International Monetary System
In July 1944, the International Monetary System defined at the Bretton Woods Conference in the United States created the International Monetary Fund (IMF) and the World Bank. The first agency is designed to monitor the economic policies of member states and help maintain the balance of payments, that is, there is no task of sustaining deficits, and the second agency is designed to rebuild loans from war-torn economies and former colonies.
Between 1870 and the First World War, the gold standard was the main international monetary arrangement. The currencies of the main countries are related to the amount of gold in the economy. The logic of the system is based on a mechanism that automatically corrects imbalances in international payments and imposes restrictions on monetary policy to guarantee low inflation. With the growth of international trade, this is a highly stable and open stage.
During World War I, countries were forced to break the gold standard to finance the war. Despite attempts to restore it in the 1920s, at the end of the century, the system crashed again. The mechanism for ensuring balance of payments adjustment has failed. The war ended the promise between the governments of the previous period.
At the gold standard stage, the government guarantees that the national currency will be converted into gold, and the import and export of gold between countries is free. The ban on gold exports caused trade barriers and deflation in industrialized economies. The great turbulence between the two world wars inspired the establishment of the Bretton Woods system agreed between nations.
A system of fixed and adjustable exchange rates has been established with a maximum exchange rate of 10%, in which all currencies maintain a fixed parity with the United States dollar, and the United States dollar has a constant value in gold. However, as some countries postponed the introduction of currency convertibility, the agreement took a long time to be fully operational.
Capital controls are permitted, but currency restrictions and current transactions must be removed as soon as possible. The United States and Canada established convertibility in 1945, and European countries did not realize it until 1958. From then on, the foreign exchange market started to convert in a current account, and it became more difficult to control the movement of the dollar. .
As a result, the degree of integration of financial markets has increased and the flow of international reserves has become more turbulent. The pressure of inflation and the increase in capital flows caused the dollar to depreciate in the early 1970s. In 1971, the US dollar was no longer convertible into gold.
The end of the international monetary arrangements established by the Bretton Woods system occurred in 1973, when the industrialized countries adopted floating exchange rates. International Monetary Fund terms have been modified to include a new floating exchange rate system. In that case, countries should intervene only to reduce exchange rate fluctuations. International currency arrangements with fluctuating exchange rates mean a great expansion of the international capital market.
Throughout the 1980s and 1990s, deregulation, financial innovation and reduced control of capital flows have greatly expanded the foreign exchange market, including developing countries.
In the early 1990s, then President of the United States, George Bush, pressured Saddam Hussein’s dictatorship to freeze Iraq’s reserves. The largest oil supplier in the world has fragile liquidity. Iraq has two-thirds of its dollar reserves frozen on US territory.
Although he himself provides some necessary funds, he officially invites European countries to use their own currencies. Buy your products. Financial loss caused by the conversion. It just happened. Many historians believe that this fact is the biggest step against the sovereignty of US dollar trade negotiations. In the second half of the 1990s, Iraq already had large reserves in European currencies.
In the foreign exchange market, the currency exchanged in euros is the sum of the “hungry who crave food”. The environment is ready! This practice, associated with the previous decline in the gold standard, accelerated the occurrence of natural parity (price) between currencies. The addition of other European countries to the vanguard regions of the continent has further strengthened the euro currency and the demand for large markets. The foreign exchange or FX for short makes it the largest and most attractive electronic trading market in the world.
It can be said that foreign exchange trading is the oldest financial market in the world, which obviously is not what it is today, but opens up through international trade because countries need the means to buy their own currencies. Products from other countries. As we all know, the gold standard is a pioneer in foreign exchange trading. It is not clear how it started or exactly when it ended, but based on that, we can understand the basic principles of exchange.
Considering that not every milkman wants bread and not every baker wants milk, the exchange ended, giving way to the gold standard of the time. This model chooses a metal as the basis for a global exchange or trading hub. In addition to its material properties, gold is an ideal rare and brilliant metal!
The functioning of the standard is very simple, these countries indicate how much their gold monetary unit is worth, that is, it determines the relationship or exchange rate of their currency in relation to gold. Therefore, all countries provide a reference for the negotiation and speculation of prices and the weight of gold.
Therefore, paper money or currency minted in this period has book value, that is, they are securities with a predetermined amount of gold reserved for the holder in the bank that issued the bill.
In the post-war period (1919-1923), inflationary pressures in almost all countries led to insufficient gold reserves. In 1933, after the serious crisis on the 29th, the United States signed the “Gold Transfer Act” under the pretext of helping to end the depression, forcing all American citizens to hand over their gold reserves to the Federal Reserve under threat. Those who do not do so are sentenced to 10 years in prison.
As the government holds large amounts of gold, the United States has set the dollar’s value in relation to ounces of gold. Under the condition of guaranteeing liquidity, the US dollar has become the currency of international transactions and its demand is enormous. Since then, countries have started to make reserves in dollars, a fact that later became the axis of global exchange transactions stipulated by the Bretton Woods Agreement.
During the Second World War, a new and stable international system was established, which must guarantee the balanced development of international exchanges and promote the growth of the national economy. This new standard is called the Bretton Woods system, also known as the dollar standard.
In July 1944, representatives of the United Nations coalition gathered in countries belonging to the anti-fascist movement (including Brazil) gathered in the small town of Bretton Woods, in the northeastern United States, and took on one of the most difficult tasks to date, the social engineering The plan has been difficult, even since then.
This meeting was held under the auspices of John Maynard Keynes, the 20th century economic thought giant. The preparatory debate revolved around two proposals: the British one elaborated by Keynes and the United States in honor of the author Harry Dexter White. Both sides fear that the end of the war will bring back the Great Depression of the 1930s.
The differences between the two proposals are partly explained by different understandings about the functioning of the market economy, but of course they also reflect the different interests of countries that represent. Unless it is another circumstance, the winning proposal for this meeting is the American one, and Keynes’s plan at the institution established in the Bretton Woods system has almost nothing.
In the standard US dollar system, exchange rates are governed by agreements and contracts. The IMF coordinates everything and then creates a currency specifically for that function. The rules are stipulated by the General Agreement on Tariffs and Trade (General Agreement on Taxation and Trade), which is the price list for the currencies of the most diverse countries.
The standard US dollar operating method is that only the value of gold in US dollars is fixed, while the exchange rate of other currencies against the US dollar is determined by the government and maintained within the scope permitted by the General Agreement on Tariffs and Trade .
The Bretton Woods system has its ups and downs, and countries that have returned to India alternate several times with the gold standard. In 1973, a consensus was reached on the proposal for an appropriate exchange rate model. All that needs to be done is always to adopt a partial easing agreement to “fix” the Bretton Woods system at any time. In fact, the system does not work, and it is impractical and very dirty to stipulate the value of the currency through political agreements. At the end of the Cold War, with the advent of the Internet, modern currency transactions reached a climax.
In mid-1973, a wave of speculation against the US dollar triggered a new wave, which not only forced the US dollar to depreciate, but also forced it to decouple directly from gold, thereby increasing the currency support of the DEG.
In late 1975, in the French city of Rambouillet, representatives of the main industrialized countries agreed to amend the IMF’s statutes to accommodate the existence of a floating exchange rate system.
In the new market, currencies are supported by bonds, contracts, etc., although this is not a factor in determining prices. Peter Joseph stated in his famous documentary “Zeitgeist Addendun” that, for holders of promises or promissory notes, we no longer have accounting coins or “we have a certain amount of gold in the bank”. Property “.
However, currency prices are unrelated to the value of bonds or any of these macro variables (even with DEG currency). In the battle of buying and selling forces affected by global events and interests, prices are determined by the open market.
In the flexible exchange rate model, the central bank allows exchange rates to be adjusted to match the supply and demand of foreign currencies, so currencies become commodities, and the value of each commodity is determined by the market
, so currencies can be traded at uninterrupted trading hours through banking and financial institutions (launched at the end of the Bretton Woods system). These institutions and institutions use the global computer network to buy and sell the currency of the desired country on the network.
Interested parties: directly to the central bank, large companies, directly, and small investors, indirectly through brokers . The purchasing power and hard work of these three groups determine the value of each country’s currency.