International Monetary System IMS n Structure of IMS

International Monetary System IMS n Structure of IMS: Framework within which the foreign Exchange rates are determined, capital flows & international trade are accommodated & Balance of Payments Adjustments are made n History of IMS: The Gold Standard (1876 -1913): Ÿ Gold as a medium of exchange- Pharaohs (3000 PC) Ÿ The Greeks, Romans & Persians Used gold coins & passed through the mercantile era to the 19 th century Ÿ No multinational agreement, but each country declared a par value for its currency in terms of gold based on rule of games or "Gold Standard" MENU

International Monetary System IMS-cont. . n Mercantilism of 19 th Century: Need for IMS: Ÿ Europe adapted the IMS in 1870 & the U. S. . in 1879 Ÿ $20. 67/Ounce of Gold, £ 4. 274/Ounce: Ÿ $20. 67/£ 4. 2474=£ 4. 8665/$ Ÿ Limitation of gold reserve & supply of money Ÿ Limit the flow of goods and gold & suspension of GS n Inter War Years: 1914 -1944: Ÿ Free Fluctuating of Exchange Rates with consideration of the gold and par value of other currencies. Ÿ Short sell of week currencies, re-evaluation of £, the collapse of the Austrian banking system-total abandonment of GS MENU

International Monetary System IMS-cont. . n The Bretton Wood Agreement: (1944) Ÿ Dollar based Monetary System (par value based on $) Ÿ Fixed value in term of $, but not required to convert Ÿ Only $ remained convertible to gold: $35/Ounce Ÿ Only 1% of par allowed for fluctuation Ÿ Devaluation was not allowed for purpose of high export Ÿ 10% devaluation for week currency or approval of IMF Ÿ IMF & World Bank were created Ÿ Former Soviet Union did participate at Bretton Wood but chose not to join IMF or World Bank MENU

International Monetary System IMS-cont. . n International Monetary Fund IMF: Ÿ Mission: Rendering temporary assistance to currencies with cyclical, seasonal or random fluctuation. Ÿ Help countries with a structural trade problem Ÿ IMF is funded based on quota of expected post WWII trade Ÿ The Original quota were 25% in gold or $ (Gold tranche), & 75% local currency. Ÿ 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 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. MENU

n International Monetary System IMS-cont. . International Monetary Fund IMF Cont. . : Ÿ 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 period Ÿ Cumulative access could be up to 600% of members quota Ÿ Distribution of the quota is prelude to distribution of vote Ÿ U. S. Vote: 19. 1%, UK: 6. 6%, Germany: 5. 8%, France: 4. 8%, Japan: 4. 5%, Canada: 3. 2% Ÿ General Agreement to Borrow: IMF ability to borrow from member countries, currently more than $180 billion. Ÿ Special Drawing Rights (SDR): created according to Rio de Janeiro agreement (1967) to help increase the global trade between nations Ÿ SDR is distributed based on members quota and valued based on 16 then 5 currency Ÿ First $/SDR determined then value of other currencies are measured MENU

International Monetary System IMS-cont. . n Monetary Development: (1944 -1971) Ÿ EFTA (1957) & EEC (1959), rapid increase in world trade Ÿ U. S. . deficit of 1959 & International Monetary Reserve dilemma: BOP deficit to create more reserve for LDCs Ÿ Doubt of convertibility of major reserve currencies Ÿ "Interest Equalization Tax"on foreign borrowing & creation of Euro-bond Ÿ Mandatory control of direct foreign investment , control of foreign lending by U. S banks, & high U. S deficit Ÿ official Currency Swaps: Group of Ten Industrialized Nations as a interest credit between central banks MENU

n International Monetary System IMS-cont. . Floating Exchange Rate-Crises of 1971: Ÿ U. S. BOT had reached to all-time high in 1971 Ÿ U. S lost one-third of her official gold & president Nixon suspended convertibility of $ to gold Ÿ U. S. imposed 10%surcharge on imports & freezed P&W Ÿ Most European currencies gained against $ n Smithsonian agreement: December of 1971 Ÿ Group ten Industrialized Nations signed on Dec, 17 1971 Ÿ $ devaluated to $38/Ounce, Yen evaluated against $ : 16. 9%, Canada 7. 4% Ÿ Floatation of 2. 25% (Max 4. 5%) is allowed Ÿ $ lost its value sharply: $42. 22 in free market, $70 in official London market MENU

International Monetary System IMS-cont. . n Jamaican Agreement: January 1976 Ÿ Floating Rate has been established ( has continued today) Ÿ Gold was demonetarized as a reserved asset Ÿ IMF agreed to sell $25 million ounces of gold to its members and used the proceeds to help the poor nations Ÿ IMF quota increased to $41 and then to $180 billion Ÿ 10% of the voting power given to OPEC members Ÿ Non-oil producing countries have more access to IMF Ÿ Floating Exchange Rate System has officially adopted & continued until present time MENU

International Monetary System IMS-cont. . • Plaza Agreement • Louvre Agreement http: //www. econ. iastate. edu/classes/econ 355/choi/cur. htm END MENU