CHAPTER 3
The International
Monetary System
nd theircnscacon and.
nwt we would conse the
owing section deeribes the intredcton oh
otining expansion of
ston and indcpendence The chapter concades withthe Min-C
bal, which detail the elation ofthe Chinese yun fem pe demestic to a
History of the International Monetary System
(Over he ages currencies have been defined interns of gold and ater items of va, and
and Romans wed gol coe i‘CHAPTER Theleomstenl Mert System
The Evion of apa obity
mae
me fmt meee oe meee
pouua
See pee tt
vie, capes [HONOR oregon economies
‘of gold and then wid to adhere tothe sos rules of he ge, Tsar cameo beknown
{she clasial old standard. The go standard a an internation monetary system gained
‘eceptance in Westom Europe inthe 16M Th United States mar scnething ofa lntecomer
forthe system, not offialy adopting the standard wnt 18.
‘Underthe god stndat, the “rales ofthe ame” were clear and mpl. Each country set
{he rate at which is currency unt (paper o coin) could be conerted a weight of gold The
Unite States, for example, declared the dollar to be converte to gol at ate of $2057 ps
‘vce (arate infect ut the beiaaing of World War) The Bri pound was pegged at
4242474 per ounce of gold. AS long as bath currencies wee freely convertible ito Bd the
‘ollapoand exchange ate was
S206ounee of gold :
‘Es2eraounce of gud ~ S485
Becane the government of each country on the god standard agred to huyor sl gold on
demand with anyone a its wm ee pay rate the vale of ach nda ccrecy iit
eserves of gold 1 buck I curren’ vale wnt very impoctant fr country andes this
‘ysiem. The system alo ad the elect of imp limiting the rate which ny ndivieal
country could expand is money supply. Any growth inthe amount ol tonsy ws ied 0
the ate at which ofl authors sould sage aittonal gold.
‘The gold standard worked adequately ual the outbreak of Word Wa interuptd trade
‘ows andthe tree movement of gold. This event eaused the min trading ations to ssp
operation fhe gol standard‘The Interwar Years and World War Il, 1914-1944
Daring Word War aod the sty 192, crrenses wer lowed to Mucus over fairy wide
"anger in lems of go ad in elation teach oes. Theoretically soppy sd demand fos
Coureys export and import essed moderate changes in en exchange as about 3 ental
Sullviu tlue This waste sme funtion that gold had performed der the previous
ful stander. Unortonately, such exile exchange rates id aot work i an equating
{uaner, Oo the contrary: international spectre sold the weak currenees shor, easing
‘he ofall rier in salu than warsanod by ral econo foctors Sling short aspec
Iason technique in wtih an indiviglspcaatr sells an aset soe as acevency to smother
pot) for deer ata future date, The speculate, bowever doesnot yet own the asset, nd
Expentthe pie of he aet ofa the date when the asset must be pueiased inthe open
Saket bythe spocslatr for delivery
"The reverse happened wit strong cutencs,Fctoation in currency values could not
be oflecby the relatively hud forward exchange market except at exorbant cost The net
"esl wa that the volume of word rade dd ot grow nthe 192 i proportion to word
‘ros domestic produc ut instead decline tos ery low eel wih the advent ofthe Grea
Depression ithe 1930
"The United Stuer adopted a moifed go standard in 1934 when ths US. dolar ws
valued to $35 po ounce of gold fom the $20.57 pe ounce price in effet prio io World
War Contrary to previous practice, the US. Tasty Wades gol only wa foreign ental
nk, no private zens Prom 1934 the end of World War, excbage rates Were theo
Fetealiy determined by each caren’ vil in terms of gold. Durie Wod War I and its
“hati aftermath, however any of the in trading crrenies ote oaverity nto
ther catenies The dolar was toe othe fw curenls that coatinued to be conver
Bretton Woods and the Intemational Monetary Fund, 1944
As Worl War If dew toa clot in 1944, the Allied Powers met at Breton Woods, New
‘lampshire to create new portvar international moatar system. The Bretton Woods
“Agreement esiahed « US. dollar bared international monetary system and provided for
‘ro nem nstutons the lacroationl Monetary Fund ad the Word Bank. The International
‘Monetary Fund (ME) ade countries wih balance of payments and exchange rate problens.
| The Intretional Bonk for Recontrction ané Development (World Ink) helped fand
| ‘ostwar reconstruction and sine then hae supported geneal economic development. Glabal
| Finance in Practice. prover ome sight nto the debates at Bretton Woods.
The IMF wer the Ke inmtton ithe sew inteationl manta tem, and it has
| remained soto the present The IMI was established to render tempor) assistance
Inembes countries tying to defend thir currencies nginsteylcl, seasonal, or random
‘rcureaceeItaso ait courte having structural trae problems ithe promise to take
Stequate steps to corres thelr probles I person deft ecu, however. he IMF cant
Save s county from eventual devaluation, In eee years, thas tempted to help counties
| Facing financial rcs thas provided masivefouns ss well adic to Rus and other
foumes Rosson repubies, Braz, Indonesia and South Korea, o marc bua few
Tnger the onal provisions ofthe Brtion Woods Agreement, all oun fied the
‘aloe of their currencies in terme of god but were not required to exchange their curences
TorpoldOnly the dollar remained cornet ito god (a $35 per ounce). Therefore, each
County esabled its exchange rate va-ivs the Goll and then eaiubted the gold pat
‘alc otsearteney to cteate te desod dolar exchange rate Paripating counts apr
fy to maintain the valu of thelr utrencies within 1% (alr expandec to 225%) of par
by buying o seling foreign exchange or old needed Devaluation was no tobe used #52 (CHAPTERS The kferaton! Menta Syn
"Hammering Out an Agreement.
(one poke A Ll yeu Sth pox ate
(ly 1-2 aetna Now Hangar Ud
Neos Mest an art Carvers, at ons
fest ocean ees va hed
Sroragrazam
Tread py ator at tn Wonde wee
lv a frre, Tha ten non ay
Lard Majo, eda ccc
‘lt Meine estos an al wos
‘Senay er be a era ol re no
‘losin Koes arse sera Wo i at
stants cree wos ga wos ae pears
{oro nary oo er ogid eran rd Pe
‘ean warner eats
iw tee nn et ate
“Teronan xp iby becca.
Treautysrnaiay ach par any
{eUs Suan he ou, Nowy eget 8
‘ere by bed ota ne 9 8
‘sn ge saa tao cig te 3
atte fl st oe gal ee Ate somes, US
gs aed ut cure seus be tod pai,
‘at Bretton Woods:
ne monroe ot gol sect as bt ot
Suh pea bao cf goer
sa garni te weary ves
‘rm ooo pom eran, why kaw ob
‘assem arora woe
ocr ced ores arn whe
tagraten On cams my US Tey Saney
Mopmnrai vescragesvniescustin datigcte
‘Sion vssdtr ectenerdustaton Ascond con
Son ody Logon eschge the crea
{tavern aheanupsnenousonong em
‘sen a dsr Accra ae Taner
fan caren th tr ood Ana. Te py
(Steed ectange ae tmos ous py
‘org nates atin cg an cet rere
Sateen tr saat ect cere
sci erat bnoay ngewe ator
{Snanergurerer omeeprt rants era roe
‘Stave, Om por rourg ton moran
‘ish ant ay rm Ut Se esa
‘et wok! ora as nrc are
aLcompetiive rade policy. but acureney became on weak fonda devatantion of op
to 10% wav allowed without formal approval bythe (MP. Larger devaluation eguted IME
approval. This bare known athe gol.exchange senda
“The Special Drawing igh (SDR) san aeretional reserve asset rested by the IMF
ti time to supplement existing foreign exchange ener It serves a unit f acount
forthe IMP and ther international and regional erganiztions, and elo the bas gaint
hich some counties po the exchange rat for thei atrencies nitly defined ines of
‘ied quantity of, ta SDR iscurety the woighted average of our mejor curenccs
the US! dollar, eeu, the Japan yen, andthe Bish pound. The meght are updated
ry fv years by the IME. Individual countries old SDR i the form of deposits inthe
IMF. These holdings are pare of each couney’s international monetary reserve, lone th
ical hodings ogo foreign exchange, andi reserve position a the IME. Members may
‘eile transaction among themselves by tansletng SDR
Fixed Exchange Rates, 1945-1973
The cuteny arrangement nogodiated at Bretton Woods and monitored bythe IMF worked
{sy wel diving the post-World Wa Il period of ecastuction and vaped growth in world
trade However, widely diverging national monetary and fel pois, iferental ates of
inflation, and various unexpected external shocks eventually resid inthe systems demi
TeeThe US, dolar was the min reserve erreney elé by cent baks aod was the key to the
snebof exchange rte flues. Unontunatey the United Stites am persistent and rong
Usfictsin abalone of payments A hear capital cutiow of dolar ma required Yo inane
ee defi and to mect the growing demand fr dolars from investors and businesses.
Fventally the heany overhang of dollars eld by foreigners rented ps ack of confidence
nthe sliy of the United States fo met tcomtment to conver dost gl
“This Ick of confidence forced Present Richi Nion to sspendoficil purchases or
sales of gold bythe US Treasury on Asp 15,1971 ater the ted States sfres out
Tow of rougiy one-third of oil god reserves inthe firs seven months ofthe yest
Exchange rates of most ofthe leading trading countries were alle to leat in relation To
ine do and ths noes elation to gol A year anda hal Ite, the US. dolar once
spun came under tack, tery frcng second devaluation on February 12,1873 this
tine by 1% to $12.22 per une of god By late Pebrary 197, fxed-ate stem 20 lon
fe apeared feasible given the spectativ Now of currencies. The mor foreign exchange
‘kets were actualy closed for several wees in March 1973. "Vhen they reopened, most
Cutencies wee allowed to float to evel eterined by market ores, Pa Values wee let
Cnchanged The dollar Hated downward am sverage of another 1% by Tune 97S,
“The Floating Era of Eclectic Arrangements, 1973-1987
Sine March 173, exchange rates have Become much mor vole and less predictable than
they were during the vfned” exchange rate period, when changes ocurred nfequenty
Ett 22 irtates the wide swing exhibited bythe IMF nominal exchange rate dex
Ine US dot since 197, Clesy voit as teed for iscustey mewn sie 173
“we IMs Exchange Rate index ofthe Dal
fae
*saman \ 4
am —— \
a \/EEE, Woe Crecy evens sari-tors
sr 180
va 8
CHAPTER. Thelronstons! Mensa Setar
iit 33 summarizes the key events and external shocks that hve affected currency
‘ales singe Mare 1978-The most inportaa shocks in recent years ave been the European
‘Monetary System (EMS) retrucuring in 1992 and 199; the emerging market currency ches
Including that of Mexico in 194, Thnland (anda number of ether Asan currencies 0197,
sree
areca aera
ys sows
Prcstaoanet
6 ket
met
cn dns be. poe wo sierra pda ot 900b/ US
Tray os nat oot
Geupa Tn eae carpanen wey USS SS of oe
‘roarurnay oun wa scaeh sats
neki ain oer US, ang rte naan oA 2D fp
Fc area og ated lt: pci ene ove
‘aut rater oy tage rae rey wo ea Pai en
‘agen rar See
Feat a conrad ay arg US dan yr 0 by
npn of ens cri urn OPO gs aan ata
gunobginewarspen clon toms sole se saan gak hat
USSrconws sae re song
Memon nearing ig etre
srony she guds rtd wes
Cre shneatn ese nero as tin wo ng
US "thtncame commeapecann ave sd
‘To Euspuan Money Sar 03) a ce abla copra mare
‘i sats ontopargranta ih Sep Se: Gey Ba)
ode tn nan eo stn cud wet tr
‘Sortprice en! Sonos
eto ners Uy ty 9188 alt rte mar cn
‘Ses rts ats pera be i a
BAUS, die a mast rar nate rg aS
(Gan a Tenant no te Pace a Ne Yok og
Spee apeen core persue wacom ra ete
Sno eee
(Gig skin a ey “anys ky oan
‘ona gonna na es
Eegnm ion corn ey liad cama ashe
‘onruecau cry towel tetas tase se! em re
{ude ar cones 0 wear copes yo eacos ICDS
European Wont hh EM, cnn oth Cup Cr Bark
‘pias ania ayTholreomstenal rian System CHAPTEF
“Wea Garey Evers TTI-BAT
‘eecanree aed Gla pty, ps ar Ps Pass wi cep
Russian 199 and Bri in 1999 the inte dution of he euro in 19% and he currency crises
and changes in Argentina and Venezuelan 200
‘Tho Emerging Era, 1997-Presont
The post Asn Chis of 97 pernghae sen the grt in both read and depth of mei
rmaet economies and cortencies We ma en p being proven wrong on this cous, bu the
Final sion of ths chapter argues tat the global monetary stem already more than 8
dtcade into the embracemento numberof major emerging market currencies beaming(CHAPTER'S Thlnemstonl Menta Sys
IMF Classification of Currency Regimes
“The lal monetary system -sfthere indoedasngla“sysem”—isaneocticcombiaation
‘tetchange rte rfimes and arangements Although there so singe govering body, the
Ternatioosl Monetary Fund (ME) ha t east played the role of own cre snce Work!
‘Wat Il We present is curent lasiation system of errency regimes ber,
Brief Classification History
The IMF was for many years the contra clearinghouse for exchange rat clasifistions.
“Member stats submited tei exhange rate police tothe IMF, and those submaions were
{he ba ors eateorization of exchange rate repmes. However, ha al changed in 197
1998 with the Asan Financial Cri One ofthe lar ouoees ofthat rl was tha what
‘many counties chimed as thi egne structure, he de reste, difred dramaialy
from wha they praceed during the cis, thir de fastens
Beginning 199 the IMF adopted practic ofa longer electing regime clasietion
submissions fom member sates, ut confining its eine csiieatios an Yepors to analy
performed in-house Ava global isituion which in rinepeapolial, the IMF's anaes
today focused on clastying currencies onthe basis ofan ex pox analysis of how the
currency value was based inthe rosea pes, one which focuses on observed behave not
‘on offical government poly pronouncements
‘The IMF's 2008 defacto System
The IMF's methodology of lsiying exchange rate regimes today, in eet since January
2008s peesentein Feit 38 Tiss On etl ooerved bahar, de act esl, as
‘ot te ofl poi salement ofthe respective governments de ure cassiation? The
‘asfetion proersbepne withthe determination of whether the exchange rate ofthe
County's currency s dominated by markets o y lial action. Although the classifeation
System sat challenging, hoe at our basi entepoics
‘Catogory 1: Hara Paps These countries have given up their own soversany over monetary
pobey. This eatogry clude countries that Rave adopted other county currencies (o>
‘Ziebabwe's adoption af the US. dollar, doarzaton) and countries wlzing 4 cureney
Doar sractre ich nis monary expansion Io the accumulation a foreign exchange
Category 2: Soft Pays. This general category i colloquially refered toa ised exchange
‘aus The ive subcategories of sf pee epimes ae dlferemtiated onthe basis of what the
Srtency is ted to, whether tht fi llowe to change and founder wh conditions
‘what ype. magnitude, and frequencies of inervention ae allomedhed nd the Seow of
arlane bout the fed rat
Category 5: Floating Avrangements. Curences tht are predominantly market-driven
se farther subdivided into fe flming, valves determined by open market frees without
Bovernmentlinfience or iatervention, and snl floating o flog wth inervrion where
{ovoramentocasoaly does nerene the marktin pur ofsome rats pos or objects.
“Ri me nti ign ma Rn srg chee
‘Romi eye on Aner, Manan nd aps Mant epee
rh Noche yom psa an et eas ee esCSUISIIRIEY 1F Exchonae Fat Ginssientons
insane Seip genne Seer cnn
‘eso naan hes ty rug orc
| See Rovebacuscay saved ven acmewear
| peng treonrececs
| Seecee mgs oee comes
| Roanniowad omistcecnoragresmmbemsenns
i cee: ae, ay en re os.COHAPTES|9. Teltemstenal Meet Stan
Category Rosidual As one would suspect this ete gory lnlude all exchange rte
‘rangsmentsthat donot cet the crea ofthe peso thes categories County stem
emonsrating frequent shits in policy ypiely make wpthe bulk of ts categoy,
‘A Global Eclectic
apie the IMF attempt to lend ioe to regime casistios the global monetary system
{odayisindea glo eter any sense ofthe ter. As Cher 6 wl describe deta,
the current global markt in currency donna by two major cstenis the U.S dat
and the European euro, and afer that, multitude ofaytems, arangemens cuceny te
nd zones,
‘The caro tel san example ofa gly tte system ovine a ingle currency for is
member countries, However, te euro selfs a indcpenseatlyHotig aroncy anna ll
ter curencics Other examples af riled exchange reginesinlude Feandbn, Panera,
and Zines which use the US. dia as thar fia curren the Cee can Frog
(CFA) zone, in which counts such as Maly, Nger, Senegal, Cameroon, and Chad aston
bers use a ingle common eurene (ie fans ed wo the eo) andthe Eater Carbon
CGureney Union (ECCU, att ofall counties hat ses common eureny, the Earn
‘Canbean dll
[At the other extreme ae counses with independent floating currencies. Thess include
‘any ofthe most deycloped counties, sch as Jpn, the United Stes the United Kingdom,
Canada, Australia, New Zealand, Sede, and Switzerland. However, ths catego aos
Inc umber of unmilingpartipmts~ereying markt coune a tad te epnacs
fixe rates ut were forced bythe markciplace toe them fot Among tse ae Keven th
Plilppines, Bra Indonesia, Mesio, nd Than.
esimportant wo note hat only the ast ator, ncudng roughly half ofthe 188