TOPIC 1.2 - History of International Monetary Systems Flashcards
International money should promote…
International trade and investment
International borrowing and lending
BOP adjustment to prevent disruption and crises
Types of trade…
Barter
Strict bilateral trade (two-way)
Multilateral trade (lots of trade partners)
Before the Gold Standard in the 16th and 17th century most nations operated under what monetary system?
Define the system and its problems.
Bimetallic Standard:
Currency is converted into either gold or silver and there is an official mint ratio between the two.
This standard was unstable due to it being based on two different metals.
Define the Gold Standard.
From 1880 - 1914,
Currencies were valued in terms of a gold equivalent or mint parity price.
Fixed ER regime
Three conditions to the Gold Standard…
1) Each member nation’s MS consisted of gold or paper money backed by gold
2) Each member nation defined the official price of gold in terms of its national currency and was prepared to buy and sell at that price.
3) Free export and import of gold were permitted by member nations
How did the BOP play into the Gold Standard?
In a BOP deficient country = falling prices lead to increasing exports
In a BOP surplus country = rising prices lead to reduced exports
Therefore EVENTUALLY restoring BOP equilibrium (Price specie flow mechanism)
However this only balanced in the Short Term
Two weaknesses of the Gold Standard
1) The global supply of Gold depended on mining, business cycles were affected by Gold Rushes, and Governments had no control over Monetary Policy.
2) Deficit countries are forced into recessions to achieve deflation which creates economic/social costs, instead of devaluing.
When was the interwar period and after the war what was the state of countries?
Between 1918 - 1939
Europe couldn’t go back to the Gold Standard due to inflation however the US was peachy and when the war ended they went back to the Gold Standard at the old ER.
When was the Gold Exchange Standard proposed and what did it include.
1922
Using Gold and Government bonds as international reserves
What happened in 1925 and in 1931 to the UK
1925 - UK went back to the Gold Standard even with their inflation
1931 - UK suspendes its ties to the Gold Standard
When did the US suspend its ties to the Gold Standard?
1933
Define the Gold Exchange Standard (Bretton Woods System)
1944 - 1973
started in New Hampshire
The USD was the key currency and $1 was defined as 1/35oz of Gold.
All currencies were linked to the USD and each other in a fixed ER system.
Adjustable Peg System and a country was allowed to devalue its currency.
Define the International Monetary Fund (IMF)
1944
44 founding members and allied countries.
They contributed a quota, depending on their economic size and importance in world trade.
One quarter was Gold and the rest was their national currency.
A member country has automatic borrowing rights however with conditionalities.
What is the Adjustment Problem?
Devaluation was seen as a failure, and revaluation would hurt growth and employment. So countries were unwilling to use the adjustment mechanism created.
What caused the end of Bretton Woods?
High US government spending in the 60’s (Korean War, Vietnam War) = BOP deficit.
Then a sharp increase in US deficit in 1970/71 led to speculative pressure.
1971 Nixon took the US$ off gold and imposed a 10% tariff on imports to force other currencies to be revalued.
In other words… The US overspent and their paper money wasn’t backed by gold reserves.
