Exchange Rate Regimes Dipak Abhyankar
Fiat Currency Paper Currency (and Nickel Coins) is called as Fiat Currency Intrinsic Value of Fiat Currency is far less than its face value. It is used as currency just because the Government has certified it. It is a promissory note.
Fiat Currency It is a paper currency, vetted by the Government. Its intrinsic value is much less than its face value.
Fiat Currency Shows true colors in crisis Promise is valid till certifying authority (The Government) exists and is strong enough. German Woman is burning currency notes to cook her meal after World War II
Fiat Currency Because of hyper inflation in Zimbabwe its fiat currency has lost its value They print Billion dollar notes. It takes thousands of dollars to buy a loaf of bread in Zimbabwe.
Fiat Currency In Argentina in 2002 Crisis, there was lots of rioting and unrest because of paper currency loosing its value (Hyper Inflation) If one does not place an order in a restaurant within half an hour, there was a risk of menu rates going up, because of hyper inflation!
So far… Barter Experiments of Sea-shells etc Gold – Gold Specie Standard – Gold Bullion Standard – Gold Exchange Standard Concept of Fiat Currency
Till World War I Gold Standard Notes (Bullion, Exchange Standard) No collective effort to bring uniformity across the globe
Paris Peace Conference – In principle resolution for free trade and capital flows [League of Nations] 1922 Genoa- Re established gold standard for some European countries 1930 Rome- Established Bank of International Settlements BIS 1933 London- Tried to re establish fixed parities; but US did not support Till World War II
1944 Town: Bretton Woods in the USA 44 Countries Participated This was after World War II
BRETTON WOODS VIDEO Dipak Abhyankar Institute
Outcome of Bretton Woods Conference Discussions for Signing an Agreement: GATT Formation of two supranational institutions: IMF and World Bank [Bretton Wood Twins] World Monetary System Bretton Woods System
Bretton Woods in Pictures The Conference Indian Delegation to Bretton Woods
Bretton Woods System USA volunteered to peg its currency, US Dollar to Gold It declared to make it a rigid parity Parity was fixed at $35 for 1 Oz of Gold.
Bretton Woods System US Dollar fixed to Gold All other currencies fixed to Dollar
Bretton Woods System System worked well till 1960s Other economies; especially European economies were working on development projects
Robert Triffin Professor Robert Triffin first identified a problem with the fixed parity (Bretton woods) system Belgian-American economist Robert Triffin, who first identified the problem in 1960.
Triffin’s Dilemma US was the ‘supplier’ of Dollars to the world US was the net importer and net investor; resulting in BoP deficits BoP deficit is not sustainable for long
Triffin’s Dilemma If US stops supplying Dollars; then the system will fail for the lack of liquidity If US continues to run deficit; and supply Dollars; the system would loose confidence in Dollars The system would fail
Bretton Woods …..towards failure Gold Convertibility Clause Unconditional conversion of US Dollar to Gold Difficult to Honor USA defaulted on demand of Gold US printed more dollars than the Gold Quantity they had
Smithsonian Agreement Smithsonian InstituteTry to revive Bretton Woods US Dollar parity was changed to $38 for an Ounce of Gold Thus the Dollar was devalued However, the system could not sustain even that parity
Bretton Woods Failure Most countries delinked their currencies with US Dollar by 1971 Officially Bretton Woods was declared withdrawn in 1978
New Age Systems Let’s study now the new systems