Currency system

Chapter:
Global Finance and
Business

Currency System
Gold Currency
Monetary Currency
Convertible Currency
Unconvertible Currency
Hard Currency
International Currency Exchange
Exchange Rate
Gold Standard System.
Bretton Wood System/Fixed Exchanged Rate
Free Floating System
Managed Floating System
Hyperinflation

Currency System
Nearly every state prints its own money. The
ability to print one’s own currency is one of the
hallmarks of state sovereignty. yet is a globalized
system of trade and finance, business and
individuals often need other states’ currencies to
do business.

Gold Currency
 No world currency
 Sovereign states
 Europe
 World Currency
 Political Instability-Future Value

Monetary Currency
 Gold Standard System Vs International Monetary System
 Irrespective of gold and silver
 Makes international economies more efficient
 Today’s Currency System
This Currency is of two types of Currencies,
summed up in the next slide

Hard Currency
“In contrast with nonconvertible currency, hard currency is money that
can be readily converted to leading world currencies” (Joshua.p.312)
 Examples of China and Two Version of Currency in Cuba
 States maintain reserves of hard currency
 These reserves are the equivalent of the stockpiles of gold in
centuries past.
 National currencies are now backed by hard currencies reserves, not
gold.

Soft Currency
Soft currencies are usually from countries that
are not too stable (politically and economically) nor
come in the category of "superpowers".
Investments and trade in such currencies is a high
risk. But investors willing to earn more over short-
term can definitely go for such currencies, at their
own risk.

Two Types of Hard and
Soft Currencies
Lets-Visit Next Slide

Convertible Currency
“The guarantee that the holder of
a particular currency can
exchange it for another currency”.
(Joshua.p.311)

Benefits of Convertible Currency
 Encouragement to exports-FER increase
 Encouragement to import substitution-expensive
 Incentive to send remittances from abroad-Hawala
 Integration of World Economy

Non-Convertible Currency
The holder of such money has no guarantee of being able to trade it
for another currency. Such states cut off from the world capitalist
economy.
 This can be sold, in black markets
 Or dealing with governments issuing currency, but the price will be
low
 Holding of unconvertible currency means loss of money

International Currency Exchange
Today, national currencies are valued
against each other, not against gold
or silver. Each state for a different
state’s currency according to
exchange rate.

Exchange Rate
“The rate at which one state’s currency
can be exchange for the currency of
another state, since 1973, the international
monetary system has depended mainly on
floating rather than fixed exchange rates”.
(Joshua.p.310)

Exchange Rate
There area four exchange methods of exchange rate have been
used to conduct international trade.
 Gold Standard System.
 Bretton Wood System
 Free Floating System
 Managed Floating System

Gold Standard System(GSS)
“A System in international monetary
relations, prominent for century before
1970s, in which the value of national
currencies was pegged to the value of gold
or other precious metals”. (Joshua.p.310)

Drawbacks in GSS
 Countries acted to protect their gold reserves
 It resulted in huge deficit
 Countries had advantage (outflow) and disadvantage (inflow)
 Price level rose, and income increased when gold fields
discovered
 The supply of money remained unchanged and prices and
income tended to fall

Bretton Wood System (BWS)/Fixed
Exchanged Rate (FER)
The official rates of exchange for currencies set
by governments; not dominant mechanism in the
international monetary system since 1973.
(Joshua.p.312)

Two premises of BWS
Countries were to maintain fixed exchange
with each other, for example, US dollar was
fixed in value at $35 per ounce.
Countries experiencing a deficit in their
balance of payment were allowed to change
their exchange rates.

The advantages of a fixed exchange rate include:
 Providing greater certainty for importers and exporters,
therefore encouraging more international trade and
investment.
 Helping the government maintain low inflation, which can
have positive long-term effects such as keeping down interest
rates.

Drawbacks of BWS
This system abolished in 1971
Countries were asked to devalue their currencies
to mete out balance of payment-rising price
They were asked to take measure to cut deficit by
contracting their economies-unemployment

Free Floating System
“The rates determined by global currency markets
in which private investors and governments alike
buy and sell currencies”. (Joshua.p.312)

The advantages of a Free Floating rate include:
 No need for international management of exchange
rates: Unlike fixed exchange rates based on a metallic standard,
floating exchange rates don’t require an international manager
such as the International Monetary Fund to look over current
account imbalances.
 No need for frequent central bank intervention: Central
banks frequently must intervene in foreign exchange markets
under the fixed exchange rate regime to protect the gold parity,
but such is not the case under the floating regime.

Drawbacks of FFS
 Higher volatility: Exchange rates are highly volatile.
 Use of scarce resources to predict exchange rates: Higher
volatility in exchange rates increases the exchange rate risk that
financial market participants face.
 Tendency to worsen existing problems: Floating exchange rates
may aggravate existing problems in the economy. If the country is
already experiencing economic problems such as higher inflation or
unemployment, floating exchange rates may make the situation
worse.

Managed Floating
System
“A system of occasional multinational
government interventions in currency markets to
manage otherwise free-floating currency rates”.
(Joshua.p.313), Govt-intervene-market disorder

The advantages of a MFS rate include:
 The value of a currency from day to day is determined by market
demand for and supply of the currency
 Some currency market intervention might be considered as part of
demand management (e.g. a desire for a slightly lower currency to
boost export demand)
 The value of the currency is determined purely by demand and supply of the
currency
 Trade flows and capital flows affect the exchange rate under a floating system
 There is no target for the exchange rate and no intervention in the market by the
central bank

Hyperinflation
“An extremely rapid, uncontrolled rise in
prices, such as occurred in Germany in the
1920s and some third world countries
more recently”. (Joshua.p.311)-50%-13000

Currency system

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