1、Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.Tenth EditionThe International Monetary System:Past,Present,and FutureDominick SalvatoreJohn Wiley&Sons,Inc.CHAPTER T W E N T Y O N ESalvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.In this chapter:nIntrod
2、uctionnThe Gold Standard and the Interwar ExperiencenThe Bretton Woods SystemnOperation and Evolution of the Bretton Woods SystemnU.S.Balance of Payments Deficits and Collapse of the Bretton Woods SystemnInternational Monetary System:Present and FutureSalvatore:International Economics,10th Edition 2
3、009 John Wiley&Sons,Inc.IntroductionnAn international monetary system refers to the rules,customs,instruments,facilities and organizations for effecting international payments.nA good international monetary system is one that:n maximizes the flow of international trade and investments.nLeads to“equi
4、table”distribution of gains from trade among nations.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.IntroductionnAn international monetary system can be evaluated in terms of:nAdjustment process by which balance of payments disequilibria are corrected.nLiquidity amount of in
5、ternational reserve assets available to settle temporary balance of payments disequilibria.nConfidence knowledge that the adjustment mechanism is working adequately,and that international reserves will retain their absolute and relative values.Salvatore:International Economics,10th Edition 2009 John
6、 Wiley&Sons,Inc.The Gold Standard and the Interwar ExperiencenThe Gold Standard Period(1880-1914)nNations defined the gold content of its currency and passively stood ready to buy or sell any amount of gold at that price.nExchange rates were fixed at mint parity,allowed to fluctuate by cost of shipp
7、ing.nAdjustment mechanism was Humes price-specie flow mechanism(see chapter 16).nNations could not use monetary policy for achieving full employment without inflation.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.The Gold Standard and the Interwar ExperiencenThe Gold Standa
8、rd Period(1880-1914)nIn reality,adjustment process worked much too smoothly and quickly,with few actual transfers of gold.nAdjustments occurred because of special conditions that existed during this time:nGreat economic expansion and stability in most of the world.nPound sterling was only important
9、international currency.nGreater price flexibility than today.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.The Gold Standard and the Interwar ExperiencenThe Interwar ExperiencenClassical gold standard ended with outbreak of World War I.nWildly fluctuating exchange rates fro
10、m 1919 to 1924 led nations to return to a modified gold standard.nThe gold-exchange standard allowed gold and currencies convertible into gold to be used as international reserves.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.The Gold Standard and the Interwar ExperiencenTh
11、e Interwar ExperiencenCauses of gold-exchange standard collapse:nLack of adequate adjustment mechanismsnHuge destabilizing capital flows from London to New York and Paris.nOutbreak of the Great Depression.nFrom 1931 to 1936,great instability and competitive devaluations,increased protectionism,inter
12、national trade cut almost in half.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.The Bretton Woods SystemnGold-Exchange Standard(1947-1971)nBretton Woods was a gold-exchange standard,with the United States maintaining the price of gold at$35 per ounce,standing ready to excha
13、nge dollars for gold.nOther nations fixed their exchange rates in terms of dollars,maintaining rates within one percent above or below par value.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.The Bretton Woods SystemnGold-Exchange Standard(1947-1971)nSystem devised at Bretto
14、n Woods called for establishment of International Monetary Fund(IMF)for purposes of:nOverseeing that nations followed rules of conduct in international trade and finance.nProviding borrowing facilities for nations in temporary balance of payments difficulties.Salvatore:International Economics,10th E
15、dition 2009 John Wiley&Sons,Inc.The Bretton Woods SystemnIn borrowing from the IMF,a nation receives convertible currencies to fund balance of payments disequilibria.nA nation may borrow no more than 25 percent of its quota during any given year with a maximum borrowing limit of 125 percent.nThe fir
16、st 25 percent borrowed,the gold tranche,comes without restrictions or conditions.nSubsequent tranches come with higher interest charges and stricter conditions.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.Operation and Evolution of the Bretton Woods SystemnBretton Woods al
17、lowed changes to par values in cases of fundamental disequilibria.nDeficit nations saw devaluation as a sign of weakness.nSurplus nations resisted revaluation,preferring instead to accumulate international reserves.nSince few nations changed par values,adjustment mechanism was hindered.nResulted in
18、destabilizing international capital flows.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.U.S.Balance-of-Payments Deficit and Collapse of the Bretton Woods SystemnBeginning in 1958,the U.S.began running significant balance of payments deficits.nBecause dollar was an internati
19、onal currency,U.S.felt it could not devalue to correct balance of payments.nEffects:nDepletion of U.S.gold reservesnDeclining gold reserves forced the U.S.to suspend gold convertibility in 1971.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.U.S.Balance-of-Payments Deficit an
20、d Collapse of the Bretton Woods SystemnThe ability to settle its balance of payments deficit with dollars conferred an important privilege on the United States that other nations did not have.nSeignorage-benefit accruing to a nation from issuing its currency or when its currency is used as an intern
21、ational currency.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.U.S.Balance-of-Payments Deficit and Collapse of the Bretton Woods SystemnBut the United States could not devalue its currency without bringing down the Bretton Woods system.nSince the United States could not use
22、 monetary policy,it had to rely heavily on fiscal policy to achieve domestic objectives.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.U.S.Balance-of-Payments Deficit and Collapse of the Bretton Woods SystemnThe unwillingness of Germany and Japan to revalue their currency fo
23、rced the United States to devalue the dollar,collapsing the Bretton Woods system.nThis was a political decision to remove the United States from its position as the“worlds banker”.nIronically,the U.S.dollar remained an international currency even without the gold backing.Salvatore:International Econ
24、omics,10th Edition 2009 John Wiley&Sons,Inc.U.S.Balance-of-Payments Deficit and Collapse of the Bretton Woods SystemnSmithsonian Agreement(1971)nDollar price of gold increased to$38/ouncenOther major currencies revaluednFluctuation bands increased to+/-2.25 percentnEffectively generates a dollar sta
25、ndardnContinuing balance of payments deficits forced a subsequent devaluation of the dollar in 1973($42.22 per ounce)and finally a suspension of dollar convertibility to gold.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.The International Monetary System:Present and Futuren
26、Following the collapse of the Bretton Woods System,the monetary system moved to a system of managed floats.nOfficially acknowledged by the Jamaica Accords of 1976.nInternational reserves for currency intervention still provided by the IMF.nThe lending ability of the IMF was expanded in 1997 by the N
27、ew Arrangement to Borrow.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.The International Monetary System:Present and FuturenThe use of IMF conditionality has come to be a source of great contention within the international monetary system.nIMF Conditions for Loans and Speci
28、al Help:nReductions in government spendingnGrowth of the money supplynWage increases to reduce imports,stimulate exports,and make country more self-sustainingSalvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.The International Monetary System:Present and FuturenProblems with Pre
29、sent Exchange Rate ArrangementsnLarge volatility,and wide and persistent misalignments of exchange ratesnDollar overhang large quantities of dollars held by foreigners and ready to move from monetary center to monetary center in response to fluctuations in exchange ratesSalvatore:International Econo
30、mics,10th Edition 2009 John Wiley&Sons,Inc.The International Monetary System:Present and FuturenProblems with Present Exchange Rate ArrangementsnFailure to promote greater coordination of economic policies among leading industrial nationsnInability to prevent international financial crises or deal w
31、ith them adequately when they ariseFIGURE 21-1 Exchange Rates of Major Currencies Against the Dollar.Salvatore:International Economics,10th Edition 2009 John Wiley&Sons,Inc.The International Monetary System:Present and FuturenCurrent International ProblemsFinancial crises in emerging market economies.Trade protectionism in advanced countries in a rapidly globalizing world.Structural imbalances in the United States,slow growth in Europe and Japan,and insufficient restructuring in transition economies.
