Transcript The International Monetary System and the

• The Gold standard
• The Bretton Woods Era
The Gold Standard
• Countries agree to buy or sell their paper
currencies in exchange for gold on the
request of any individual or firm and to
allow the free export of gold bullion and
coins
• Created a fixed exchange rate
* Exchange rate: price of a one currency in
terms of a second currency
* Fixed exchange rate system: price of a
given currency does not change relative to
each other currency
– Under the gold standard, each country pegged
the value of its currency to gold
The Collapse of the Gold
Standard
• Economic pressures of WWI
• Countries suspended pledges to buy or sell
gold at currencies’ par values
• Gold standard readopted in 1920s
• Dropped during Great Depression
• British pound allowed to float in 1931
– Float: value determined by supply and demand
• 44 countries met in Bretton Woods, New
Hampshire in 1944
• Goal: to create a postwar economic
environment to promote worldwide peace
and prosperity
• Renewed gold standard on modified basis
(dollar-based)
• Created International Bank for
Reconstruction and Development and
International Monetary Fund
The End of the Bretton
Woods System
• Susceptible to speculative “runs on the bank”
• U.S. $ became only source of liquidity necessary
to expand international trade
• Triffin Paradox:
– foreigners increased holdings of dollars
– Increased holdings decreased faith in U.S ability
– Increased demand for redeeming dollars for gold
• IMF created special drawing rights (SDRs) – paper
gold
• Bretton Woods system ended August 15, 1971
International Monetary
System since 1971
• Development of floating exchange rate
system
– Supply and demand for a currency determine
its price in the world market
– Managed float – central banks can affect
supply and demand
• Legitimized in 1976 with the Jamaica
Agreement
• Believed flexible system would hinder
ability to create integrated economy
• Created European Monetary System to
manage currency relationships
• ERM participants maintained fixed
exchange rates among their currencies
• Facilitated creation and adoption of Euro
• Double entry bookkeeping system
– Measures and records all economic
transactions between residents of one country
and residents of all other countries during
specified time period
– Provides understanding of performance of
each country’s economy in international
markets
– Signals fundamental changes in country
competitiveness
– Assists policy makers in designing appropriate
public policies
Aspects of the BOP
Accounting System
• Records international transactions made in
some time period
• Records only economic transactions
• Records transactions between residents of
one country and all other countries
– Residents include individuals, businesses,
government agencies, nonprofit organizations
• Uses a double-entry system
Major Components of the
BOP Accounting System
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Current Account
Capital Account
Official Reserves
Errors and Omissions