International Monetary System IMS n Structure of IMS: Framework within which the foreign Exchange rates are determined, capital flows & international trade are accommodated & Balance of Payments Adjustments are made n History of IMS: The Gold Standard ( ):  Gold as a medium of exchange- Pharaohs (3000 PC)  The Greeks, Romans & Persians Used gold coins & passed through the mercantile era to the 19th century  No multinational agreement, but each country declared a par value for its currency in terms of gold based on rule of games or "Gold Standard" MENU

International Monetary System IMS-cont.. n Mercantilism of 19th Century: Need for IMS:  Europe adapted the IMS in 1870 & the U.S.. in 1879  $20.67/Ounce of Gold, £4.274/Ounce:  $20.67/£4.2474=£4.8665/$  Limitation of gold reserve & supply of money  Limit the flow of goods and gold & suspension of GS n Inter War Years: :  Free Fluctuating of Exchange Rates with consideration of the gold and par value of other currencies.  Short sell of week currencies, re-evaluation of £, the collapse of the Austrian banking system-total abandonment of GS MENU

International Monetary System IMS-cont.. n The Bretton Wood Agreement: (1944) The Bretton Wood Agreement The Bretton Wood Agreement  Dollar based Monetary System (par value based on $)  Fixed value in term of $, but not required to convert  Only $ remained convertible to gold: $35/Ounce  Only 1% of par allowed for fluctuation  Devaluation was not allowed for purpose of high export  10% devaluation for week currency or approval of IMF  IMF & World Bank were created  Former Soviet Union did participate at Bretton Wood but chose not to join IMF or World Bank MENU

International Monetary System IMS-cont.. n International Monetary Fund IMF: International Monetary Fund IMF International Monetary Fund IMF  Mission:Rendering temporary assistance to currencies with cyclical, seasonal or random fluctuation.  Help countries with a structural trade problem  IMF is funded based on quota of expected post WWII trade  The Original quota were 25% in gold or $ (Gold tranche), & 75% local currency.  A member country can borrow up to its original 25% in gold or convertible currencies in any 12 month plus 100% of its total quota. A member country can also borrow up to 120% of its quota in convertible currency or gold, even through it only paid 25% in convertible currency or gold. MENU

International Monetary System IMS-cont.. n International Monetary Fund IMF Cont..:  At the present time, each of the 151 member can borrow up to 150% annually of its quota or up to 450% during a three years period  Cumulative access could be up to 600% of members quota  Distribution of the quota is prelude to distribution of vote  U.S. Vote:19.1%, UK:6.6%,Germany:5.8%, France:4.8%,Japan:4.5%,Canada:3.2%  General Agreement to Borrow: IMF ability to borrow from member countries, currently more than $180 billion.  Special Drawing Rights (SDR): created according to Rio de Janeiro agreement (1967) to help increase the global trade between nations  SDR is distributed based on members quota and valued based on 16 then 5 currency  First $/SDR determined then value of other currencies are measured MENU

International Monetary System IMS-cont.. n Monetary Development: ( )  EFTA (1957) & EEC (1959), rapid increase in world trade  U.S.. deficit of 1959 & International Monetary Reserve dilemma: BOP deficit to create more reserve for LDCs  Doubt of convertibility of major reserve currencies  "Interest Equalization Tax"on foreign borrowing & creation of Euro-bond  Mandatory control of direct foreign investment,control of foreign lending by U.S banks,& high U.S deficit  official Currency Swaps: Group of Ten Industrialized Nations as a interest credit between central banks MENU

International Monetary System IMS-cont.. n Floating Exchange Rate-Crises of 1971:  U.S. BOT had reached to all-time high in 1971  U.S lost one-third of her official gold & president Nixon suspended convertibility of $ to gold  U.S.imposed 10%surcharge on imports & freezed P&W  Most European currencies gained against $ n Smithsonian agreement: December of 1971 Smithsonian agreement Smithsonian agreement  Group ten Industrialized Nations signed on Dec,  $ devaluated to $38/Ounce, Yen evaluated against $ :16.9%,Canada 7.4%  Floatation of 2.25% (Max 4.5%) is allowed  $ lost its value sharply: $42.22 in free market, $70 in official London market MENU

International Monetary System IMS-cont.. n Jamaican Agreement: January 1976 Jamaican Agreement: January 1976 Jamaican Agreement: January 1976  Floating Rate has been established ( has continued today)  Gold was demonetarized as a reserved asset  IMF agreed to sell $25 million ounces of gold to its members and used the proceeds to help the poor nations  IMF quota increased to $41 and then to $180 billion  10% of the voting power given to OPEC members  Non-oil producing countries have more access to IMF  Floating Exchange Rate System has officially adopted & continued until present time MENU

International Monetary System IMS-cont.. Plaza Agreement Louvre Agreement END MENU