International Financial system . pptx

International financial system

1. Evolution of the International Monetary System Bimetallism: before 1875 Classical Gold Standards: 1875-1914 Interwar Period: 1915-1944 Bretton Woods System: 1945-1972 The Flexible Exchange Rate Regime: 1973-present

2. BIMETALLISM: BEFORE 1875 Bimetallism is the standard in which the value of the monetary unit is defined as equivalent to certain quantities of two metals, typically gold and silver, creating a fixed rate of exchange between them. A "double standard" in the sense that both gold and silver were used as money. Both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Exchange ratio between two metals (gold and silver) was fixed.

3. Some countries were on the gold standard, some on the silver standard, some on both. Gold and silver were used for international payments & determining Exchange Rates. The presence of Bi-metallic countries is a must BIMETALLISM: BEFORE 1875

4. COLLAPSE: Countries on bimetallism often experiences a well known phenomenon called Gresham's Law Abundant metal is used as money driving more scarce metal out of circulation Due to GRESHAM'S LAW, i . e, bad money drives away good money, leading to Uni - metallism . BIMETALLISM: BEFORE 1875

5. CLASSICAL GOLD STANDARD: 1875-1914 The gold standard is a monetary system where a country's currency or paper money has a value directly linked to certain quantities of gold. A country's capacity to print the money was decided on the basis of gold reserves held by the country. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency.

6. Three rules of the game were: only gold to be used for international payments. two way convertibility between gold and currency at a fixed rate. Free EX-IM (Export & Import) of gold. CLASSICAL GOLD STANDARD: 1875-1914

7. The exchange rate between two country's currencies would be determined by their relative gold contents. Exchange rate between currencies used to remain fixed Lasted for about 40 years as an international monetary system For example, if the dollar is pegged to gold at U.S.$30 = 1 ounce of gold, and the British pound is pegged to gold at £6 = 1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents: $30 = £6 $5 = £1 CLASSICAL GOLD STANDARD: 1875-1914

8. Gold standard received positive views of the public much more easily than any other standard. It was an easy system to introduce and operate. Gold standard gave stable price level in the country. When the country is on Gold standard, currency cannot be over issued. So prices remain stable. Gold standard provides currency which is universally acceptable ADVANTAGES OF GOLD STANDARD

9. In international dealings Gold standard provides stability of exchange rates thereby making Gold standard very useful for the settlement of international transactions. Gold standard cannot be secretly tempered with by the independent will of the government. The deficit or surplus in the balance of payment is automatically brought into balance by import or export of Gold. ADVANTAGES OF GOLD STANDARD

10. After the world war most of the countries on Gold standard did not obey the rules of Gold standard and even all the new forms of Gold standard failed to function smoothly . Following are the main defects of this system.  One serious defect in this system was that it worked smoothly in the period of peace , and prosperity while in the period of war and economic crises it has always failed . Gold standard is an expensive standard and a luxury which all the countries cannot afford because a lot of precious metal is wasted. DISADVANTAGES OF GOLD STANDARD

11. 3. Gold standard sacrifices the internal stability to external stability . 4. Under Gold standard the automatic working of the economic system is considered as a demerit. 5. The changes in output of Gold can bring changes in the prices level . 6. In the Gold standard independent monetary policy is adopted. DISADVANTAGES OF GOLD STANDARD

12. DEMISE OF THE GOLD SYSTEM In 1914 at the break of the first world war crushed the first economic order of the world. With the outbreak of war, normal commercial transactions between the Allies (United Kingdom, Russia, and the united kingdom) and the Central Powers (Germany, Ottoman Empire, and the Austria-Hungary) ceased. The economic pressures of war caused country after country to suspend their pledges to buy or sell Gold at their currencies' par values.

13. INTERWAR PERIOD: 1915-1944 World war I ended the classical gold standard in august 1914 as major countries such as Great Britain, France ,Germany and Russia suspended redemption of bank notes in gold and imposed restrictions on the gold export Gold standard was followed, but it was not classical . Most countries followed the policy of sterilization of gold.

14. COLLAPSE By end of World War II, gold standard was dead due to competitive devaluations and restrictions on export and import of gold. • Britain suspended its convertibility of gold. Reasons for the collapse of inter war system Hyper inflation Depression and financial crisis

15. BRETTON WOODS SYSTEM: 1945-1972 Named for a 1944 meeting of 44 nations (370 delegates) at Bretton Woods, New Hampshire, Washington . The purpose was to design a postwar international monetary system . The goal was exchange rate stability without the gold standard . The result was the creation of the IMF and the World Bank . Considered as most remarkable event in history of world

16. BRETTON WOODS SYSTEM: 1945-1972 IMF was entrusted with the responsibility of formulation and enforcement of rules and policies of international monetary system IMF was also made responsible for monitoring and managing exchange rates between currencies IMF also lend funds to countries International bank for Reconstruction and Development (IBRD) better known as world bank was made responsible for financing individual development project

17. BRETTON WOODS SYSTEM: 1945-1972 Collapse: Due to Triffin paradox which means that the demands on an international currency meet the excess supply would undermine its value.

18. Measures taken to save Bretton Wood System ■ Smithsonian Agreement In an attempt to save Breeton woods system 10 major countries known as a group of 10 met at Smithsonian in 1971 According to this agreement The price of gold was raised to $ 38 Each country revalued their currency against USD by 10 % The band for the movement in exchange rate was expanded from 1% to 2.2% BRETTON WOODS SYSTEM: 1945-1972

19. THE FLEXIBLE EXCHANGE RATE REGIME: 1973-PRESENT In 1973 after the collapse of Bretton Wood system IMF members met at Jamaica (Jamaican agreement) to adopt the flexible exchange rate as international monetary system Flexible exchange rates were declared acceptable to the IMF members. Central banks were allowed to intervene in the exchange rate markets to pacify unwarranted volatilities. Gold was officially abandoned as an international reserve asset.