International Monetary SystemInternational Monetary SystemIMSIMS

Structure of IMSStructure of IMS: Framework within which the foreign Exchange : Framework within which the foreign Exchange rates are determined, capital flows & international trade are rates are determined, capital flows & international trade are accommodated & Balance of Payments Adjustments are madeaccommodated & Balance of Payments Adjustments are made

History of IMSHistory of IMS: The Gold Standard (1876-1913):: The Gold Standard (1876-1913):

Gold as a medium of exchange- Pharaohs (3000 PC)Gold as a medium of exchange- Pharaohs (3000 PC)

The Greeks, Romans & Persians Used gold coins & passed The Greeks, Romans & Persians Used gold coins & passed through the mercantile era to the 19th centurythrough the mercantile era to the 19th century

No multinational agreement, but each country declared a par No multinational agreement, but each country declared a par value for its currency in terms of gold based on rule of games value for its currency in terms of gold based on rule of games or "Gold Standard"or "Gold Standard"

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International Monetary SystemInternational Monetary SystemIMS-cont..IMS-cont.. Mercantilism of 19th CenturyMercantilism of 19th Century: Need for IMS:: Need for IMS:

Europe adapted the IMS in 1870 & the U.S.. in 1879Europe adapted the IMS in 1870 & the U.S.. in 1879

$20.67/Ounce of Gold, £4.274/Ounce:$20.67/Ounce of Gold, £4.274/Ounce:

$20.67/£4.2474=£4.8665/$$20.67/£4.2474=£4.8665/$

Limitation of gold reserve & supply of moneyLimitation of gold reserve & supply of money

Limit the flow of goods and gold & suspension of GSLimit the flow of goods and gold & suspension of GS

Inter War Years: 1914-1944:Inter War Years: 1914-1944:

Free Fluctuating of Exchange Rates with consideration of the gold and Free Fluctuating of Exchange Rates with consideration of the gold and par value of other currencies.par value of other currencies.

Short sell of week currencies, re-evaluation of £, the collapse of the Short sell of week currencies, re-evaluation of £, the collapse of the

Austrian banking system-total abandonment of GSAustrian banking system-total abandonment of GS

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International Monetary SystemInternational Monetary SystemIMS-cont..IMS-cont..

The Bretton Wood Agreement: (1944): (1944) Dollar based Monetary System (par value based on $)Dollar based Monetary System (par value based on $)

Fixed value in term of $, but not required to convertFixed value in term of $, but not required to convert

Only $ remained convertible to gold: $35/OunceOnly $ remained convertible to gold: $35/Ounce

Only 1% of par allowed for fluctuationOnly 1% of par allowed for fluctuation

Devaluation was not allowed for purpose of high exportDevaluation was not allowed for purpose of high export

10% devaluation for week currency or approval of IMF10% devaluation for week currency or approval of IMF

IMF & World Bank were createdIMF & World Bank were created

Former Soviet Union did participate at Bretton Wood but chose not Former Soviet Union did participate at Bretton Wood but chose not to join IMF or World Bankto join IMF or World Bank

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International Monetary SystemInternational Monetary SystemIMS-cont..IMS-cont..

International Monetary Fund IMF:: Mission:Rendering temporary assistance to currencies with cyclical, Mission:Rendering temporary assistance to currencies with cyclical,

seasonal or random fluctuation.seasonal or random fluctuation.

Help countries with a structural trade problemHelp countries with a structural trade problem

IMF is funded based on quota of expected post WWII tradeIMF is funded based on quota of expected post WWII trade

The Original quota were 25% in gold or $ (The Original quota were 25% in gold or $ (Gold trancheGold tranche), & 75% local ), & 75% local currency.currency.

A member country can borrow up to its original 25% in gold or convertible A member country can borrow up to its original 25% in gold or convertible currencies in any 12 month plus 100% of its total quota. A member country currencies in any 12 month plus 100% of its total quota. A member country can also borrow up to 120% of its quota in convertible currency or gold, can also borrow up to 120% of its quota in convertible currency or gold, even through it only paid 25% in convertible currency or gold.even through it only paid 25% in convertible currency or gold.

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International Monetary SystemInternational Monetary SystemIMS-cont..IMS-cont..

International Monetary FundInternational Monetary Fund IMF IMF Cont..Cont..::

At the present time, each of the 151 member can borrow up to At the present time, each of the 151 member can borrow up to 150% annually of its quota or up to 450% during a three years 150% annually of its quota or up to 450% during a three years periodperiod

Cumulative access could be up to 600% of members quotaCumulative access could be up to 600% of members quota

Distribution of the quota is prelude to distribution of voteDistribution of the quota is prelude to distribution of vote

U.S. Vote:19.1%, UK:6.6%,Germany:5.8%, France:4.8%,Japan:4.5%,Canada:3.2%U.S. Vote:19.1%, UK:6.6%,Germany:5.8%, France:4.8%,Japan:4.5%,Canada:3.2%

General Agreement to Borrow: IMF ability to borrow from member General Agreement to Borrow: IMF ability to borrow from member countries, currently more than $180 billion.countries, currently more than $180 billion.

Special Drawing Rights (SDR): created according to Rio de Janeiro agreement (1967) to help Special Drawing Rights (SDR): created according to Rio de Janeiro agreement (1967) to help increase the global trade between nationsincrease the global trade between nations

SDR is distributed based on members quota and valued based on 16 then 5 currencySDR is distributed based on members quota and valued based on 16 then 5 currency

First $/SDR determined then value of other currencies are measured First $/SDR determined then value of other currencies are measured

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International Monetary SystemInternational Monetary SystemIMS-cont..IMS-cont.. Monetary Development: (1944-1971)Monetary Development: (1944-1971)

EFTA (1957) & EEC (1959), rapid increase in world tradeEFTA (1957) & EEC (1959), rapid increase in world trade

U.S.. deficit of 1959 & International Monetary Reserve dilemma: U.S.. deficit of 1959 & International Monetary Reserve dilemma: BOP deficit to create more reserve for LDCsBOP deficit to create more reserve for LDCs

Doubt of convertibility of major reserve currenciesDoubt of convertibility of major reserve currencies

"Interest Equalization Tax"on foreign borrowing & creation of "Interest Equalization Tax"on foreign borrowing & creation of Euro-bondEuro-bond

Mandatory control of direct foreign investment ,control of foreign Mandatory control of direct foreign investment ,control of foreign lending by U.S banks,& high U.S deficitlending by U.S banks,& high U.S deficit

official Currency Swaps: Group of Ten Industrialized Nations as official Currency Swaps: Group of Ten Industrialized Nations as a interest credit between central banksa interest credit between central banks

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International Monetary SystemInternational Monetary SystemIMS-cont..IMS-cont..

Floating Exchange Rate-Crises of 1971:Floating Exchange Rate-Crises of 1971:

U.S. BOT had reached to all-time high in 1971U.S. BOT had reached to all-time high in 1971

U.S lost one-third of her official gold & president Nixon suspended U.S lost one-third of her official gold & president Nixon suspended convertibility of $ to goldconvertibility of $ to gold

U.S.imposed 10%surcharge on imports & freezed P&WU.S.imposed 10%surcharge on imports & freezed P&W

Most European currencies gained against $Most European currencies gained against $

Smithsonian agreement: : December of 1971December of 1971

Group ten Industrialized Nations signed on Dec, 17 1971Group ten Industrialized Nations signed on Dec, 17 1971 $ devaluated to $38/Ounce, Yen evaluated against $ :16.9%,Canada 7.4%$ devaluated to $38/Ounce, Yen evaluated against $ :16.9%,Canada 7.4%

Floatation of 2.25% (Max 4.5%) is allowedFloatation of 2.25% (Max 4.5%) is allowed $ lost its value sharply: $42.22 in free market, $70 in official London market$ lost its value sharply: $42.22 in free market, $70 in official London market

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International Monetary SystemInternational Monetary SystemIMS-cont..IMS-cont..

Jamaican Agreement: January 1976

Floating Rate has been established ( has continued today)Floating Rate has been established ( has continued today)

Gold was demonetarized as a reserved assetGold was demonetarized as a reserved asset

IMF agreed to sell $25 million ounces of gold to its members and IMF agreed to sell $25 million ounces of gold to its members and used the proceeds to help the poor nationsused the proceeds to help the poor nations

IMF quota increased to $41 and then to $180 billionIMF quota increased to $41 and then to $180 billion

10% of the voting power given to OPEC members10% of the voting power given to OPEC members

Non-oil producing countries have more access to IMFNon-oil producing countries have more access to IMF Floating Exchange Rate System has officially adopted & continued until Floating Exchange Rate System has officially adopted & continued until

present timepresent time

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International Monetary System IMS-cont..International Monetary System IMS-cont..

• Plaza Agreement

• Louvre Agreement

http://www.econ.iastate.edu/classes/econ355/choi/cur.htm

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