This document provides an overview of international monetary systems and exchange rates. It discusses the historical evolution from the gold standard to Bretton Woods to floating rates today. It also outlines the roles of the IMF and World Bank in maintaining order and promoting development. Managers must account for currency fluctuations and maintain strategic flexibility given the difficulties predicting exchange rate movements.

1. MONETARY
SYSTEM

3. Monetary System
 Relationship between monetary system and
foreign exchange rates
 Historical development
 Fixed vs floating exchange rates
 Role of the IMF and World Bank
 Implications for managers

4. International Monetary System
 Currency exchange rates depend on the
structure of the international monetary
system
 In 2003 of all IMF members currencies
◦ Only 19% were free floating
◦ 25% were managed float
◦ 8% were adjustable peg
◦ 22% were fixed peg
◦ 4% were fixed by a currency board
◦ 22% were not currency of their own (use
Euro, US Dollar)

6. Evolution of the International
Monetary System
 GoldStandard: currencies pegged to
gold value
◦ Convertibility guaranteed
◦ By 1880 most on gold standard
◦ Balance of trade equilibrium for all
countries
 Value of exports should equal value of
imports
 Flow of gold used to make up differences
◦ Abandoned in 1914
 Failed resumption after WWI
 Great Depression

7. Bretton Woods (1944 - 1973)
 44 countries met to design a new
system in 1944
 Established:
International Monetary Fund (IMF) and
World Bank
◦ IMF: maintain order in monetary system
◦ World Bank: promote general economic
development
◦ Fixed exchange rates pegged to the US
Dollar
◦ US Dollar pegged to gold at $35 per ounce
◦ Countries maintained their currencies ±
1% of the fixed rate; buy/sell own
currency to maintain level

8. The Role of the IMF
 IMF maintained exchange rate
◦ discipline
 National governments had to manage inflation
through their money supply
◦ flexibility
 Provides loans to help members states with
temporary balance-of-payment deficit;
◦ Allows time to bring down inflation
◦ Relieves pressures to devalue
 Excessive drawing from IMF funds came with
IMF supervision of monetary and fiscal policies
◦ Allowed to 10% devaluations and more with
IMF approval
 187 members by 2003

9. The Role of the World Bank
 WorldBank (IBRD) role
(International Bank for Reconstruction
& Development)
◦ Refinanced post-WWII reconstruction and
development
◦ Provides low-interest long term loans to
developing economies
 TheInternational Development Agency
(IDA), an arm of the bank created in
1960
◦ Raises funds from member states
◦ Loans only to poorest countries
◦ 50 year repayment at 1% per year interest

10. Collapse of Bretton Woods
 Devaluation pressures on US dollar
after 20 years
◦ Lyndon Johnson policies
 Vietnam war financing
 Welfare program financing
◦ Nixon ended gold convertibility of US
dollar in 1971
◦ US dollar was devalued and dealers
started speculating against it for
further devaluation
◦ Bretton Woods fixed exchange rates
abandoned in January 1972

11. Jamaica Agreement 1976
 Floating rates declared acceptable
 Gold abandoned as reserve asset;
◦ IMF returned gold reserves to members at
current prices
◦ Proceeds placed in trust fund to help poor
nations
◦ IMF quotas – member country
contributions – increased; membership
now 182 countries
◦ Less-develop, non-oil exporting countries
given more access to IMF
 IMF continued its role of helping countries
cope with macroeconomic and exchange rate
problems

12. Case for Floating Exchange Rates
◦ Monetary policy autonomy
◦ Trade balance adjustments helped
The Case for Fixed
Exchange Rates
◦ Monetary discipline
◦ Speculation limited
◦ Uncertainty reduced
◦ Trade balance adjustment effects on
inflation controlled
Who is right?

13. Recent Activities and the IMF
 Mexican Crisis 1995
 Russian Ruble crisis1995
 Asian crisis 1997/1998
◦ Events
 The investment boom
 Excess capacity
 The debt bomb
 Expanding imports
 The crisis
 How does the IMF achieve results?
◦ Inappropriate policies?
◦ Moral Hazard?
◦ Lack of accountability?

14. Managerial Implications
 Currency management
◦ Currency market does not always work as
expected
◦ Government intervention
◦ Speculative activity
 Business strategy
◦ Movements in exchange rates are difficult to
predict
◦ Forward market is imperfect predictor of
exchange rate movements
◦ Forward exchange rate market covers risk for
months not years
◦ Maintenance of strategic flexibility required
 Disperse manufacturing
 Outsource
◦ Corporate-government relations