Brettonwoods System evolved in response to dire necessity of: i) stability of Exchange Rate and Availability of adequate international reserves. Created in 1969. To augment world liquidity. Taking into account shortage of $ and gold supply. Holders of SDRs can obtain these currencies in exchange for their SDRs. Deficit countries can use them to purchase stronger currencies which can be used to pay off B.O.P. Debts.
Brettonwoods System evolved in response to dire necessity of: i) stability of Exchange Rate and Availability of adequate international reserves. Created in 1969. To augment world liquidity. Taking into account shortage of $ and gold supply. Holders of SDRs can obtain these currencies in exchange for their SDRs. Deficit countries can use them to purchase stronger currencies which can be used to pay off B.O.P. Debts.
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Brettonwoods System evolved in response to dire necessity of: i) stability of Exchange Rate and Availability of adequate international reserves. Created in 1969. To augment world liquidity. Taking into account shortage of $ and gold supply. Holders of SDRs can obtain these currencies in exchange for their SDRs. Deficit countries can use them to purchase stronger currencies which can be used to pay off B.O.P. Debts.
Direitos autorais:
Attribution Non-Commercial (BY-NC)
Formatos disponíveis
Baixe no formato PPT, PDF, TXT ou leia online no Scribd
Brettonwoods System Evolved in response to the dire necessity of:
i) Stability of Exchange Rate &
ii) Availability of adequate International Reserves. July 1, 1944 Brettonwoods Agreement.
Fixed Parity of global currencies against
US $.
U.S. fixed gold parity as $ 35 for one
ounce of gold.
U.S.A undertaken free convertibility of
U.S. dollar for gold. Global currencies backed by U.S. gold as collateral.
+ or – 1% fluctuation band allowed.
Values of other currencies fixed in U.S. $
official parity.
Exchange rate maintained within 1
percent on either side of official parity. This required U.S. to maintain gold backing its $ currency.
Other member countries to maintain $
reserves.
Allowed a revision of 10 percent within a year
of initial selection of the exchange rate. The Articles of Agreements requires IMF members countries to :
1.Promote international monetary co-operation
2.Facilitate the growth of trade 3.Promote exchange rate stability 4.Establish a system of multilateral payments
5.Create reserve base.
ACTIVITIES OF I M F
Surveillance – process of monitoring &
consultation handled by I M F.
Financial assistance of different kinds.
For ensuring adequate reserves flow
maintaining Exchange Rate stability & avoiding competitive depreciation of currencies. Special Drawing Rights (SDRs)
Created in 1969.
To augment world liquidity.
Taking into account shortage of $ and gold
supply in response to increase world trade / other global transactions & consequent shortage of world liquidity.
SDRs allocation to members in proportion to
their contribution to funds. What is SDRs ?
SDRs => Not currency => Not claim on
I M F => is sanction of credit limit to member countries.
Is potential claim on freely usable
currencies of I M F members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways:
i) Through arrangement of voluntary
exchanges between member countries.
ii) An arrangement by I M F fordesignating
members with strong external positions to purchase SDRs from members with weak external positions.
Deficit countries can use them to purchase
stronger currencies which can be used to pay off B.O.P. debts. Brettonwoods system ended in 1973
By 1973 – many countries moved to flexible exchange rates.
Break-down of Brettonwoods system
General Force Specific Forces
French Policy Reaction Tiffin's paradox
to dominance of $ continuing and growing U.S. deficits growing reserve requirements. Huge Deficit in U.S. BOP => loss of confidence in U.S. $.
Holland & Germany came out of fixed rate parity.
Central Banks met at Smithsonian Institute on
December 17 & 18, 1971 to resolve the crisis.
U.S.A revised the gold parity against $ as $38 per
ounce of gold.
Currency fluctuation band widened from 1% to 2.25%
and for some currencies 4.50%. Prospects of the International Financial System.
“The International Financial System
evolves in response to the environment it serves.” I. 1914 – 1918 => 1944 – 1973
The shift from classical Gold Standard to the
Standard adopted at Brettonwoods came in response to i) Beggar-thy-neighbour, “cut-throat competition”. ii) Protectionist exchange rate policies – competitive devaluations – during the depression and World war.
In reaction to the above environment the
system chosen was characterised by extreme rigidity of exchange rates. II. 1960s – 1970s
Oil shocks of the 1960s and the early 1970s.
Rigidity of Brettonwoods System did not provide adjustment needed between oil using and oil producing countries.
In response to the above environment, the
system of flexible exchange rate has emerged. III. Since 1980s
The environment emerged subsequently was
characterised by:
i. Growing financial & economic
interdependence.
ii. Financial deregulation & growth in trade.
iii. Massive structural imbalances of trade &
fiscal deficits. In response to the above scenario, the
unfettered flexibility of the 1970s & early 1980s
was replaced by the more co-operative
arrangements of Plaza Agreement and Louvre
Accord. IV. Where do we go from here ?
A broad answer to this question can be
discovered from review of the following challenging questions:
a) The Third World Debt Problem.
& b) The shift from U.S. economic hegemony to a shared U.S. – Japanese – European balance of Economic Power.
The review of the above two burning issues
suggest the possible direction of the International Finance System.