Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Currency War of 2009–11 wikipedia , lookup
Reserve currency wikipedia , lookup
Foreign exchange market wikipedia , lookup
Currency war wikipedia , lookup
Purchasing power parity wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Exchange rate wikipedia , lookup
Fixed exchange-rate system wikipedia , lookup
Currency intervention wikipedia , lookup
Prof. Dr. John JA Burke Recognise the Functions and Properties of Money Distinguish between Monetary and Non-Monetary Economic Systems List the benefits and drawbacks of the Gold Standard Money is used to buy goods and services Requires stability of value i.e., control over inflation Instability of currency leads to loss of confidence Panic: consumers purchase what they do not need Flight of capital by investors May take years to repair damage PROPERTIES Durability Portability Divisibility Standardised measure of value FUNCTIONS Traditional Definition in Economic Texts Form of Payment/Medium of Exchange [Means of Payment] Standard of Value [Store of Value] Zero inflation is goal Standard of account Unit of account Quote prices and debts in common unit Fiat Money Egypt as example Something [can be anything] becomes money by command Pharaoh decrees that white stones are money White stones lack intrinsic value; they derive value by command [fiat] Benefits: Enjoy faith and credit system of Egypt Used to buy goods and services Problem: No standardisation Anyone who found “white rocks” could claim to be wealthy Solution Back fiat money with something scarce and desirable Gold, Silver Products exchanged for products or services E.g., 4 chairs [Carpenter] for 4 pigs [farmer] Problems Lack of portability Lack of divisibility Lack of standardized measure of value Lack of durability Cost of care if Carpenter wants metal Waste of time to search for person willing to exchange metal for farm animals But note: barter is still used today effectively in some situations Currency [Fiat money] of most Nations convertible into Gold Rates of exchange between Nations are fixed against a specific price of gold John can turn $1 to the US Treasury in exchange for 1/20th of an ounce of Gold Ian can turn 1 pound Sterling Note to the British Treasury for ¼ ounce of Gold It follows that John can exchange $20 for I ounce of Gold; Ian can exchange 4 BPS notes for 1 ounce of Gold Therefore exchange rate between USD and BPS is $5 to 1£ Proponents argue that economies that adhere to the Gold standard enjoy low inflation. However, the fact remains that the gold standard does not have the flexibility governments and national economies require Argument persists to this day: Return to the Gold standard Gold standard kept exchange rates fixed Countries unable to control their money supplies Flow of gold determined the amount of money in an economy Production and discovery of gold, and international politics, affected monetary policy 1870 Gold production was low Money supply grew slowly Failure to keep pace with economic growth Result: deflation [Falling price levels] Devaluation occurs when a country formally lowers the fixed ratio between its money and gold US devalued the $ in 1934 to 1/35th of an ounce of Gold from 1/20th of an ounce of Gold Devaluation reflected depression economics In 1999 and 2009, RoK devalued the KZT against the $: Why? Gold was discovered in Alaska and South Africa Money supply and price levels grew quickly Result: Inflation until World War I Trade disruptions caused by World War I led to collapse of the Gold Standard Countries were unable to convert their currencies into Gold Recall assumption of fixed exchange rate between USD and £: 5-1 Suppose value of £ rises above 5$, and suppose American company wants to import British tea 100£ of tea costs $500 But if £ rises against USD, then the use of currency becomes costly Importer is better off trading in dollars for Gold and shipping Gold to London to pay for tea But this is impractical, risky, and burdensome Post-World War II Exchange Rate System Established a new economic order (Keynes and White were architects) Responsible for development of contemporary international banking models in US, Europe and Japan Three major institutions emerging were: IMF, WBG, and GATT; BIS already existed System, but not principles, brought to an end in 1971 when US went off gold standard Fixed Exchange Rate System, the value of which may occasionally be changed Famous Example: Bretton Woods 1945-1973 Countries agreed to use dollars and gold as foreign reserve currencies Each country fixed its exchange rate against the Dollar Every country had to hold dollar reserves and stand ready to exchange its own currency for dollars at the fixed exchange rate The price of Gold was fixed in Dollars Initial rate was 35$ per ounce Currencies were convertible against dollars or gold that together formed foreign exchange reserves IMF managed the system At fixed exchange rate, Central Banks were committed to buy or sell domestic currency for foreign exchange reserves Central banks intervened in the Forex market to defend the exchange against the Dollar Unlike gold standard, Dollar standard did not require 100% Forex reserve backing for domestic currency Governments could print as much money as they wished Discretion to print money created two problems Architects of Bretton Woods felt that Gold supply would not increase to support post-war prosperity and a rising demand for money Giving governments discretion to print money led to two problems 1. Discretion to print money [problematic] 2. World of sustained inflation Explanation of First Problem Undercut the concept of the gold standard that required governments to adjust money supply based on gold holdings E.g., countries with a Balance of Payments deficit lost gold and domestic money supply fell accordingly This had effect of lowering prices and increasing competitiveness of country Under Dollar standard, countries with a payments deficit could print more money This lowered unemployment but raised prices defeating the objective of competitiveness Devaluation If balance of payments deficit persisted, countries would run out of foreign exchange reserves Result: devaluation to raise competitiveness and wipe out imbalance in international payments Speculative pressure Speculators always bet on devaluation of currency Countries lost reserves not only from current account deficits but also from capital account outflows Architects of Bretton Woods Made Private Capital Flows Illegal Designed to fight against speculation Rules were relaxed in 1960s Second Problem Dollars were world’s medium of exchange US payments deficit financed by printing more dollars Because of Vietnam War, deficit spending increased producing more dollars Supply of dollars raised world’s money supply and led to inflation throughout the trading world Countries refused to adopt the same rate of inflation as the US The enormous US deficit The gap between the price of gold on the open market and the initial peg of 35$ per ounce of gold Devaluations of the peg from 35 to 38 and eventually to 44 failed to work Open market price of gold was $70 in 1972 In 1973 ,Nixon declared that US would abandon the Bretton Woods system and would allow the dollar to float The Bretton Woods System succeeded to a system of floating currency exchange Q1. A US International Balance of Payments deficit forces other nations to accept: A) More Gold B) More dollars C) Inflation D) Rising interest rates Q2. Much like fiat currency, a fiat economy: A) Operates through centralized control B) Operates as a free market C) Operates as a free trade system D) Operates as a limited-market system Q3. Countries A and B share a fixed exchange rate. Country A’s currency the Blot, is pegged at 4 Blots = 0,5 ounce of gold. Country B’s currency the Zlot, can be exchanged for Blots at a rate of 5 Zlots = 1 Blot. What is the exchange rate for the Zlot with gold? A) 5 Zlots = 0,5 ounce gold B) 20 Zlots = 0,5 ounce gold C) 10 Zlots = 0,5 ounce of gold D) 40 Zlots = 0,5 ounce of gold Q4. Globally, money is tight and prices are rising. What happens to the money supply and to prices if South Africa releases a huge amount of gold on the market? A) Money loosens up; prices continue to rise B) Money remains tight; prices drop C) Money loosens up; prices stabilise, then drop D) Money remains tight; prices continue to rise Q5. National economic decisionmakers like the gold standard because: A) It removes much of the uncertainty from international trade B) It steadies national interest rates C) It stabilises prices D) It tends to push up the money supply