IB (International Monetary System)

-convertibility
-exchange rate regimes
-reserve assets
*Gold
*US dollar & other currencies
*SDRs

-government controls that limit the legal uses currency in an international transaction
-in general, only the relatively rich industrial countries have few or no currency exchange controls

-official exchange rate
-convertibility restrictions

-freely convertible
-externally convertible
-not convertible
*perserve foreign exchange reserves
*service international debt
*purchase imports
*gov afraid of capital flight

-closest approach to perfect competition-- aggregate supply & demand for currency affects exchange rates-- not gov intervention
-equilibrium follows from overall macroeconomic indicators
-focus more on interest rates & fiscal policy

-governments intervene in the currency markets as they percieve their national interests to be served
-nations may explain their interventions in terms of "smoothing market irregularities" or "assuring orderly markets"

When countries agree to buy or sell gold for an established number of currency units (fixed value)
-gov could not create currency not backed by gold
-convertibility guarenteed
-most countries on by 1880
-balance of trade equilibrium for all countries (value of exports should equal value of imports, flow of gold used to make up differences)
-system broke down in 1914 (failed after WWI and Great Depression)

1944, representatives of the major Allied powers met at Bretton Woods, New Hampshire to plan for the future
-established the IMF
-could not use devaluation as a weapon of competitive trade policy

-stable exchange rates were desired
-floating or fluctuating exchange rates had proved unsatisfactory
-the gov controls of trade, exchange & production that had developed through WWII were wasteful & discriminatory

-from 1945-1971 IMF agreement was the basis of the international monetary system
-the US dollar was agreed to be the central reserve asset
-an ounce of gold was agreed to be worth USD 35
-other nations fixed their exchange rates to the dollar
-187 countries
-over 2000 employees from 143 countries
-$237 billion
-

-discipline
-flexibility

-national governments had to manage inflation through their money supply
-excessive drawing from IMF funds came with IMF supervision of monetary & fiscal policies-- "conditionality"

-provides loans to help member states with temporary balance-of-payment deficit
*allows time to bring down inflation
*relieves pressures to devalue
-members allowed 10% devaluations & more with IMF approval

-lending
-technical assistance
-survellience consultations

-emerged the late 1960s
-a derivative "currency" that aims to diversify reserve currency holdings
-objective to make prinicple reserve asset in the international monetary system -- to avoid overdependence on specific currency/asset
-not a currency that exists in the private sphere, only within IMF-- limits their use (must be exchanged for hard currency)