The Gold-Exchange Standard (1947–1971)

In 1944, representatives of the United States, the United Kingdom, and 42 other nations

met at Bretton Woods, New Hampshire, to decide on what international monetary system

to establish after the war.

The system devised at Bretton Woods called for the establishment of the International Monetary Fund (IMF) for the purposes of (1) overseeing that nations followed a set of agreed upon rules of conduct in international trade and finance and (2) providing borrowing facilities for nations in temporary balance-of-payments difficulties.

The new international monetary system reflected the plan of the American delegation, drawn up by Harry D. White of the U.S. Treasury, rather than the plan submitted by John Maynard Keynes, who headed the British delegation. Keynes had called for the establishment of a clearing union able to create international liquidity based on a new unit of account called the “bancor,” just as a national central bank (the Federal Reserve in the United States) can create money domestically.

The IMF opened its doors on March 1, 1947, with a membership of 30 nations. With the admission of the Soviet Republics and other nations during the 1990s, IMF membership reached 187 at the beginning of 2012. Only a few countries, such as Cuba and North Korea, are not members.

The Bretton Woods system was a gold-exchange standard. The United States was to maintain the price of gold fixed at $35 per ounce and be ready to exchange on demand dollars for gold at that price without restrictions or limitations. Other nations were to fix the price of their currencies in terms of dollars (and thus implicitly in terms of gold) and intervene in foreign exchange markets to keep the exchange rate from moving by more than 1 percent above or below the par value. Within the allowed band of fluctuation, the exchange rate was determined by the forces of demand and supply.

Specifically, a nation would have to draw down its dollar reserves to purchase its own currency in order to prevent it from depreciating by more than 1 percent from the agreed par value, or the nation would have to purchase dollars with its own currency (adding to its international reserves) to prevent an appreciation of its currency by more than 1 percent from the par value. Until the late 1950s and early 1960s, when other currencies became fully convertible into dollars, the U.S. dollar was the only intervention currency, so that the new system was practically a gold-dollar standard.

Nations were to finance temporary balance-of-payments deficits out of their international reserves and by borrowing from the IMF. Only in a case of fundamental disequilibrium was a nation allowed, after the approval of the Fund, to change the par value of its currency.

Fundamental disequilibrium was nowhere clearly defined but broadly referred to large and persistent balance-of-payments deficits or surpluses. Exchange rate changes of less than 10 percent were, however, allowed without Fund approval. Thus, the Bretton Woods system was in the nature of an adjustable peg system, at least as originally conceived, combining general exchange rate stability with some flexibility. The stress on fixity can best be understood as resulting from the strong desire of nations to avoid the chaotic conditions in international trade and finance that prevailed during the interwar period.

After a period of transition following the war, nations were to remove all restrictions on the full convertibility of their currencies into other currencies and into the U.S. dollar. Nations were forbidden to impose additional trade restrictions (otherwise currency convertibility would not have much meaning), and existing trade restrictions were to be removed gradually in multilateral negotiations under the sponsorship of GATT.

Restrictions on international liquid capital flows were, however, permitted to allow nations to protect their currencies against large destabilizing, or “hot,” international money flows. Borrowing from the Fund (to be described below) was restricted to cover temporary balance-of-payments deficits and was to be repaid within three to five years so as not to tie up the Fund’s resources in long-term loans. Long-run development assistance was to be provided by the International Bank for Reconstruction and Development (IBRD or World Bank) and its affiliates, the International Finance Corporation (established in 1956 to stimulate private investments in developing nations from indigenous and foreign sources) and the International Development Association (established in 1960 to make loans at subsidized rates to the poorer developing nations).

The Fund was also to collect and propagate balance-of-payments, international trade, and other economic data of member nations. Today the IMF publishes, among other things, International Financial Statistics and Direction of Trade Statistics, the most authoritative sources of comparable time series.

China Steps In as World's New Bank by William Pesek

Thanks to China, Christine Lagarde of the International Monetary Fund, Jim Yong Kim of the World Bank and Takehiko Nakao of the Asian Development Bank may no longer have much meaningful work to do.

Beijing's move to bail out Russia, on top of its recent aid for Venezuela and Argentina, signals the death of the post-war Bretton Woods world. It’s also marks the beginning of the end for America's linchpin role in the global economy and Japan's influence in Asia.

What is China's new Asian Infrastructure Investment Bank if not an ADB killer? If Japan, ADB's main benefactor, won't share the presidency with Asian peers, Beijing will just use its deep pockets to overpower it. Lagarde's and Kim’s shops also are looking at a future in which crisis-wracked governments call Beijing before Washington. 

China stepping up its role as lender of last resort upends an economic development game that's been decades in the making. The IMF, World Bank and ADB are bloated, change-adverse institutions.  When Ukraine received a $17 billion IMF-led bailout this year it was about shoring up a geopolitically important economy, not geopolitical blackmail.

Chinese President Xi Jinping's government doesn't care about upgrading economies, the health of tax regimes or central bank reserves. It cares about loyalty. The quid pro quo: For our generous assistance we expect your full support on everything from Taiwan to territorial disputes to deadening the West’s pesky focus on human rights.

This may sound hyperbolic; Russia, Argentina and Venezuela are already at odds with the U.S. and its allies. But what about Europe? In 2011 and 2012, it looked to Beijing to save euro bond markets through massive purchases. Expect more of this dynamic in 2015 should fresh turmoil hit the euro zone, at which time Beijing will expect European leaders to pull their diplomatic punches. What happens if the Federal Reserve’s tapering slams economies from India to Indonesia and governments look to China for help? Why would Cambodia, Laos or Vietnam bother with the IMF’s conditions when China writes big checks with few strings attached?

Beijing’s $24 billion currency swap program to help Russia is a sign of things to come. Russia, it's often said, is too nuclear to fail. As Moscow weathers the worst crisis since the 1998 default, it’s tempting to view China as a good global citizen. But Beijing is just enabling President Vladimir Putin, who’s now under zero pressure to diversify his economy away from oil. The same goes for China’s $2.3 billion currency swap with Argentina and its $4 billion loan to Venezuela. In the Chinese century, bad behavior has its rewards.

If ever there were a time for President Barack Obama to accelerate his "pivot" to Asia it's now. There's plenty to worry about as China tosses money at rogue governments like Sudan and Zimbabwe. But there’s also lots at stake for Asia's budding democracies. The so-called Washington consensus on economic policies isn't perfect, but is Beijing's model of autocratic state capitalism with scant press freedom really a better option? With China becoming Asia's sugar daddy, the temptation in, say, Myanmar might be to avoid the difficult process of creating credible institutions to oversee the economy.

There could be a silver lining to China lavishing its nearly $4 trillion of currency reserves on crisis-plagued nations: It might force the IMF, World Bank and ADB to raise their games. Competition, as Lagarde, Kim and Nakao would agree, is a good thing. But more likely, China's largess will encourage bad policy habits and impede development in ways that leave the global economy worse off.

To contact the author on this story:
William Pesek at wpesek@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net

(Sources - http://www.bloombergview.com/articles/2014-12-25/china-steps-in-as-worlds-new-bank)

Iceland says it was 'bullied' over bank debt

REYKJAVIK (Sept 4, 2011): Iceland's president accused European countries on Sunday of having bullied it into agreeing to guarantee repayment of the debts of a failed bank, reviving a dispute with Britain and the Netherlands whose citizens are owed billions.

When Iceland's banking sector collapsed in the 2008 global financial crisis, accounts were frozen at the bank Landsbanki, which had accepted deposits from British and Dutch savers through online funds called Icesave.

Iceland says the estate of the failed bank will be enough to repay about US$5 billion (RM15 billion) of debt to the British and the Dutch. The two countries had wanted the government in Reykjavik to give a state guarantee to the repayment.

In a referendum earlier this year, Icelanders rejected for a second time giving a guarantee.

"People (in the government) bowed to the bullying of the Europeans ...," President Olafur Ragnar Grimsson told RUV public radio. He said the British and Dutch demand that the government guarantee the debt had been "absurd".

"So, what is happening now is proving that if the issue had been handled sensibly here from the beginning, it would have been totally unnecessary to put the people of Iceland and our cooperation with Europe into this straightjacket," he said.

"The EU should investigate and face up to how in the world it was possible that EU member states agreed to support this absurd claim against Iceland," he said.

The British and Dutch, with the support of other EU nations, had also persuaded the International Monetary Fund to pressure Iceland, Grimsson said, adding that former IMF managing director Dominique Strauss-Kahn told him in January 2010 he was unhappy that the Fund was being used as a "fist" against Iceland.

Since the 2008 global financial crisis, Iceland had to accept a bailout led by the IMF, accompanied by a programme of economic reforms which have just been completed.

The administrators of Landsbanki have said the estate of the bank can more than repay the British and Dutch. They have said the payments can begin later this year after final domestic legal action is out of the way. – Reuters

(Sources - http://www.thesundaily.my)