International Monetary System

June 2007
Chronology
Bimetallism before 1875
Classic Gold Standard (1875-1914)
Inter war period (1915-1944)
Bretton Woods System (1945-1972)
Flexible Exchange Rates (since 1973)
Classic gold standard
Gold is assured of unrestricted coinage
There is 2 way convertibility between gold
and the national currency at a stable rate
Gold may be freely exported or imported
Not a compulsory standard so countries
could abandon gold standard at will
Inter war years
Faith lost in gold standard as countries
tried to depreciate their values to gain
competitiveness.
Gold sterilization happened with issue of
gold certificates.
Great Depression happened so
domestic economic stability gained priority
Gold Exchange Standard
IMF and IBRD
Bancor vs Currency Pool
Par value to US $ that was pegged to gold
within a 1 % band
Triffin Paradox
Creation of SDRs after Charles de
Gaulle exchanged gold for $
Interest Equalisation tax
SDR
1970 IMF- weighted average of 16
currencies
1981 Dollar, Mark, Yen and Pound
Now Dollar, Euro, Yen and Pound
SDR portfolio of currencies so more
stable
Crash of Gold exchange
1971 Nixon abandoned the standard and
levied 10 % import surcharge
Smithsonian Agreement Dollar devalued
and other currencies were revalued
Oil crisis
Flexible exchange rates
Post 1976 Exchange rates flexible and
market determined
Gold was de-monetized
Volatility of exch rates since then
Louvre Accord 1987 Managed float

Exchange Rate Agreements
No separate legal tender Euro
Currency Board HK $
Fixed peg
Peg with 1 % band
Crawling pegs and crawling bands
Managed float
Independent float
Monetary Union
Reduction in transaction costs and elimination of
uncertainty
Save hedging costs
Greater competition more price transparency
Promotes more trade
Loss of national policy independence
Asymmetric Shocks
Labor mobility
Wage-price flexibility
Mexican Peso Crisis
1994 devalued peso against $ by 14%
Capital flight
Moved across borders
Bailed out by the IMF and US 50 bn $
Depleted forex reserves
Dependence on foreign portfolio capital
alone to finance its growth
Asian currency crisis
1997 Thai baht devalued
Spread to Korea, Indonesia, Malaysia and
the Philippines
Origins
Weak financial system
Free intl capital flows
Contagion effects of sentiment
Inconsistent economic policies
Asia
Inflow into the Tiger economies 93 bn$
Led to a credit boom
Bad invt avenues
Appreciation of currency with increased asset
prices
Export slowdown exch rates were fixed
High short term debt to intl reserves
Lenders withdrew, credit crunch
Through the IMF we have privatized profits and
socialized losses
Lessons learnt
Banking supervision Basle committee
More transparency of financial activity
Chile Tobin tax
Discourage short term investment
Trilemma
Fixed exchange rate
Free intl capital flows
Independent monetary policy