Gold standard is a monetary system in which the standard
economic unit of account is a fixed weight of gold. Silver standard
is a monetary system in which the standard economic unit of account
is a fixed weight of silver.
Slide 4
Gold specie standard is a system in which the monetary unit is
associated with circulating gold coins, or with the unit of value
defined in terms of one particular circulating gold coin in
conjunction with subsidiary coinage made from a lesser valuable
metal. (till late WW I 1925 in Britain) Gold exchange standard
typically involves only the circulation of silver coins, or coins
made of other metals(during the silver standard ie period from 1600
to 1800) Gold bullion standard is a system in which gold coins do
not actually circulate as such, but in which the authorities have
agreed to sell gold bullion on demand at a fixed price in exchange
for the circulating currency. (till 1931) Byzantine Empire
Slide 5
Gold certificates were used as paper currency in the United
States from 1882 to 1933. These certificates were freely
convertible into gold coins.
Slide 6
The gold standard limits the power of governments to inflate
prices through excessive issuance of paper currency; The gold
standard makes chronic deficit spending by governments more
difficult; and High levels of inflation are rare and hyperinflation
is impossible as the money supply can only grow at the rate that
the gold supply increases.
Slide 7
A gold standard leads to deflation whenever an economy using
the gold standard grows faster than the gold supply; Deflation
rewards savers and punishes debtors; recessions can be largely
mitigated by increasing money supply during economic downturns; and
Fluctuations in the amount of gold that is mined could cause
inflation if there is an increase, or deflation if there is a
decrease.
Slide 8
The gold standard broke down in country after country soon
after its rehabilitation during the post-1914-18 war decade. There
were several reasons for this development: Gold was very unevenly
distributed among the countries in the inter-war period. While the
U.S.A. and France came to possess the bulk of it, other countries
did not have enough to maintain a monetary system based in gold.
International trade was not free. Some countries often imposed
stringent restrictions on imports, which created serious balance of
payments problems for other countries. Not having enough gold to
cover the gap, they threw the gold standard overboard.
Slide 9
Slide 10
Slide 11
In 1929 after the stock market crash banks in Austria,
England,and The United States experienced large declines in
portfolio values. This set off a series of bank runs. Most
countries focused on stabilizing their own national economies. They
hoarded gold reserves which constrained monetary supply and
hampered international trade. Britain especially experience severe
outflows of gold (why ?) The British Pound was still the dominant
international currency and Britain had exploited that fact
incurring large trade deficits on currency backed by their own gold
reserves. British gold reserves were devastated causing a general
loss in confidence in the pound, which ended its use as the
dominant international currency Hoarding of gold became such a
problem in the U.S. that in 1933 Franklin D. Roosevelt made it
illegal to own more that $100 worth of gold. The government could
confiscate gold in exchange for paper money Britain was forced off
the gold standard in 1931 Canada, Sweden, Austria, Japan, the US,
and finally France followed between 1933 - 1936
Slide 12
Held in 1944. 44 Countries participated. Birth of IMF Birth of
International Bank for Reconstruction and Development (IBRD)
Implemented a system of fixed exchange rates with the $ as the key
currency Goal: Avoid a recurrence of the closed markets and
economic warfare that had characterized the 1930s.
Slide 13
DESIGN The liberal economic system required an accepted vehicle
for investment, trade, and payments. Unlike national economies,
however, the international economy lacks a central government that
can issue currency and manage its use. In the past this problem had
been solved through the gold standard, but the architects of
Bretton Woods did not consider this option feasible for the postwar
political economy. Instead, they set up a system of fixed exchange
rates managed by a series of newly created international
institutions using the U.S. dollar (which was a gold standard
currency for central banks) as a reserve currency
Slide 14
Previous regimes In the 19th and early 20th centuries gold
played a key role in international monetary transactions. The gold
standard was used to back currencies; the international value of
currency was determined by its fixed relationship to gold; gold was
used to settle international accounts. The gold standard maintained
fixed exchange rates that were seen as desirable because they
reduced the risk of trading with other countries.gold standard
Imbalances in international trade were theoretically rectified
automatically by the gold standard. A country with a deficit would
have depleted gold reserves and would thus have to reduce its money
supply. The resulting fall in demand would reduce imports and the
lowering of prices would boost exports; thus the deficit would be
rectified. Any country experiencing inflationwould lose gold and
therefore would have a decrease in the amount of money available to
spend. This decrease in the amount of money would act to reduce the
inflationary pressure. Supplementing the use of gold in this period
was the British pound. Based on the dominant British economy, the
pound became a reserve, transaction, and intervention currency. But
the pound was not up to the challenge of serving as the primary
world currency, given the weakness of the British economy after the
Second World War.deficitmoney
supplydemandimportsexportsinflationinflationaryBritish pound
Slide 15
The architects of Bretton Woods had conceived of a system
wherein exchange rate stability was a prime goal. Yet, in an era of
more activist economic policy, governments did not seriously
consider permanently fixed rates on the model of the classical gold
standard of the nineteenth century. Gold production was not even
sufficient to meet the demands of growing international trade and
investment. And a sizeable share of the world's known gold reserves
were located in the Soviet Union, which would later emerge as a
Cold War rival to the United States and Western Europe.Soviet
UnionCold WarWestern Europe The only currency strong enough to meet
the rising demands for international currency transactions was the
U.S. dollar. The strength of the U.S. economy, the fixed
relationship of the dollar to gold ($35 an ounce), and the
commitment of the U.S. government to convert dollars into gold at
that price made the dollar as good as gold. In fact, the dollar was
even better than gold: it earned interest and it was more flexible
than gold.U.S. dollar Another view is that in the time of discount
banks, discount was the interest earned on gold, and that the only
way to repay interest on government bonds is by printing more
dollars, thus raising the price of gold. If gold is fixed at $35
then other countries will demand gold and not accept dollars. The
closing of the gold window in 1971 was the result.
Slide 16
The rules of Bretton Woods, set forth in the articles of
agreement of the International Monetary Fund (IMF) and the
International Bank for Reconstruction and Development (IBRD),
provided for a system of fixed exchange rates. The rules further
sought to encourage an open system by committing members to the
convertibility of their respective currencies into other currencies
and to free trade.International Monetary FundInternational Bank for
Reconstruction and Development What emerged was the "pegged rate"
currency regime. Members were required to establish a parity of
their national currencies in terms of gold (a "peg") and to
maintain exchange rates within plus or minus 1% of parity (a
"band") by intervening in their foreign exchange markets (that is,
buying or selling foreign money).pegged rate In theory the reserve
currency would be the bancor (a World Currency Unit that was never
implemented), suggested by John Maynard Keynes; however, the United
States objected and their request was granted, making the "reserve
currency" the U.S. dollar. This meant that other countries would
peg their currencies to the U.S. dollar, andonce convertibility was
restoredwould buy and sell U.S. dollars to keep market exchange
rates within plus or minus 1% of parity. Thus, the U.S. dollar took
over the role that gold had played under the gold standard in the
international financial system. (Rogue Nation, 2003, Clyde
Prestowitz)bancorinternational financial system Fixed exchange
rates
Slide 17
Meanwhile, to bolster faith in the dollar, the U.S. agreed
separately to link the dollar to gold at the rate of $35 per ounce
of gold. At this rate, foreign governments and central banks were
able to exchange dollars for gold. Bretton Woods established a
system of payments based on the dollar, in which all currencies
were defined in relation to the dollar, itself convertible into
gold, and above all, "as good as gold". The U.S. currency was now
effectively the world currency, the standard to which every other
currency was pegged. As the world's key currency, most
international transactions were denominated in US dollars. The U.S.
dollar was the currency with the most purchasing power and it was
the only currency that was backed by gold. Additionally, all
European nations that had been involved in World War II were highly
in debt and transferred large amounts of gold into the United
States, a fact that contributed to the supremacy of the United
States [citation needed]. Thus, the U.S. dollar was strongly
appreciated in the rest of the world and therefore became the key
currency of the Bretton Woods system.purchasing powercitation
needed Member countries could only change their par value with IMF
approval, which was contingent on IMF determination that its
balance of payments was in a "fundamental disequilibrium".par
value
Slide 18
Developed by Harry Dexter WhiteJohn Maynard Keynes US defined 1
ounce of Gold as $35 All other nations had to define the value of
their money according to par value system in terms of U.S. dollars
or gold.
Slide 19
Officially established on December 27, 1945 Commenced its
financial operations on March 1, 1947 Purpose o Promote
international monetary cooperation o Facilitates world trade
expansion o Ensures exchange rate stability o Provide funds to
member countries to bring their BOP to equilibrium
Slide 20
IMF-Operations Source of Money: Quota subscription IMF-
Organization Highest authority is the Board of Governors Day-to-day
work is managed by the Executive Board formed by 24 Executive
Directors
Slide 21
Goal: Original mission was to finance the reconstruction of
nations devastated by WW-2 Improve living standards and to
eliminate the worst forms of poverty Supports the restructuring
process of economies and provides capital for productive
investments Encourages foreign direct investment by making
guarantees or accepting partnerships with investors. Aims to keep
payments in developing countries balanced and fosters international
trade
Slide 22
The highest authority: Council of Governors Executive Board:
five Directors to whom the Council of Governors transfers
responsibility for nearly all issues.
Slide 23
1.Integration of developing countries Affiliated organizations
of the World Bank: i.International Finance Cooperation (IFC)-1956
Function: grant credits to private organizations that lack capital
for projects in the developing world ii.International Development
Association (IDA)- 1961 Function: grant credits to especially poor
countries at very favorable conditions.
Slide 24
Marshall Plan (1947-1958) Dollar shortages and the Marshall
Plan The Bretton Wood arrangements were largely adhered to and
ratified by the participating governments. It was expected that
national monetary reserves, supplemented with necessary IMF
credits, would finance any temporary balance of payments
disequilibria. But this did not prove sufficient to get Europe out
of its doldrums.balance of payments Postwar world capitalism
suffered from a huge dollar shortage. The United States was running
huge balance of trade surpluses, and the U.S. reserves were immense
and growing. It was necessary to reverse this flow. Dollars had to
leave the United States and become available for international use.
In other words, the United States would have to reverse the natural
economic processes and run a balance of payments deficit. The
modest credit facilities of the IMF were clearly insufficient to
deal with Western Europe's huge balance of payments deficits. The
problem was further aggravated by the reaffirmation by the IMF
Board of Governors in the provision in the Bretton Woods Articles
of Agreement that the IMF could make loans only for current account
deficits and not for capital and reconstruction purposes. Only the
United States contribution of $570 million was actually available
for IBRD lending. In addition, because the only available market
for IBRD bonds was the conservative Wall Street banking market, the
IBRD was forced to adopt a conservative lending policy, granting
loans only when repayment was assured. Given these problems, by
1947 the IMF and the IBRD themselves were admitting that they could
not deal with the international monetary system's economic
problems. [8]Wall Street [8] The United States set up the European
Recovery Program (Marshall Plan) to provide large-scale financial
and economic aid for rebuilding Europe largely through grants
rather than loans. This included countries belonging to the Soviet
bloc, e.g., Poland. In a speech at Harvard University on June 5,
1947, U.S. Secretary of State George Marshall stated:Marshall
PlanHarvard UniversityGeorge Marshall The breakdown of the business
structure of Europe during the war was complete. Europe's
requirements for the next three or four years of foreign food and
other essential products principally from the United States are so
much greater than her present ability to pay that she must have
substantial help or face economic, social and political
deterioration of a very grave character. [Notes 4] [Notes 4]
Slide 25
From 1947 until 1958, the U.S. deliberately encouraged an
outflow of dollars, and, from 1950 on, the United States ran a
balance of payments deficit with the intent of providing liquidity
for the international economy. Dollars flowed out through various
U.S. aid programs: the Truman Doctrine entailing aid to the
pro-U.S. Greek and Turkish regimes, which were struggling to
suppress communist revolution, aid to various pro-U.S. regimes in
the Third World, and most important, the Marshall Plan. From 1948
to 1954 the United States provided 16 Western European countries
$17 billion in grants.Truman DoctrineGreekTurkish To encourage
long-term adjustment, the United States promoted European and
Japanese trade competitiveness. Policies for economic controls on
the defeated former Axis countries were scrapped. Aid to Europe and
Japan was designed to rebuild productivity and export capacity. In
the long run it was expected that such European and Japanese
recovery would benefit the United States by widening markets for
U.S. exports, and providing locations for U.S. capital
expansion.Axis In 1956, the World Bank created the International
Finance Corporation and in 1960 it created the International
Development Association (IDA). Both have been controversial.
Critics of the IDA argue that it was designed to head off a broader
based system headed by the United Nations, and that the IDA lends
without consideration for the effectiveness of the program. Critics
also point out that the pressure to keep developing economies
"open" has led to their having difficulties obtaining funds through
ordinary channels, and a continual cycle of asset buy up by foreign
investors and capital flight by locals. Defenders of the IDA
pointed to its ability to make large loans for agricultural
programs which aided the "Green Revolution" of the 1960s, and its
functioning to stabilize and occasionally subsidize Third World
governments, particularly in Latin America.International Finance
CorporationInternational Development Associationcapital flightGreen
Revolution Bretton Woods, then, created a system of triangular
trade: the United States would use the convertible financial system
to trade at a tremendous profit with developing nations, expanding
industry and acquiring raw materials. It would use this surplus to
send dollars to Europe, which would then be used to rebuild their
economies, and make the United States the market for their
products. This would allow the other industrialized nations to
purchase products from the Third World, which reinforced the
American role as the guarantor of stability. When this triangle
became destabilized, Bretton Woods entered a period of crisis that
ultimately led to its collapse.
Slide 26
One national currency (the U.S. dollar) had to be an
international reserve currency at the same time. As a result US
were free from external economic pressures, while heavily
influencing those external economies. To ensure international
liquidity USA were forced to run deficits in their balance of
payments This, together with the emergence of a parallel market for
gold where the price soared above the official US mandated price,
led to speculators running down the US gold reserves. The system of
Bretton Woods collapsed on 15 August 1971
Slide 27
Collapse of Bretton Woods Agreement- Floating Exchange Rate
Regime was formalized in 1976 in Jamaica. At the Jamaica meeting,
the International Monetary Fund's (IMF) Articles of Agreement were
revised to reflect reality of floating exchange rates. Under the
Jamaican agreement floating rates were declared acceptable gold was
abandoned as a reserve asset total annual IMF quotas - the amount
member countries contribute to the IMF - were increased to $41
billion (today, this number is $311 billion) The rules for the
International Monetary System that were agreed upon at the meeting
are still in place today.
Slide 28
Floating-rate Bretton Woods system 19681972 By 1968, the
attempt to defend the dollar at a fixed peg of $35/ounce, the
policy of the Eisenhower, Kennedy and Johnson administrations, had
become increasingly untenable. Gold outflows from the U.S.
accelerated, and despite gaining assurances from Germany and other
nations to hold gold, the unbalanced fiscal spending of the Johnson
administration had transformed the dollar shortage of the 1940s and
1950s into a dollar glut by the 1960s. In 1967, the IMF agreed in
Rio de Janeiro to replace the tranche division set up in 1946.
Special Drawing Rights were set as equal to one U.S. dollar, but
were not usable for transactions other than between banks and the
IMF. Nations were required to accept holding Special Drawing Rights
(SDRs) equal to three times their allotment, and interest would be
charged, or credited, to each nation based on their SDR holding.
The original interest rate was 1.5%.dollar glutRio de
JaneirotrancheSpecial Drawing Rights
Slide 29
The intent of the SDR system was to prevent nations from buying
pegged gold and selling it at the higher free market price, and
give nations a reason to hold dollars by crediting interest, at the
same time setting a clear limit to the amount of dollars that could
be held. The essential conflict was that the American role as
military defender of the capitalist world's economic system was
recognized, but not given a specific monetary value. In effect,
other nations "purchased" American defense policy by taking a loss
in holding dollars. They were only willing to do this as long as
they supported U.S. military policy. Because of the Vietnam War and
other unpopular actions, the pro-U.S. consensus began to evaporate.
The SDR agreement, in effect, monetized the value of this
relationship, but did not create a market for it. The use of SDRs
as paper gold seemed to offer a way to balance the system, turning
the IMF, rather than the U.S., into the world's central banker. The
U.S. tightened controls over foreign investment and currency,
including mandatory investment controls in 1968. In 1970, U.S.
President Richard Nixon lifted import quotas on oil in an attempt
to reduce energy costs; instead, however, this exacerbated dollar
flight, and created pressure from petro-dollars. Still, the U.S.
continued to draw down reserves. In 1971 it had a reserve deficit
of $56 billion; as well, it had depleted most of its non-gold
reserves and had only 22% gold coverage of foreign reserves. In
short, the dollar was tremendously overvalued with respect to
gold.Richard Nixonpetro-dollars
Slide 30
Since 1973, exchange rates have become more volatile and less
predictable because of the oil crisis in 1971 the loss of
confidence in the dollar after U.S. inflation jumped between 1977
and 1978 the oil crisis of 1979 the rise in the dollar between 1980
and 1985 the partial collapse of the European Monetary System in
1992 the 1997 Asian currency crisis the decline in the dollar in
the mid to late 2000s
Slide 31
Nixon Shock Background By the early 1970s, as the costs of the
Vietnam War and increased domestic spending accelerated inflation,
[1] the U.S. was running a balance of payments deficit and a trade
deficit, the first in the 20th century. The year 1970 was the
crucial turning point, which, because of foreign arbitrage of the
U.S. dollar, caused governmental gold coverage of the paper dollar
to decline 33 percentage points, from 55% to 22%. That, in the view
of Neoclassical Economists and the Austrian School, represented the
point where holders of the U.S. dollar lost faith in the U.S.
governments ability to cut its budget and trade deficits.Vietnam
War [1]arbitrageNeoclassical EconomistsAustrian School In 1971, the
U.S. government again printed more dollars (a 10% increase) [1] and
then sent them overseas, to pay for the nation's military spending
and private investments. In the first six months of 1971, $22
billion dollars in assets left the U.S. [citation needed] In May
1971, inflation-wary West Germany was the first member country to
leave the Bretton Woods system unwilling to deflate the Deutsche
Mark to prop up the dollar. [1] In order to prevent the dumping of
the Deutsche Mark on the open market, West Germany did not consult
with the international monetary community before making the change.
In the next three months, West Germanys move strengthened their
economy; simultaneously, the dollar dropped 7.5% against the
Deutsche Mark. [1] [1]citation neededWest GermanyDeutsche Mark [1]
Because of the excess printed dollars, and the negative U.S. trade
balance, other nations began demanding fulfillment of Americas
promise to pay - that is, the redemption of their dollars for gold.
Switzerland redeemed $50 million of paper for gold in July. [1]
France, in particular, repeatedly made aggressive demands, and
acquired $191 million in gold, further depleting the gold reserves
of the U.S. [1] On 5 August 1971, Congress released a report
recommending devaluation of the dollar, in an effort to protect the
dollar against foreign price-gougers. [1] Still, on 9 August 1971,
as the dollar dropped in value against European currencies,
Switzerland withdrew the Swiss franc from the Bretton Woods system.
[1]Switzerland [1] devaluation [1]Swiss franc [1] [
Slide 32
Nixon Shock The shock To stabilize the economy and combat
runaway inflation, on August 15, 1971, President Nixon imposed a
90-day wage and price freeze, a 10 percent import surcharge, and,
most importantly, closed the gold window, ending convertibility
between US dollars and gold. The President and fifteen advisors
made that decision without consulting the members of the
international monetary system, so the international community
informally named it the Nixon shock. Given the importance of the
announcement and its impact upon foreign currencies presidential
advisors recalled that they spent more time deciding when to
announce publicly the controversial plan, than they spent creating
the plan. [2] He was advised that the practical decision was to
make an announcement before the stock markets opened on Monday (and
just when Asian markets also were opening trading for the day). On
August 15, 1971, that speech and the price-control plans proved
very popular and raised the public's spirit. The President was
credited with finally rescuing the American public from price-
gougers, and from a foreign-caused exchange crisis. [2][3] [2]stock
markets [2][3] By December 1971, the import surcharge was dropped,
as part of a general revaluation of the major currencies, which
thereafter were allowed 2.25% devaluations from the agreed exchange
rate. By March 1976, the worlds major currencies were floating in
other words, the currency exchange rates no longer were
governments' principal means of administering monetary
policy.floating
Slide 33
2. Special Drawing Rights In 1960s substantial economic
expansion lead to weakening of the position of the USA and a
devaluation of the U.S. dollar. IMF reacted by issuing SDRs which
member countries could add to their holdings of foreign currencies
and gold. SDRs were assigned with a value based on the average
worth of the worlds major currencies. These were the U.S. dollar,
the French franc, the pound sterling, the Japanese yen, and the
German mark.
Slide 34
When Special Drawing Rights were created in 1969 one SDR was
defined as having a value of 0.888671 grams of gold, the value of
one US dollar at that time. [1] After the breakdown of the Bretton
Woods system in the early 1970s, the SDR was redefined in terms of
a basket of currencies. [9][12] Today, this basket is composed of
Japanese Yen, US Dollars, British Pounds and Euros, and the
proportion each of these four currencies contribute to the nominal
value of a SDR is reevaluated every five years. [1] [1]Bretton
Woods system [9][12]Japanese YenUS DollarsBritish PoundsEuros [1]
For the period of 2006-2010, one SDR is the sum of 0.6320 US
Dollars, 0.4100 euro, 18.4 Japanese yen and 0.0903 pound
sterling.US DollarseuroJapanese yenpound sterling
Slide 35
Slide 36
Slide 37
Slide 38
2003 - Michael P. Dooley, Peter M. Garber, and David
Folkerts-Landau the emergence of a new international system
involving an interdependency between states with generally high
savings in Asia lending and exporting to western states with
generally high spending
Slide 39
Asian currencies were being pegged to the dollar Result -
Unilateral intervention of Asian governments in the currency market
to stop their currencies appreciating Led to the developing world
as a whole preventing current account deficits in 1999 It was in
response to unsympathetic treatment following the 1997 Asian
Financial Crisis.
Slide 40
Slide 41
Slide 42
The call for the a New Bretton Woods System was strengthened
post the 2008 crisis. Brown and Sarkozy have been pushing for a New
Bretton Woods System for a significant time now But they differ for
a fact that Brown favors free trade and globalization Sarkozy
Argues that unrestricted has failed
Slide 43
But the European Leaders were unanimous in calling for a the
development of a New International Financial Order that succeeds
the one present now. Probably here the dollar will be superseded as
a base currency and may be replaced by probably a pool of
currencies or pool of commodities. Triffin dilemma - conflicts of
interest between short-term domestic and long-term international
economic objectives Bancor John Maynard Keynes Bretton Woods I
Slide 44
This has gained significance as it started gaining support from
the economic giant China. Chinese Proposal Based on SDR The call
for a New Order has been gaining momentum starting from the 2008 G
20 Washington Summit, 2009 G 20 London summit and the 2010 World
Economic Forum Davos Summit. ASEAN, NAFTA have their own cusotmized
Bancors.
Slide 45
IMF Exchange Rate Regime Classifications
Slide 46
Exchange Arrangements with No Separate Legal Tender: Currency
of another country circulates as sole legal tender or member
belongs to a monetary or currency union in which same legal tender
is shared by members of the union eg. Euro Currency Board
Arrangements: Monetary regime based on implicit national commitment
to exchange domestic currency for a specified foreign currency at a
fixed exchange rate.ie. Pegging.
Slide 47
Other Conventional Fixed Peg Arrangements: Country pegs its
currency (formal or de facto) at a fixed rate to a major currency
or a basket of currencies where exchange rate fluctuates within a
narrow margin or at most 1% around central rate Pegged Exchange
Rates w/in Horizontal Bands: Value of the currency is maintained
within margins of fluctuation around a formal or de facto fixed peg
that are wider than 1% around central rate Crawling Peg: Currency
is adjusted periodically in small amounts at a fixed, preannounced
rate in response to changes in certain quantitative measures
Slide 48
Exchange Rates w/in Crawling Peg: Currency is maintained within
certain fluctuation margins around a central rate that is adjusted
periodically Managed Floating w/ No Preannounced Path for Exchange
Rate: Monetary authority influences the movements of the exchange
rate through active intervention in foreign exchange markets
without specifying a pre-announced path for the exchange rate
Independent Floating: Exchange rate is market determined, with any
foreign exchange intervention aimed at moderating the rate of
change and preventing undue fluctuations in the exchange rate,
rather than at establishing a level for it
Slide 49
Dollarization refers to the replacement of a foreign currency
with U.S. dollars. Dollarization goes beyond a currency board, as
the country no longer has a local currency. For example, Ecuador
implemented dollarization in 2000.
Slide 50
Slide 51
Exchange rate stability the value of the currency would be
fixed in relationship to other currencies so traders and investors
could be relatively certain of the foreign exchange value of each
currency in the present and near future Full financial integration
complete freedom of monetary flows would be allowed, so traders and
investors could willingly and easily move funds from one country to
another in response to perceived economic opportunities or risk
Monetary independence domestic monetary and interest rate policies
would be set by each individual country to pursue desired national
economic policies, especially as they might relate to limiting
inflation, combating recessions and fostering prosperity and full
employment
Slide 52
Slide 53
Slide 54
Slide 55
Slide 56
CountryCurrency BahrainBahrain Dinar EgyptEgyptian Pound
IragIraqi Dinar IranIranian Rial IsraelNew Shekel JordanJordanian
Dinar KuwaitKuwaiti Dinar LebanonLebanese Pound OmanRial Omani
Palestinian West Bank-Gaza New Israeli Shekel/ Jordanian Dinar
QatarQatar Riyal Saudi ArabiaSaudi Riyal SyriaSyrian Pound
TurkeyTurkish Lira United Arab EmiratesUAE Dirham YemenYemeni
Rial
Slide 57
The British were in the Middle East by 1838 At first, the
Indian Rupee was introduced in the Gulf States After the first
World War: British East Africa Florin and then a Shilling
TransJordan and Palestine- Palestinian Pound at par with pound
sterling East African Shilling - Arabian Dinar in 1965 The system
gradually gave away to a systems based on units of the sterling
system, but without ever involving the introduction of the full
sterling coinage
Slide 58
1951 : East African Shilling replaced the Rupee in Aden 1961 :
Dinar was adopted in Aden and Kuwait 1 Dinar = 20 Shillings 1966 :
Bahrain and Abu Dhabi adopted Dinar 1966 : Qatar, Dubai and other
States adopted Saudi Riyal 1970 : Oman adopted the Rial Difference
arose due to the Maria Theresa Thaler Coinage System
Slide 59
Sterling Devaluation in 1970 Value of other Dinars rose, Omani
rial was less in value Pound Sterling UnitMaria Theresa Thaler
Israel, Jordan, Iraq, Kuwait, Bahrain, Oman, and the Yemen Saudi
Arabia, UAE and Qatar After World War II, Sterling Area was formed
All the Middle East Territories were pegged at a fixed value to the
pound sterling After the devaluation in 1967, and other issues,
none of the currencies retained any fixed parity
Gulf Arabs are planning along with China, Russia, Japan and
France to end dollar dealings for oil, moving instead to a basket
of currencies including the Japanese yen and Chinese yuan, the
euro, gold and a new, unified currency planned for nations in the
Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi,
Kuwait and Qatar. A new concept of financing- Gulf Clearing Union
functioning on the lines of Swiss WIR creating - within a suitable
legal framework - a "petro" unit redeemable in a constant amount of
energy value provides a straightforward benchmark for both domestic
and international buyers of oil, gas, petroleum products, and even
electricity, to use petros - as well as, or instead of, US dollars
- in settlement for purchases of GCC production.
Slide 62
The Path to a Flexible Economy
Slide 63
As early as World War - II The Bretton Woods System - Fixed
exchange rates Collapse of BWS in 1970s The US moved towards
Floating Exchange Rates The Europe held to its path of Stable
Exchange Rates
Slide 64
15 members of European Union Used Exchange Rate Mechanism (ERM)
Helped to create Stable Exchange Rates Member Govts. commitment
Exchange Rate Fluctuation < 2.25% from central point Created
European Currency Unit (ECU) An unit of Account Weighted average of
EMS Countries Not a real currency A basis for the idea though Idea
Realized with launching of Euro (1999) Designed to create stable
commerce & encourage trade between member states Unprecedented
co-ordination of monetary policies between member states Operated
successfully over a decade Provided impetus for more
Slide 65
The European Commission President, Jacques Delors, and The
Central Bank Governors of the EU Member states commitment towards
EMU Stage I (1990-1994) Completing Internal Market Free Movement of
Capital Stage II (1994-1999) The ECB, ESCB & Economic
Convergence Stage III (1999 onwards) Fixing Exchange Rates &
Launching of Euro
Slide 66
Acceptance of the Delors report Replace all individual ECU
Currencies with a single currency called Euro Laid down the steps
for a complete European Economic Monetary Union(EMU)