Multinational Business Finance Chatper One Qestion Answer

The Gold Standard was the framework by which the value of cash was characterized in terms of gold, for which the money could be traded. The Gold Standard ended up being deserted in the Depression of the 1930s. Friedman felt that,“The gold standard is not feasible because the mythology and beliefs required to make it effective do not exist. This conclusion is supported not only by the general historical evidence referred to but also by the specific experience of the United States” ( “The Gold Standard:Please Stop”).Economists who contradict the Gold Standard may perceive what must be accomplished with a specific end goal to make a centrally controlled paper standard better than a decentralized Gold Standard. Milton Friedman poses the key question: "How can we establish a monetary system that is stable, free from irresponsible tinkering, and

One of the most heated debates of the time period was over the gold standard monetary policy. In Document ‘E’ the crop-lien system or sharecropping is demonstrated. It shows how the farmers are profiting little or no money at all by the 1880’s, however the government, along with the wealthier citizens, were trying to implement a gold standard, eliminating silver currency altogether and creating some deflation. The farmers, most of whom were already in debt, advocated strongly against this monetary policy. They were in favor of a bimetallistic system. The Farmer’s were already indebted to the people they leased their land from, and if there was a monetary policy, the amount of money they owed would remain the same, however the value of that money would increase. Document ‘J’ is a clear opposition to the monetary policy by the farmers. Through the fight

The gold standard refers to a monetary system in which the fixed amount of gold is used to define the value of country's currency and the country's currency is freely interchangeable to gold. To guarantee convertibility, the supply of money issued by the central back was entirely restricted by the quantity of gold reserves in the nation. International payments are compensated in term of gold. Under the gold standard system, the value of a fixed quantity of gold reflects the value of the country's currency, thus leading to a fixed exchange rate, which is determined by the gold weights. For instance, if the gold price in the United State is $400 per an ounce, the dollar’s value will be 1/400 for an ounce of gold. As a result, the government needs

There was pushback from the Federal Government, President Grover Cleveland included, wanted to keep the money supply fixed in gold, held in the hand of the government (Doc D). Monopolization of the wealth supply was pandemic in the United States in the late

Currency exchange rates can be categorised as floating, in which case they constantly change based on a number of factors, or they can subsequently be fixed to another currency, where they still float, but they additionally move in conjunction with the currency to which they are pegged. Floating rates are a reflection of market movement, demonstrating the principles of both demand and supply, as well as limit imbalances in the international financial system. Fixed exchange rates are predominantly used by developing countries as they are preferred for their greater stability. They grant further control to central banks to set currency values, and are often used to evade market abuse. (MacEachern, A. 2008; Simmons, P.

Most of the countries have their own central bank such as the Federal Reserve is the central bank of United States. First let’s discuss about the Gold Reserve, gold reserve is where the gold was held by a national central bank. There are many reasons why central bank reserve the gold, one of the reasons is to support the value of the national

After World War II, the Bretton Woods Agreement established the gold standard and two support institutions called the International Monetary Fund (IMF) and the World Bank. This would lead to a shift, away from the gold standard, to more relaxed systems. The idea of currency purely backed by gold was slowly being shifted to a trust based currency. These institutions purpose was to regulate the economies by injecting or taking money in a process called sterilization. Sterilization is to protect certain countries from a going bankrupt. If a country goes bankrupt, it chain a chain reaction of bankruptcies. So, in order to maintain balance, currencies need to be stable enough, so that it can be in debt without having to declare bankruptcy. The idea is

This made the policy fine until WW 1 when the gold standard was torn up in 1914 because countries needed to print money to fight World War I. When World War I was over and the world entered the early 1920s, countries wanted to go back to the gold standard but they didn’t quite know how to do it. Before World War I started with parity, meaning there was a certain amount of gold and a certain amount of paper money backed by gold. Then, the paper money supply was doubled. That left only two choices if countries wanted to go back to a gold standard. They could’ve doubled the price of gold — basically cut the value of their currency in half or they could’ve cut the money supply in half. They could’ve done either one but they had to get to the parity

At the end of World War Two, the Bretton Woods system was established for world currencies. This system involved countries fixing their currencies to the US Dollar, which in turn was tied to the value of gold at a fixed exchange rate of $35 per ounce. As this was a fixed exchange rate system it effectively forced countries to pursue a certain monetary policy, in order to keep their currency pegged to the Dollar and in turn the value of gold.

One of the characteristics of gold standard defined by Temin is that the adjustment mechanism for a trade deficit country was deflation rather than devaluation, that is, a change in domestic prices instead of a change in the exchange rate. In the event of a balance-of-payment deficit, countries on the gold standard could not devalue their currencies or expand the money supply to stimulate domestic demand, because by doing so would push up good prices, encourage more gold exports, and weaken the currency. Instead, they could only tighten monetary conditions with the goal of reducing domestic prices and costs until international balance was restored. “Critical to this process was the effort to reduce wages, the largest element in costs.” That is to say, the gold standard system must be maintained at the expense of the welfare of ordinary people, which they must either experienced wages fall or unemployment. This mechanism worked well to facilitate trade and exchange before the First World War, the reason,

How did this historical evolution unfold? In the late 1960’s, capital movements began to undermine the Bretton Woods preoccupation with capital controls, as US officials began actively encouraging the growth of the Euromarket— the pool of unregulated dollar reserves concentrated in the City of London. Speculative capital flows, however, began to undermine the capacity for the US to guarantee the convertibility of dollars into gold at fixed parity (Triffin, 1960). In 1974, Nixon closed the gold window and loosened capital controls. The deregulation of financial markets established a global market of mobile financial capital, yet Keynesian inspired institutional arrangements remained intact, especially the maintenance of cheap money policy for

Such a process can be very time consuming and imprecise, without, of course, having a market currency price to begin with. The exchange-rate system is an important topic in international economic policy. Policymakers and journalists often seem to treat the choice of exchange-rate system as one of the most important economic policy choices that a national government makes, on a par with free international trade. Under most circumstances and for most countries, a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate.

According to the author Ramaa Vasudevan the article was aiming to compare and contrast the actual workings of the international l monetary arrangements in the two periods, Britain during the period of the international gold standard and USA after post war period. The pyramiding if official liabilities on a disproportionately small reserve base and the parallel emergence of unregulated monetary mechanisms based on an explosion of private liabilities generated international liquidity in both periods. It also adds to explain the workings of the international monetary systems of the two periods which

A fixed exchange rate regime will offer an economy greater stability in international prices and therefore encourage trade. Additionally, for developing countries a fixed rate will assist in promoting institutional discipline as the country will adopt restrictive monetary and fiscal policies that foster an anti-inflationary environment. A significant weakness of a fixed rate is that it is subject to destabilizing speculative attacks which could lead to financial meltdowns and devastating economic contractions. A floating exchange rate regime allows central banks to combat macroeconomic factors such as unemployment, inflation, and interest rates without having to worry about the effect on exchange rates. However, developing countries whose economies depend on trade will be reluctant to allow their exchange rates to fluctuate freely.

In 70’s and 80’s many countries switched over to the free convertibility of their currencies into foreign exchange. By 1990, 70 countries of the world had introduced currency convertibility on current account; another 10 countries joined them in 1991.