves the emergence of a

multi-global currency system. A third scenario is creation of a supranational

international currency.


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A New Reserve Currency To Challenge

The Dollar

Japan and China will promote direct trading ofthe yen and Yuan without using dollars and willencourage the development of a market for

companies involved in the exchanges. China is Japans largest trading partner. Japan will

also start in 2012 buying Chinese debts.

Iran and China signed two agreements on

expansion of trade ties and joint investments. These trades too will not be settled in Dollars or

in Euros.


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Currency system is 'product of past'

International currency system dominated by the

US dollar is a "product of the past".

"China has made important contribution to the

world economy in terms of total economic outputand trade, and the RMB has played a role in the

world economic development," he said.

"But making the RMB an international currencywill be a fairly long process."

h b d


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Japan, China bypass US in currency trade

By Kosuke Takahashi

By skipping the dollar in transactions, theregion's two biggest economies intend toreduce their dependence on dollar risk and US

monetary authorities' influence on the Asianeconomy

Internationalization of the YuanFor China, this new trading is a step in itsmoves to internationalize the Yuan,accelerating the currency's wider use


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China, Japan Start Direct Currency

Trade

The move means the Japanese Yen becomes themost important foreign currency to directly tradewith the Yuan after the US dollar.

the yen-yuan direct exchange system will helpbusinesses in both China and Japan because itwill reduce the risks associated with exchange

rate fluctuations in the dollar and will cuttransaction costs for companies...thats becausethere's no need to convert to an intermediary inbetween which was the U.S. dollar.


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Cont.

The step eliminates the US dollars monopoly

position to set the exchange rate between the

two currencies

its an important move towards the

internationalization of Chinas yuan currency

Yuan-Yen trading is due to take place at the

Tokyo and Shanghai exchanges.


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Thanks..

History of International Monetory System

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