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International Monetary System With Special Focus On China Japan Exchange Rate Determination

Group members Bawa Suneja Neha Chhabra Rajpal Singh Shruti bansal

HISTORY OF INTERNATIONAL MONETARY SYSTEM


The International monetary System establishes the rules by which countries value and exchange their currencies It also provides a mechanism for correcting imbalances between countries international payments and receipts.

The history of monetary system started when in ancient time (17th century B.C.) tribes & citystates of India, Babylon & Phoenicia used gold and silver as medium of exchange in trade.

THE GOLD STANDARD


MEANING: Buying and selling of paper currency in exchange for gold on the request of any individual of firm. FIRST ADOPTED BY UNITED KINGDOM IN 1821. It created a fixed exchange rate system because each country tied the value of its currency. DIFFICULTY Transacting in gold was expensive. Guarding it against theft. Insuring it against possible disasters.

For e.g. U.K. buys or sell 1 ounce of gold for 4.247 pounds sterling (establishing official value of pound sterling in terms of gold) & Unites states agreed to buy or sell an ounce of gold to a par value of $ 20.67 pound sterling 4.247 = 1 ounce of gold = $ 20.67 This implied a fixed exchange rate between the pound & dollar; 1 pound sterling = $ 4.247.

STERLING BASED GOLD STANDARD


From 1821 until the end of 1918, the most important currency in international commerce was the British pound Sterling because of united kingdom large territory due to dominant economic and military power.

THE COLLAPSE OF GOLD STANDARD


World war 1: With the outbreak of war, normal commercial transactions between the allies (France, Russia & U.K) and the central powers (Austria-Hungary, Germany & the ottoman Empire) ceased. The economic pressures of war caused country after country to pledges to buy or sell gold at their currencies par value.

Post War Conferences & Readaptation Of Gold Standard


After war, conferences at Brussels (1920) Genoa (1992) yielded genera agreements among the economic powers to return to the pre-war gold standard. Most countries included united states, the U.K, the France, readopted the gold standard in 1920s despite the high level of inflation, unemployment and political instability that were racking Europe.

Cont..
Implementation of floating rate system by bank of England. Competitive devaluation of currencies & increased tariff rate. Effect of beggar-thy-neighbor policies ( world war -2)

THE BRETTON WOODS ERA


Post war situation Breton woods conference A. Agreements of conferees to renew the gold standard on modified basis B. Agreement to create two new international organizations to assist a) International bank for reconstruction and development b) International monetary fund

International Bank For Reconstruction And Development


It is the official name of the world bank. Established in 1945 Initial goal was to help finance reconstruction of the war torn European economies & completed this task by the mid 1950s. Then, bank adopted new mission i.e. to build the economies of the worlds developing countries.

As the mission expanded over, the world bank created three official organizations
a. International development association (IDA)provides soft loans. b. International finance corporation (IFC)promotes private sector development. c. Multilateral investment guarantee agency (MIGA)- provides political risk insurance.

International monetary fund


Objectives area. To promote international monetary cooperation. b. To facilitate the expansion and balance growth of international trade. c. To promote exchange stability d. To assist in establishment of a multilateral system payments.

A DOLLAR BASED GOLD STANDARD BRETTON WOOD SYSTEM AS ADJUSTABLE PEG

THE END OF BRETTON WOODS SYSTEM


Shortcoming of dollar based gold standard under Bretton woods system & triffin paradox Agreement to create special drawing rights (SDRs) Outcome of creating SDRs Official ending of bretton woods system

POST BRETTON WOODS SYSTEM & THE FLOATING RATE ERA


After president speech Nixons speech, most foreign currencies began to float ,their values are determined by demand and supply in foreign exchange market.

Exchange Rate Systems


Fixed exchange rate system. Floating exchange rate system.
A fixed exchange-rate system (also known as pegged exchange rate system) - in which governments try to keep the value of their currencies constant against one another. A countrys government decides the worth of its currency in terms of either a fixed weight of gold, a fixed amount of another currency or a basket of other currencies.

CONT
A floating currency is one where targets other than the exchange rate itself are used to administer monetary policy.

Focus On Japan & China Exchange Rate Determination

The Future Of The International Currency System And Chinas RMB


The global financial crisis could mark the beginning of the end for the US dollars dominance over the global economy. The first scenario is continuation of the US dollar as the dominant global currency. The second scenario involves the emergence of a multi-global currency system. A third scenario is creation of a supranational international currency.

A New Reserve Currency To Challenge The Dollar


Japan and China will promote direct trading of the yen and Yuan without using dollars and will encourage the development of a market for companies involved in the exchanges. China is Japans largest trading partner. Japan will also start in 2012 buying Chinese debts. Iran and China signed two agreements on expansion of trade ties and joint investments. These trades too will not be settled in Dollars or in Euros.

Currency system is 'product of past'


International currency system dominated by the US dollar is a "product of the past". "China has made important contribution to the world economy in terms of total economic output and trade, and the RMB has played a role in the world economic development," he said. "But making the RMB an international currency will be a fairly long process."

Japan, China bypass US in currency trade By Kosuke Takahashi


By skipping the dollar in transactions, the region's two biggest economies intend to reduce their dependence on dollar risk and US monetary authorities' influence on the Asian economy Internationalization of the Yuan For China, this new trading is a step in its moves to internationalize the Yuan, accelerating the currency's wider use

China, Japan Start Direct Currency Trade


The move means the Japanese Yen becomes the most important foreign currency to directly trade with the Yuan after the US dollar. the yen-yuan direct exchange system will help businesses in both China and Japan because it will reduce the risks associated with exchange rate fluctuations in the dollar and will cut transaction costs for companies...thats because there's no need to convert to an intermediary in between which was the U.S. dollar.

Cont.
The step eliminates the US dollars monopoly position to set the exchange rate between the two currencies its an important move towards the internationalization of Chinas yuan currency Yuan-Yen trading is due to take place at the Tokyo and Shanghai exchanges.

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