The International Monetary System

Chapter 11
The International
Monetary System
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
What Is The International Monetary System?
The international monetary system refers to the

institutional arrangements that countries adopt to
govern exchange rates
“An international monetary system is a set of internationally

agreed rules, conventions and supporting institutions that
facilitate international trade, cross border investment and
generally the reallocation of capital between nation states”
Wikipedia
Evolution of international monetary system
BRETTON WOODS SYSTEM FLEXIBLE EXCHANGE RATE
CLASSICAL GOLD STANDARD
1945-1972 SYSTEM
INTERWAR PERIOD
1915-1944
1800-1914 1915-1944 1945-1972 1973-Present
The gold standard refers to a World war 1 ended the gold standard in
system in which countries peg
Flexible exchange rate system since 1973
1914, • The breton woods system collapsed on
currencies to gold and Monetary and Financial Conference held in
guarantee their convertibility • Restrictions on gold export – Britain, Breton Woods, New Hampshire, from July 1 to 15th august 1971
France, Germany and Russia – Germany, July 22, 1944.
1 ounce of gold= 6 pounds Austria, Hunary and Russia- Hyper • Fixed exchange rate system was formalized
1 ounce of gold= 12 francs inflation • 730 delegates from the 44 Allied nations
in January 1976 when IMF members met in
attended the conference
It means 1 pound= 2 francs. will Jamaica and agreed to the rules of the
• US replaced Great Britain as dominant
be the exchange rate. financial power • US held 2/3rds of world gold reserves international monetary system that are in
place today.
• Fueled up by the great depression • Major outcomes IMF IBRD Rupees,yen,etc
WORLD CURRENCIES quantity GOLD
Bretton Woods System
1945-1972 SYSTEM
INTERWAR PERIOD
1915-1944
1800-1914 1915-1944 1945-1972 1973-Present
place today.
What Institutions Were
Established At Bretton Woods?
The International Monetary Fund (IMF) to maintain
order in the international monetary system through
a combination of discipline and flexibility
➢ fixed exchange rates stopped competitive

devaluations and brought stability to the world trade
environment
➢ fixed exchange rates imposed monetary discipline
on countries, limiting price inflation
➢ in cases of fundamental
disequilibrium, devaluations were
permitted
➢ the IMF lent foreign currencies to members during
short periods of balance-of-payments deficit, when a
rapid tightening of monetary or fiscal policy would
hurt domestic employment
How Has The IMF Done?
➢ By 2012, the IMF was committing loans to 52
countries in economic and currency crisis
➢ All IMF loan packages require tight
macroeconomic and monetary policy
➢ However, critics worry
➢ the “one-size-fits-all” approach to macroeconomic
policy is inappropriate for many countries
➢ the IMF is exacerbating moral hazard - when people
behave recklessly because they know they will be
saved if things go wrong
➢ the IMF has become too powerful for an institution
without any real mechanism for accountability
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11-7
The World Bank to promote general
economic development
➢ also called the International Bank for
Reconstruction and Development (IBRD)
Countries can borrow from the World Bank in two ways

1. Under the IBRD scheme, money is raised through
bond sales in the international capital market
➢ borrowers pay a market rate of interest - the
bank's cost of funds plus a margin for expenses.
2. Through the International Development Agency, an arm

of the bank created in 1960
➢ IDA loans go only to the poorest countries
Why Did The Fixed Exchange Rate System
Collapse?
➢ Bretton Woods worked well until the late 1960s
➢ It collapsed when huge increases in welfare programs
and the Vietnam War were financed by increasing the
money supply and causing significant inflation
➢ other countries increased the value of their currencies
relative to the U.S. dollar in response to speculation
the dollar would be devalued
➢ However, because the system relied on an economically
well managed U.S., when the U.S. began to print money,
run high trade deficits, and experience high inflation, the
system was strained to the breaking point
➢ the U.S. dollar came under speculative attack
Bretton Woods Collapsed ➔ A new exchange system
was established
1945-1972 SYSTEM
INTERWAR PERIOD
1915-1944
1800-1914 1915-1944 1945-1972 1973-Present
place today.
Flexible Exchange Rate System
FLEXIBLE EXCHANGE RATE
SYSTEM JAMAICA AGREEMENT
➢ A new exchange rate system was established in
1976 at a meeting in Jamaica
➢ The rules that were agreed on then are still in
1973-Present
place today
➢ Under the Jamaican agreement
• The breton woods system collapsed on ➢ floating rates were declared acceptable
15th august 1971
• Fixed exchange rate system was formalized

➢ gold was abandoned as a reserve asset
Jamaica and agreed to the rules of the
➢ total annual IMF quotas - the amount member
international monetary system that are in countries contribute to the IMF - were increased to
place today.
$41 billion – today they are about $767 billion
What Has Happened To
Exchange Rates Since 1973?
Major Currencies Dollar Index, 1973-2015
the rise in the dollar

oil crises between 1980 and the rise in the dollar
1985 between 1980 and
1985
the global financial
crisis of 2008–2010;
the partial collapse of
sovereign debt crisis
the EMS in 1992
of 2010–2011
the 1997 Asian

the loss of confidence in the dollar
after U.S. inflation in 1977-78 currency crisis
Which Is Better – Fixed Rates Or Floating Rates?
A fixed exchange rate system Floating exchange rates provide

1. Provides monetary discipline 1. Monetary policy autonomy
➢ ensures that governments do not ➢ removing the obligation to maintain
exchange rate parity restores monetary
expand their money supplies at control to a government
inflationary rates 2. Automatic trade balance adjustments
2. Minimizes speculation ➢ under Bretton Woods, if a country
3. Reduces uncertainty developed a permanent deficit in its
balance of trade that could not be
➢ promotes growth of
corrected by domestic policy, the IMF
international trade and would have to agree to a currency
investment devaluation
3. Help countries recover from financial crises
What Type of Exchange Rate System Is
In Practice Today?
Exchange Rate Policies of IMF Members
?
What Does The Monetary System
Mean For Managers?
Business strategy - exchange rate movements can
have a major impact on the competitive position of
businesses
➢ need strategic flexibility
Corporate-government relations - businesses can

influence government policy towards the international
monetary system
➢ companies should promote a system that facilitates
international growth and development
Chapter 12
The Global Capital

Market
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Why Do Capital Markets Exist?
Capital markets bring together investors and borrowers
The Main Players in the Generic Capital Market
investors - markets makers - the borrowers -

corporations with financial service individuals,
surplus cash, companies that companies, and
individuals, and connect investors and governments
non-bank borrowers, either
financial directly (investment
institutions banks) or indirectly
(commercial banks)
➢ capital market loans
can be equity or debt
How Have Global Capital
Markets Changed Since 1990?
Global capital markets have grown rapidly
➢ the stock of cross-border bank loans was just

$3,600 billion in 1990, $7,859 billion in 2000,
$33,913 billion in 2012
➢ the international bond market has grown from

$3,515 billion in 1997, $5,908 billion in 2000,
$21,979 billion in 2012
TIME
Why Is the Global Capital
Market Growing?
➢ Two factors are responsible for the
growth of capital markets
1. Advances in information technology
➢ the growth of international communications
technology and advances in data processing
capabilities
➢ 24-hour-a-day trading
➢ so, shocks that occur in one financial market
spread around the globe very quickly
21 Novo Nordisk®
• The ENIAC took up

1,800 square feet of
warehouse space and
weighed more than 25
tons
• 5,000 instructions per

second
22 Novo Nordisk®
11,000,000,000,000
Market Growing?
?
2. Deregulation by governments
➢ has facilitated growth in international capital
markets
➢ governments have traditionally limited foreign
Foreign banks in
investment in domestic companies, and the VN
amount of foreign investment citizens could Vina Capital
make ……
➢ since the 1980s, these restrictions have been

falling
Market Growing?
?
➢ Deregulation began in the U.S., then moved to
Great Britain, Japan, and France
➢ Many countries have dismantled capital controls
making it easier for both inward and outward
investment to occur
➢ The 2008-2009 global financial crisis raised
questions as to whether deregulation had gone
too far
➢ Question: Are new regulations for the financial
services industry needed?
Capital Market: Equity and Bond
What Is the
Global Equity Market?
➢ The global equity market allows firms to
1. Attract capital from international investors
➢ many investors buy foreign equities to
diversify their portfolios
2. List their stock on multiple exchanges
➢ this type of trend may result in an
internationalization of corporate ownership
What Is the
Global Equity Market?
3. Raise funds by issuing debt or equity
around the world
➢ by issuing stock in other countries, firms
open the door to raising capital in the foreign
market
➢ gives the firm the option of compensating
local managers and employees with stock
➢ provides for local ownership
➢ increases visibility with local stakeholders
Ho Chi Minh City Stock Exchange
Ho Chi Minh City Stock Exchange
What Is the
Global Bond Market?
The bond market (also debt market or credit market) is a
financial market where participants can issue new debt, known as the
primary market, or buy and sell debt securities, known as the
secondary market. This is usually in the form of bonds, but it may
include notes, bills, and so for public and private expenditures.
Wikipedia
➢ Bonds are an important means of financing

for many companies
➢ the most common bond is a fixed rate which gives investors
fixed cash payoffs
What Do Global Capital Markets
Mean for Managers?
Growth in global capital markets has created
opportunities for firms to borrow or invest
internationally
➢ firms can often borrow at a lower cost than in the
domestic capital market
➢ firms must balance the cost savings against the
foreign-exchange risk associated with borrowing in
foreign currencies
What Do Global Capital Markets
Mean for Managers?
Growth in capital markets offers opportunities for
firms, institutions, and individuals to diversify
their investments and reduce risk
➢ again though, investors must consider
foreign exchange rate risk
➢ Capital markets are likely to continue to
integrate, providing more opportunities for
business

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Chapter 11

The international monetary system refers to the

“An international monetary system is a set of internationally

1800-1914 1915-1944 1945-1972 1973-Present

1800-1914 1915-1944 1945-1972 1973-Present

➢ fixed exchange rates stopped competitive

Countries can borrow from the World Bank in two ways

2. Through the International Development Agency, an arm

1800-1914 1915-1944 1945-1972 1973-Present

• Fixed exchange rate system was formalized

the rise in the dollar

the 1997 Asian

A fixed exchange rate system Floating exchange rates provide

Corporate-government relations - businesses can

The Global Capital

investors - markets makers - the borrowers -

➢ the stock of cross-border bank loans was just

➢ the international bond market has grown from

• The ENIAC took up

• 5,000 instructions per

➢ since the 1980s, these restrictions have been

➢ Bonds are an important means of financing

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