final ppt international fiance

8/8/2019 Final Ppt International Fiance

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The International Monetary SystemThe International Monetary System

Arora Gaurav Singh

Mukesh Kumar

Rwechungura Seriaris

Amandeep Singh

Gurpreet Singh


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Introduction

The institutional arrangements that countries adopt

to govern exchange rates are known as the

international monetary system

When a country allows the foreign exchange market

to determine the relative value of a currency, a

floating exchange rate system exists

T

he systems can grow organically as the collectiveresult of numerous individual agreements between

international economic actors spread over several

decades


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Goals

In open economies, policymakers are motivated by

two goals:

Internal balance

It requires the full employment of a countrys

resources and domestic price level stability.

External balance

It is attained when a countrys current account is

neither so deeply in deficit nor so strongly in surplus.


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Gold Standard, 1870-1914

Origins of the Gold Standard

The gold standard had its origin in the use of gold

coins as a medium of exchange, unit of account, and

store of value. The Resumption Act (1819) marks the first adoption

of a true gold standard.

It simultaneously repealed long-standing restrictions

on the export of gold coins and bullion from Britain.

The U.S. Gold Standard Act of 1900 institutionalized

the dollar-gold link.


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Era of Gold Standard

The gold standard worked fairly well from the 1870s

until the start of World War I in 1914

During the war, many governments financed their

war expenditures by printing money, and in doing so,created inflation

People lost confidence in the system and started to

demand gold for their currency putting pressure on

countries' gold reserves, and forcing them to suspend

gold convertibility

By 1939, the gold standard was dead.


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The Interwar Years, 1918-1939

With the eruption of WWI in 1914, the gold

standard was suspended.

The interwar years were marked by severe economic

instability.

The reparation payments led to episodes of

hyperinflation in Europe.

The German Hyperinflation

Germanys price index rose from a level of 262 in

January 1919 to a level of 126,160,000,000,000 in

December 1923 (a factor of 481.5 billion).


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The Fleeting Return to Gold

1919

U.S. returned to gold

1922

A group of countries (Britain, France, Italy, and Japan)

agreed on a program calling for a general return to the

gold standard and cooperation among central banks

in attaining external and internal objectives.



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1925

Britain returned to the gold standard

1929

The Great Depression was followed by bank failuresthroughout the world.

1931

Britain was forced off gold when foreign holders of

pounds lost confidence in Britains commitment tomaintain its currencys value.



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International Economic Disintegration

Many countries suffered during the Great

Depression.

Major economic harm was done by restrictions oninternational trade and payments.

These beggar-thy-neighbor policies provoked

foreign retaliation and led to the disintegration of

the world economy.

All countries situations could have been bettered

through international cooperation

Bretton Woods agreement



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Industrial Production and Wholesale Price Index Changes,

1929-1935


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.

The Bretton Woods System & the IMF

International Monetary Fund (IMF)

In July 1944, 44 representing countries met in

Bretton Woods, New Hampshire to set up a system

of fixed exchange rates. All currencies had fixed exchange rates against the

U.S. dollar and an unvarying dollar price of gold

($35 an ounce).

It intended to provide lending to countries withcurrent account deficits.

It called for currency convertibility.


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Orgaisations Involved

The Bretton Woods agreement also established two

multinational institutions:

the International Monetary Fund (IMF) to maintain

order in the international monetary system

the World Bank to promote general economic

development .


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Goals and Structure of the IMF

The IMF agreement tried to incorporate sufficient

flexibility to allow countries to attain external

balance without sacrificing internal objectives orfixed exchange rates.

Two major features of the IMF Articles of Agreement

helped promote this flexibility in external

adjustment: IMF lending facilities

IMF conditionality is the name for the surveillance over the

policies of member counties who are heavy borrowers of

Fund resources.

and the International Monetary

Fund


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Convertibility

Convertible currency

A currency that may be freely exchanged for foreign

currencies. Example: The U.S. and Canadian dollars became convertible

in 1945. A Canadian resident who acquired U.S. dollars could

use them to make purchases in the U.S. or could sell them to

the Bank ofCanada.

The IMF articles called for convertibility on currentaccount transactions only.

The Bretton Woods System & the IMF


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The RoleOfThe World Bank

The World Bank is also called the International Bank forReconstruction and Development (IBRD)

There are two ways to borrow from the World Bank:

1. under the IBRD scheme, money is raised through bond salesin the international capital market

borrowers pay what the bank calls a market rate of interest -the bank's cost of funds plus a margin for expenses.

2. through the International Development Agency, an arm of

the bank created in 1960 IDA loans go only to the poorest countries


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The CollapseOfThe Fixed

Exchange Rate System

Bretton Woods worked well until the late 1960s.

It collapsed when huge increases in welfare

programs and the Vietnam War were financed by

increasing the money supply and causing significantinflation

Other countries increased the value of their

currencies relative to the dollar in response to

speculation the dollar would be devalued


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Collapse

However, because the system relied on an

economically well managed U.S., when the U.S.

began to print money, run high trade deficits, and

experience high inflation, the system was strainedto the breaking point

Slide 18-17Copyright 2003 Pearson Education, Inc.


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The Floating Exchange Rate Regime

In 1976, following the collapse of Bretton Woods,

IMF members formalized a new exchange rate system

at a meeting in Jamaica.

The rules that were agreed on then, are still in placetoday.


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The Jamaica Agreement

Under the Jamaican agreement:

floating rates were declared acceptable

gold was abandoned as a reserve asset

total annual IMF quotas - the amount member

countries contribute to the IMF - were increased to

$41 billion.


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Exchange Rates Since 1973

Since 1973, exchange rates have become more

volatile and less predictable than they were between

1945 and 1973.

Volatility has increased because of:

The 1971 oil crisis

The loss of confidence in the dollar that followed the

rise of U.S. inflation in 1977 and 1978

The 1979 oil crisis.


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The unexpected rise in the dollar between 1980 and

1985

The partial collapse of the European Monetary

System in 1992

The 1997 Asian currency crisis.


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Fixed Versus Floating Exchange

Rates

The merit of a fixed exchange rate versus a floating

exchange rate system continues to be debated

Many countries today are disappointed with the

floating exchange rate system.


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Special Drawing Right (SDR)

SDR (Special Drawings Rights) : this were created by

the IMF in 1969 as a type of reserve assets to

supplement international reserves of gold &national currencies for setting balance of payment

accounts.

SDR is the IMFs main reserve asset, & is held by

member-countries of the IMF as part of their

international reserves. A member may use their

special account to obtain needed foreign currency

from another member.

SDR


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VALUED

1. Japanese Yen

2. US Dollars

3. British Pounds

4. Euros


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CURRENT STATUSQO

Practice of FLOATING RATE EXCHANGE SYSTEM.

A floating-exchange rate system permits each

currency to find its own level of exchange, which

will change from time-to-time, as economicconditions change.

However many countries are still not comfortable.


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CURRENT STATUSQOOF IMF

It is an organization formed with a stated objective

of stabilizing international exchange rates and

facilitating development through the enforcement

of liberalising economic policies on other countriesas a condition for loans, restructuring or aid.

It also offers highly leveraged loans mainly

to poorer countries.


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SATUSQOOF IMF

Headquarters in Washington, D.C.

An organization of 187 countries (as of July 2010).

Facilitate international trade, promote high

employment and sustainable economic growth, and

reduce poverty.

With the exception ofCuba (left in 1964),

T

aiwan(expelled in 1980), North Korea AndorraMonaco Liechtenstein Tuvalu and Nauru, all UN

member states participate directly in the IMF.


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Member states are represented on a 24-member

Executive Board (five Executive Directors are

appointed by the five members with the largest

quotas, nineteen Executive Directors are elected bythe remaining members), and all members appoint

a Governor to the IMF's Board of Governors .


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THANK YOU.

final ppt international fiance

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