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International Monetary Systems
International Monetary Systems
Table of Contents
International monetary systems ........................................... 2 The gold standard ................................................................. 2 The gold exchange standard (1870-1914) ........................... 3 Advantages ....................................................................... 3 Disadvantages................................................................... 4 Bretton Woods system .......................................................... 5 Fixed exchange rate .............................................................. 6 Floating Exchange Rate ........................................................ 6 International Monetary Fund ............................................... 7 Role of IMF ........................................................................... 8
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Similarly, the gold exchange standard typically involves the circulation of only coins made of silver or other metals, but where the authorities guarantee a fixed exchange rate with another country that is on the gold standard. This creates a de facto gold standard, in that the value of the silver coins has a fixed external value in terms of gold that is independent of the inherent silver value. Finally, the gold bullion standard is a system in which gold coins do not circulate, but in which the authorities have agreed to sell gold bullion on demand at a fixed price in exchange for the circulating currency. The gold specie standard was not designed, but rather arose out of a general acceptance that gold was useful as a universal currency. For these reasons, it existed not just in modern states, but in some of the great empires of earlier times. One example is the Byzantine Empire, which used a gold coin known as the Byzant. But with the ending of the Byzantine Empire, the European world tended to see silver, rather than gold, as the currency of choice, and, in doing so, created the silver standard. An example is the silver pennies that became the staple coin of Britain around the time of King Offa in the year 796 AD. The Spanish discovery of the great silver deposits at Potos and in Mexico in the 16th century led to an international silver standard in conjunction with the famous pieces of eight, important until the nineteenth century. In modern times the British West Indies was one of the first regions to adopt a gold specie standard. Following Queen Anne's proclamation of 1704, the British West Indies gold standard was a de facto gold standard based on the Spanish gold doubloon coin. In the year 1717, master of the Royal Mint Sir Isaac Page 2 of 8
Australia and New Zealand adopted the British gold standard, as did the British West Indies, while Newfoundland was the only British Empire territory to introduce its own gold coin as a standard. Royal Mint branches were established in Sydney, New South Wales, Melbourne, Victoria, and Perth, Western Australia for the purpose of minting gold sovereigns from Australia's rich gold deposits
Disadvantages Gold prices (US$ per ounce) from 1968 to 2006, in nominal US$ and inflation adjusted US$.The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2).] Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications. However, this is specifically a disadvantage of return to the gold standard and not the efficacy of the gold standard itself. Some gold standard advocates consider this to be both acceptable and necessary The amount of such base currency (M0) is only about one tenth as much as the figure (M2) listed above. Deflation rewards savers and punishes debtors. Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. Lenders become wealthier, but may choose to save some of their additional wealth rather than spending it all. The overall amount of expenditure is therefore likely to fall. Deflation also prevents a central bank of its ability to stimulate spending. However in practice it has always been possible for governments to control deflation by leaving the gold standard or by artificial expenditure. Mainstream economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns. Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession. Such reason is often employed to partially blame the gold standard for the Great Depression, citing that the Federal Reserve couldn't expand credit enough to offset the deflationary forces at work in the market. Opponents of this viewpoint have argued that gold stocks were available to the Federal Reserve for credit expansion in the early 1930s, but Fed operatives failed to utilize them. James Hamilton contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak, although others contend that this very threat Page 4 of 8
On August 15, 1971, the United States unilaterally terminated convertibility of the dollar to gold. As a result, "The Bretton Woods system officially ended and the dollar became fully 'fiat currency,' backed by nothing but the promise of the federal government." This action, referred to as the Nixon shock, created the situation in which the United States dollar became the sole backing of currencies and a reserve currency for the member states.
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A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to. This makes trade and investments between the two countries easier and more predictable, and is especially useful for small economies where external trade forms a large part of their GDP.
It can also be used as a means to control inflation. However, as the reference value rises and falls, so does the currency pegged to it. In addition, according to the MundellFleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.
There are no major economic players that use a fixed exchange rate (except the countries using the euro and the Chinese yuan). The currencies of the countries that now use the euro are still existing (e.g. for old bonds). The rates of these currencies are fixed with respect to the euro and to each other. The most recent such country to discontinue their fixed exchange rate was the People's Republic of China, which did so in July 2005. However, as of September 2010, the fixed-exchange rate of the Chinese yuan has already increased 1.5% in the last 3 months.
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Role of IMF
The primary mission of the IMF is to provide financial assistance to countries that experience serious financial and economic difficulties using funds deposited with the IMF from the institution's 187 member countries. Member states with balance of payments problems, which often arise from these difficulties, may request loans to help fill gaps between what countries earn and/or are able to borrow from other official lenders and what countries must spend to operate, including to cover the cost of importing basic goods and services. In return, countries are usually required to launch certain reforms, which have often been dubbed the "Washington Consensus". These reforms are thought to be beneficial to countries with fixed exchange rate policies that may engage in fiscal, monetary, and political practices which may lead to the crisis itself. For example, nations with severe budget deficits, rampant inflation, strict price controls, or significantly over-valued or under-valued currencies run the risk of facing balance of payment crises. Thus, the structural adjustment programs are at least ostensibly intended to ensure that the IMF is actually helping to prevent financial crises rather than merely funding financial recklessness.Following the recent economic crisis, the IMF has attempted to help emerging economies deal with large capital outflows.
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