Currencies
Representative & fiat currency
Representative currency
Money is backed by physical assets (for a long time, gold).
Fiat money
Money is not backed by any physical asset, instead it is backed by
governmental decree, i.e. you got to trust the government.
E.g. the Zimbabwe inflation
Not all governments are trustworthy & stable.
Three currency systems
The Gold Standard
Currencies have their value linked to gold.
Doesn't fluctuate much (stable gold reserve, stable currency system).
Eliminates "foreign-exchange risk".
1 USD = x GOLD, 1 BP = y GOLD, thus m USD = n BP
Implications: adoption reduces power of host government to set own
monetary policy.
i.e. because there is limited number of gold in every government, every
dollar you print need to be backed up by the gold you have.
Governments can't stimulate the economy by printing more money and
have them circulated into the economy (lower interest rates, etc.); this is
impossible under the gold standard because the government can't
simply "find more gold" for the amount of money they want to add.
Bretton Woods
A new international monetary system by the end of WWII implemented by
policy-makers from the US and allied countries.
Aims
To help finance the rebuilding of war-damaged economies.
To integrate those economies and spur growth.
(The US wants to export and import to Europe.)
Main policies
Return to fixed exchange rate system.
International currency values were tied to gold and the US dollar
Thus, the US dollar plays the role as the world's central reserve currency,
placing US monetary policy at the center of global economy.
Implications
Governments are allowed to adjust value of currency within 1-2% of the
pegged dollar-gold value. i.e. we have the stability of the gold standard,
and the flexibility for governments to set their domestic currencies.
Newly-established institutions
The World Bank
Main aim: provide long-term loans to help rebuild war-damaged
economies, which now changed to prevent poverty.
Failed: the Marshall Plan from the US covered it.
The International Monetary Fund (IMF)
Main aim: stability in currencies
The General Agreement on Tariffs and Trade (GATT), replaced by the
World Trade Organization (WTO)
Aim: initially, a barrier for communism / socialism, i.e. protecting
the capitalist free trade system; presently still facilitating (free)
trade through reduction of barriers.
The power-relations of these institutions
In favor of the US rather than developing countries.
Fall of Bretton-Woods Gold-Dollar standard
The US wasn't stable enough.
During the Vietnam War and the oil crisis, the US decided to start
printing dollars, which it did not have enough gold to back up (and
resulted in decreased trust), and eventually the US lost control for
how much money it had flowing in the world (Europe).
A floating exchange rate system
Post 1973
Exchange rate between currencies are set by supply and demand in the
market place, i.e. if more people want to buy the HKD, its exchange rate goes
up.
Much greater exchange rate volatility.
This volatility is a significant problem for smaller economies (e.g.
Netherlands) which don't consume much of the goods they produce and
are more vulnerable to exchange rate changes.
Business tend to want a more stable exchange rate. Stability is key to
international trade.
Financial traders
Buy the dollars when the currencies are low, and sell them when they're
higher.
The buying and selling of financial products are increasingly much more
than that of goods and services (1973 2:1, 1995 70:1).
