Download International monetary system in the second half of XXth century and

International monetary system in the
second half of XXth century and its
transformations
second part of the lecture
Theoretical backgrounds of International Banking
by
Lubomir Civin
Transformations of international monetary
system in the second half of XXth century
•
After WW2 the attempts to eliminate previous
problems and stabilize world economy appear
•
Crucial aspect of those attempts was elimination
of repeating of negative consequences of Big
Depression and follow up developments
•
The new layout of international monetary
system after WW2 can be split in two phases:
•
•
Bretton-woods monetary system
Kingston (Jamaica) monetary system
Bretton-Woods monetary system
• already during WW2
in July 1944 the
international monetary conference
had been convened in USA
• The conference has established the
final outlook of the international
monetary system and other forms of
international economic relations
Bretton-Woods monetary system
•
The conference was held from 1-22 July 1944,
when the agreements were signed to set up
the International Bank for Reconstruction and
Development (IBRD), the General Agreement
on Tariffs and Trade (GATT), and the
International Monetary Fund (IMF).
•
As a crucial result of the conference, the
Bretton Woods system of exchange rate
management was set up, which remained in
place until the early 1970s.
Bretton-Woods monetary system
Two approaches to the new system:
John Maynard Keynes - UK
Harry Dexter White - USA
• The original Bretton Woods plans called for a world
currency.
• The British plan identified with Keynes called for an
“International Clearing Union with bancor,
• The American plan identified with Harry Dexter White
proposed a world currency called unitas,
• But both plans were refused
Bretton-Woods monetary system
• Finally the plan backed by USA won and the system
we know as Bretton Woods monetary system had
been built on slightly modified principles of H.D.White.
• The system was built on the pre-requisites suitable to
US government at the end of WW2 i.e. strong position
of USD, enormous gold stocks, active trade balance of
USA and high demand for US goods and capital
investments from abroad.
Bretton-Woods monetary system
Keynes' proposals was proposing to establish a
world reserve currency (called "bancor")
administered by a central bank vested with the
possibility of creating money and with the
authority to take actions on a much larger scale.
In case of balance of payments imbalances,
proposal recommended that both debtors and
creditors should change their policies.
Countries with payment surpluses should increase
their imports from the deficit countries and thereby
create a foreign trade equilibrium. Thus, Keynes
Bretton-Woods monetary system
Basic principles (I)
•
Creation of IMF and IBRD as central institutions
of the system providing loans to its members for
balances of payment settlement and economic
recovery
•
All member countries were required to subscribe
to the IMF's and IBRD’s capital
Bretton-Woods monetary system
Basic principles (II)
•
Key global reserve currency became USD,
directly convertible to gold at fixed prices , other
currencies indirectly - modified gold exchange
standard
•
fixed currencies parity to USD in fixed rates ( a
“peg” ) with maximum deviation +/- 1 % from parity
Bretton-Woods monetary system
Basic principles (III)
•
adaptability of the system giving a
chance to modify exchange rate of
member countries currencies with approval
of IMF (except USD), governments had the
power to revise them by up to 10%.
•
Currencies were required to be
convertible for trade related and other
current account transactions on balance of
payments.
Bretton-Woods monetary system
Changes in post war world economy
development have changed pre-requisites of the
system and led to its disintegration after some
time. Three main problems of the system have
emerged during follow-up period:
•
•
•
problem of liquidity
problem of confidence
problem of adaptability
Bretton-Woods monetary system
•
problem of liquidity - relation between volume
of international trade and stocks of gold
•
problem of confidence - low confidence of USD
convertability into gold in conditions of small
growth of golden reserves under fixed price
between USD/gold
•
problem of adaptability - absence of efficient
mechanism for disequillibriums elimination higher focus of countries on solving of internal
problems rather than external equillibrium
Bretton-Woods monetary system
As the consequence of changes in the world economy
during 60’s and 70’s BW-System had been getting
gradually to contradiction with its set up based on
asymmetry (dominant position of USA). As the result the
system had been generating:
- deficits
of balance of payments of USA
- tendencies to inflation
- growing surplus of USD in circulation out of
USA not being covered by their gold reserves
- growing currency speculations on money
markets
Bretton-Woods monetary system
• U.S. had 70% of world’s monetary gold
stock in 1948.
• Between 1948 and 1971, it sold 400
million ounces mainly to Europe at $35
an ounce.
• In 1971, President Nixon took the dollar
off gold, in order to keep the remaining
30%.
Bretton-Woods monetary system
•
in 1968 double prices of gold had been
implemented
•
de facto it was unofficial devaluation of USD
(which was necessary due to internal and
external problems of US economy)
•
subsequently the process of decline of gold in
international monetary system started
•
in 1971 the process culminated by suspension
of external convertibility of USD into gold what
led to final abolishment of golden standard
Bretton-Woods monetary system
In Decembre 1971 on the monetary
conference in Washington important
modifications of BW system occurred :
•
•
•
official devaluation of USD
•
increase of acceptable forex deviations to +/- 2,25%
(to USD) a 4,5%between other currencies
suspension of convertibility of USD into gold
transition of exchange rates of IMF member’s
currencies to official exchange rates based on SRDs
Transition period form BW to new system
dollar devaluation arranged at the
• The
Smithsonian in the middle of December
•
•
1971 raised the price of gold to $38 an
ounce.
Within two weeks OPEC raised the
price of oil by a small amount to signal
that oil prices would react to a
depreciated dollar.
This was more than two years before
the quadrupling of oil prices in 1974.
Kingston monetary system
- transitional period has been rounded off by
IMF and WB conference in Kingston (Jamaica)
which has officially defined the new system
replacing Bretton Woods system
- Legally the change has been implemented
through a change of IMF Articles of Association
- new system has been introduced since
1.4.1978
Kingston monetary system
• Abandoning of official price of gold
• gold is still traded by private subjects as
well as by governmental institutions , but
for market price
• gold price is influenced by developments
on global financial markets and are
sensitive to any marks of crisis
Kingston monetary system
• Abandoning of official price of gold
• gold is still traded by private subjects as
well as by governmental institutions , but
for market price
• gold price is influenced by developments
on global financial markets and are
sensitive to any marks of crisis
Transformations of international monetary
system in the second half of XXth century
Gold price (1960-2011)
Kingston monetary system
Limitation of position of gold as monetary
reserve metal
•
process of demonetization of gold
represented discarding of gold from official
forex reserves and some transactions of IMF
•
but gold is still important part of foreign
exchange reserves of many countries
Transformations of international monetary
system in the second half of XXth century
(official gold reserves holdings in 2010)
Oficial gold reserves of countries per capita to
31.1.2011 (in bill. USD)
•
Selected indicators of international
monetary system
International monetary system and its
chandes in XXI. century
Forex and gold reserves of counries after deduction of external debt
in 2010
Kingston monetary system
Floating
•
implementation of floating exchange rates
allowed to implement an autonomy of monetary
politics and sovereignty of countries
•
increased symetry in international monetary
system and reduced dominant position of USD
•
brought stabilization effect to economies reducing
internal and external imbalances, but the
problems were not solved definitely
Kingston monetary system
Floating
A floating exchange rate or fluctuating exchange rate is
a type of exchange rate regime wherein a currency's
value is allowed to fluctuate according to the foreign
exchange market. A currency that uses a floating
exchange rate is known as a floating currency.
The basic types are a floating exchange rate, where the market
dictates movements in the exchange rate; a pegged float, where a
central bank keeps the rate from deviating too far from a target band or
value; and a fixed exchange rate, which ties the currency to another
currency, mostly more widespread currencies such as the U.S. dollar or
the euro or a basket of currencies.
Different types of exchange rate regimes
in the world
Kingston monetary system
Disadvantages of floating
•Announced exchange rate may not coincide with the market equilibrium
exchange rate, thus leading to excess demand or excess supply
•The central bank needs to hold stocks of both foreign and domestic
currencies at all times in order to adjust and maintain exchange rates and
absorb the excess demand or supply
•Fixed exchange rate does not allow for automatic correction of imbalances
in the nation's balance of payments since the currency cannot appreciate/
depreciate as dictated by the market
•Floating can lead to loose monetary discipline of governments , as it allows
to implement any kind of economic policy
Floating (10/2010 - 10/2011)
6.10.2011
6.10.2010
Floating (změna oproti 6.10.2011)
6.7.2011
6.4.2011
Special Drawing Rights
Implementation of “Special drawing rights”
as international reserve currency
•
SDRs have been implemented in 1970 as
optional currency to USD
•
SDRs don’t exist in natural form, they exist
on IMF accounts only and are allocated to
particular countries for purchase of
convertible currencies
•
Their share on global forex reserve assets is
minimal, as of January 2011, SDRs
represented less than 4% of it.
Special Drawing Rights
•
Special Drawing Rights (SDRs) are
supplementary foreign exchange reserve
assets defined and maintained by the
International Monetary Fund (IMF).
•
Not a currency, SDRs instead represent a
claim to currency held by IMF member
countries for which they may be exchanged
Special Drawing Rights
•
SDR s are a specific type of financial assets
(sometimes named as “paper gold”), representing:
‣
one of the tools of international liquidity solving
its lack especially in crisis periods,
‣
element of exchange rates stabilization, a few
countries peg their currencies to SDRs
‣
financial resource of IMF member countries and
their mutual financial transactions
‣
a unit of account by some international
organizations including the IMF, WB, to be used
also for evidence and statistics of their
transactions
Special Drawing Rights
SDRs Value
‣
originally (in 1967) based on gold (0,888671 g, the same as
USD)
‣
later on (in 1974) new principle of “weighted currency
basket” has been introduced:
‣
‣
‣
‣
at the beginning 16 currencies (having world export share higher
than 1%)
‣
wights in currency baskets are revised in 5 years periods
since 1981 5 currencies only (USD, DEM,FFR, JPY, GBP)
since 2006 4 currencies only (USD, EUR ,JPY ,GBP)
re-calcultation of SDR value is done on daily basis based on daily
exchange rates
SDRs Composition
SDR as monetary basket
Emissions of SDR
Special Drawing Rights are allocated to member countries
by the IMF. Allocations are not made on a regular basis and
have only occurred on several occasions. The first round
took place due to the possibility of an insufficient amount of
US dollars as international liquidity. Extraordinary
circumstances have, likewise, led to the other SDR
allocations.
Allocations of SDRs:
Transformations of international monetary
system in the second half of XXth century
Development tendencies of Kingstone monetary system
at the end of XX.century and at the beginning of
XXI.century :
•
growing influence of European Union and
regionalism within Eurozone
•
growing impact of BRIC within globalization
processes
•
•
high volatility of currency markets
•
•
repeating financial crises within the system
long term loss of position of USD in the international
monetary system
instability of the system and search for new option
and tools of its set up
Phases of the International Monetary Systems over Two Centuries
Date
System
Reserve Asset
Leaders
1803-1873
Bimetallism
Gold & Silver
France, Britain.
1873-1914
Gold Standard
Gold and £
Britain,
1915-1924
Anchored $ St.
Gold and $
U.S., Britain, France
1924-1933
Gold Standard
Gold,$ and £
US, UK, France
1934-1971
Anchored $ St.
Gold and $
U.S., G-10, Britain
1971-1973
Dollar Standard
$
U.S.
1973-1985
Flex. Ex. Rates
$, DM, £
U.S., Germany, Japan
1985-1999
Man. Ex. Rates
$, DM,
U.S., G-5, IMF
1999-2011
Dollar and Euro
$, €, ¥,
U.S. EMU, IMF
2011-?
Currency Areas
$. €, ¥, £, C¥,
US,, EMU, China
Perspectives of
International
Monetary System
Seven crucial problems of
International Monetary System
•
•
•
•
•
•
•
Lack of an International Unit of Account
Lack of an Anchor for Currency Stabilization
Wild Swings of Major Exchange Rates
Wild Swings of of Raw Material Prices
Reserves Dominated by Risky Dollar Assets
Open-Ended Levels of Total Reserves
Incoherent Leadership
6=1
The six problems are all related to
the change in the role of the dollar
in the international monetary
system.
Perspectives of International
Monetary System
•
New proposals and open issues of the transformation of
existing monetary system are based on some theoretical
as well as practical discussions focused on solution of
actual problems of global finance. Most important
positions are as follows:
•
•
•
•
•
Robert Triffin (1960)
Richard N.Cooper (1985)
Prof. Robert Mundell (2002)
Joseph Eugen Stiglitz (2006)
Zhu Xiaochunan (2009)
Robert Triffin (1911-1993)
was a Belgian economist best known for his critique of the Bretton Woods system
of fixed currency exchange rates. Studied and taught on Harvard university, then
held positions in the US Federal Reserve System (1942–1946), the International
Monetary Fund (1946–1948), and the Organisation for European Economic Cooperation (1948–1951), now the OECD. In 1951 he became a professor of
economics at Yale University.
He reclaimed his Belgian citizenship in 1977 and returned to reside in Europe.
There he was a staunch supporter of European integration and helped to develop
the European Monetary System and supported the concept of a central bank,
which developed as the European Central Bank.
The Triffin dilemma is a theory that when a national currency also serves as an
international reserve currency, there could be conflicts of interest between shortterm domestic and long-term international economic objectives. He pointed out
that the country whose currency foreign nations wish to hold (the global reserve
currency) must be willing to supply the world with an extra supply of its currency to
fulfill world demand for this 'reserve' currency and thus cause a trade deficit.
Richard N.Cooper
is an American economist, policy adviser, and academic.
Cooper was an assistant professor at Yale University from 1963 to 1966 and
was Professor of International Economics from 1966 to 1977. Cooper served
on the Council of Economic Advisers as the senior staff economist. He also
served as Deputy Assistant Secretary of State for International Monetary
Affairs in the United States Department of State, and the Under-Secretary of
State for Economic Affairs. In 1981, he became Professor of International
Economics at Harvard University. From 1990 to 1992, Cooper was the
chairman of the Federal Reserve Bank of Boston, Between 1995 to 1997, he
was the chairman of the National Intelligence Council.
His opinion is that in the period of globalization of communication,
transport, technology, trade, corporate strategy banking and investment,
national level of monetary system is insufficient.
Transition to single global currency is necessary for todays global
economy replacing USD in it according to Cooper.
Prof. Robert Mundell
Robert Mundell, is a Nobel Prize-winning Canadian economist.
Currently, Mundell is a professor of economics at Columbia University
and the Chinese University of Hong Kong.
He received the Nobel Memorial Prize in Economics in 1999 for his
pioneering work in monetary dynamics and optimum currency areas.
Mundell laid the groundwork for the introduction of the Euro through this
work and helped to start the movement known as supply-side economics.
Supporter of single global currency , bringing enormous effects for
international trade, thanks to unified pricing all over the world, decreasing of
costs and risks of exchange rates.
His arguments in favor of implementation of single reserve currency consist
of using single unit for quoting prices, common unit for denominating debts,
common rates of inflation for participating countries and common interests
on risk free assets and synchronization of global business cycle as the
result.
Joseph Eugene Stiglitz
•
An American economist and a professor at Columbia University. He is
a recipient of the Nobel Memorial Prize in Economic Sciences (2001) .
He is also the former Senior Vice President and Chief Economist of
the World Bank. He is known for his critical view of the management
of globalization, free-market economists (whom he calls "free market
fundamentalists") and some international institutions like the
International Monetary Fund and the World Bank.
•
Belongs to the theoretical school of “New Keynesians” supporting
state interventionism into economics through fiscal stimulus
•
Recommends adoption of SDRs as reserve currency by the
national central banks what could pave the way for single world
currency creation and implementation.
Zhu Xiaochunan
•
A Chinese economist, banker, reformist and bureaucrat. As governor
of the People's Bank of China since December 2002, he has been in
charge of the monetary policy of the People's Republic of China.
•
In a speech entitled Reform the International Monetary System in
2009 he came out in favour of Keynes's idea of a centrally managed
global reserve currency. He argued that it was unfortunate that part of
the reason for the Bretton Woods system breaking down was the
failure to adopt Keynes's Bancor.
•
Dr Zhou said that national currencies were unsuitable for use as
global reserve currencies as a result of the Triffin dilemma - the
difficulty faced by reserve currency issuers in trying to simultaneously
achieve their domestic monetary policy goals and meet other
countries' demand for reserve currency.
•
Dr Zhou proposed a gradual move towards increased used of IMF
Special Drawing Rights (SDRs) as a centrally managed global
reserve currency
Perspectives of International
Monetary System
Some open issues with SDR as single
global currency:
giving greater role to the SDR would require
significant investments by governments over an
extended period:
•
goverments have to create a liquid market in SDR (by issuing SDR
denominated bonds - who would be byuers? )
•
goverments have to create an SDR .based forex market (by
enabling IMF to act as market maker)
•
the IMF would have to be able to issue additional SDRs in
periodsof shortage
Characteristics of optional solution of
exchange and reserve systems
Perspectives of International
Monetary System
Future of international moentary system
•
•
•
The long-run goal is a global currency
Global economy needs a global currency
The problem is to devise a way to achieve it
Perspectives of International
Monetary System
•
USD will continue serve as a global reserve currency,
but its role will be declining
•
More probably euro will increase its role as a reserve
currency (under condition its actual problems will be
solved )
•
National currencies of emerging markets will play a
critical role in the future international monetary
system
•
Creation of multiple currencies systems will be
needed
•
Final goal is a single global currency but in longer
period of time
Questions
1. Give characteristics of basic models of metallic monetary
standards before WWII
2. Give a definition of the substance of Bretton Woods monetary
system
3. Provide with characteristics of developments of international
monetary system after the WWII and its transformation
4. Try to identify basic issues dealing with future of international
monetary system
Literature
International bank management / Dileep Mehta and
Hung-Gay Fung. - 1st ed.. - Malden (MA) : Blackwell,
2004. - xiv, 395 s. ISBN 978-1-4051-1128-7, sign. 24439
Managing in a global economy: demystifying
international macroeconomis / John E. Marthinsen. Mason (OH) : Thomson South-Western, 2008. - xxi, 746
s. ISBN 0-324-54536-3978-0-324-54536-4, sign. 25326
Capital market, globalization and economic
development / edited by Benton E. Gup. - New York
(NY) : Springer, 2005. - xv, 220 s. ISBN 0-387-24564-2,
sign. 25222