chapter (4) the international financial system © 2005 pearson education canada inc

Chapter (4)

The International Financial System

© 2005 Pearson Education Canada Inc.

© 2005 Pearson Education Canada Inc. 20-2

Systems of Money

• Defining systems of money on the local level*• 1-Narrow definition:• It is a set of rules that insures determining the unit of

account which controls the issued money or ends exchange.

• 2-Broad definition of money systems: • It is a set of rules which insure the unit of account and

control issued money for exchange. Besides, controlled rules to create or exclude other forms of exchange.


*Defining money on international level: It is a set of international relation of money which result

from scientific experiment and international and international agreement which includes a mean of payment accept compromising international accounts.

- It is a system which avails international money that is used as a medium of exchange and measure or a store for foreign values.


Systems of money classify to two

discipline:

* The commodity standard

* The credit standard


1- The commodity standard:

It is a system of money in which a unit of

account is known for certain amount of

one commodity or for more than one

commodity.


1- The commodity standard:

One of the traditional examples of rules of money which uses one metal commodity is called '' the system of one metal''. It is a principle of'' gold'' or ''silver'', and which uses both gold and silver together is called'' system of two gold''


The system of one metal:

This system represents the first form of gold where coinage gold is exchanged alone or with representative banknotes, but golden coins were the basic standard.

To make sure that this system works well, the following items should exist:

1-Determining a consistent percentage between standard unit and specific quantity of

gold with certain weight and standard.



2-Existing a complete freedom for coinage of gold'' coinage freedom'' without interests or with low costs for every one who wants to change gold bullion to coinage

3-Finding a complete freedom to change other currency of exchange to gold money with consistence price of gold to facilitate returning it to gold bullion.



4-Availing a complete freedom to melt gold bullion.

5-Establishing a complete freedom for export and import gold.


Question:

When do countries resort to export gold?

When the value of currency becomes low.


The system of one metal

-The first term represents the basic banknote for establishing the system since it decides the lawful price for gold money and achieves equation for gold price locally and internationally.

Gold Bulletin Standard


We can understand the nature of this standard by recognizing the differences between it and the system of golden coins.

1-In the case of golden bulletin, golden coins can't exchange, but it withdrawals from exchange. Therefore, authorities of money continue to buy any offered bulletin with consistent price to avoid any high of standard for gold from market value (center banks keep gold in their safes and pay banknotes for seller.)


The system of one metal

2-The freedom to exchange money of exchange is restricted.


Reasons for exchange golden coins to gold bulletin:

1- Many countries fear of depletion what they have of golden precautionary by exchanging them to golden coins, so countries

aren't able to find quantities to face balance of payments

2- Countries fear that gold precautionary can't serve the needs of monetary exchange, so this threats the economical levels.

3- There is no necessity to use golden coins in natural times.As a result ,governments resort to buy gold to public as gold bulletin but with specific

quantities, and therefore, rich people are mainly who buy it.


Modified Gold Bulletin Standard

The authorities of money discovered when applying gold bulletin standard that there a chance for using it for undesirable purposes which can't serve t public interests. These purposes are speculator and compactness. Therefore, authorities modified it by identifying purposes which bank notes depend on buying, but with necessity to keep golden precautionary.


The system of two metal

It is a system where the value for unit of money is identified for silver and gold


The base of monetary credit

The system of compulsory banknote

chapter (4) the international financial system © 2005 pearson education canada inc

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