Excess reserves
In banking, excess reserves are bank reserves in excess of a reserve requirement set by a central bank. In the United States, bank reserves for a commercial bank are held in part as a credit balance in an account for the commercial bank at the applicable Federal Reserve bank; this credit balance is not separated into separate "minimum reserves" and "excess reserves" accounts. The total amount of FRB credits held in all FRB accounts for all commercial banks, together with all currency and vault cash, form the M0 monetary base. Holding excess reserves has an opportunity cost if higher risk-adjusted interest can be earned by putting the funds elsewhere. For banks in the U. S. Federal Reserve System, this earning process is accomplished by a given bank in the short term by making short-term loans on the federal funds market to another bank that may be short of its reserve requirements. Over longer periods, banks have the opportunity to choose how much to hold in excess reserves versus in loans to the non-bank public.
Therefore, the amount of its assets that a bank chooses to hold as excess reserves is a decreasing function of the amount by which the market rate for loans to the non-bank public from banks exceeds the interest rate on excess reserves and of the amount by which the federal funds rate exceeds the interest rate on excess reserves. With a substantial opportunity cost, banks may choose to hold some excess reserves to facilitate upcoming transactions or to meet contractual clearing balance requirements; the Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve Banks to pay interest on balances held by or on behalf of depository institutions at Reserve Banks, subject to regulations of the Board of Governors, effective October 1, 2011. The effective date of this authority was advanced by the Emergency Economic Stabilization Act of 2008. On October 3, 2008, Section 128 of the Emergency Economic Stabilization Act of 2008 allowed the Federal Reserve banks to begin paying interest on excess reserve balances as well as required reserves.
The Federal Reserve banks began doing so three days later. Banks had begun increasing the amount of their money on deposit with the Fed at the beginning of September, up from about $10 billion total at the end of August, 2008, to $880 billion by the end of the second week of January, 2009. In comparison, the increase in reserve balances reached only $65 billion after September 11, 2001 before falling back to normal levels within a month. Former U. S. Treasury Secretary Henry Paulson's original bailout proposal under which the government would acquire up to $700 billion worth of mortgage-backed securities contained no provision to begin paying interest on reserve balances; the day before the change was announced, on October 7, 2008, Chairman Ben Bernanke of the Board of Governors of the Federal Reserve System expressed some confusion about it, saying, "We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target. We're going to experiment with this and try to find what the right spread is."
The Fed adjusted the rate on October 22, after the initial rate they set October 6 failed to keep the benchmark U. S. overnight interest rate close to their policy target, again on November 5 for the same reason. The Congressional Budget Office estimated that payment of interest on reserve balances would cost the American taxpayers about one tenth of the present 0.25% interest rate on $800 billion in deposits: Beginning December 18, 2008, the Federal Reserve System directly established interest rates paid on required reserve balances and excess balances instead of specifying them with a formula based on the target federal funds rate. On January 13, Ben Bernanke said, "In principle, the interest rate the Fed pays on bank reserves should set a floor on the overnight interest rate, as banks should be unwilling to lend reserves at a rate lower than they can receive from the Fed. In practice, the federal funds rate has fallen somewhat below the interest rate on reserves in recent months, reflecting the high volume of excess reserves, the inexperience of banks with the new regime, other factors.
However, as excess reserves decline, financial conditions normalize, banks adapt to the new regime, we expect the interest rate paid on reserves to become an effective instrument for controlling the federal funds rate."Also on January 13, 2009, Financial Week said Mr. Bernanke admitted that a huge increase in banks' excess reserves is stifling the Fed's monetary policy moves and its efforts to revive private sector lending. On January 7, 2009, the Federal Open Market Committee had decided that, "the size of the balance sheet and level of excess reserves would need to be reduced." On January 15, 2009, Chicago Federal Reserve Bank president and Federal Open Market Committee member Charles Evans said, "once the economy recovers and financial conditions stabilize, the Fed will return to its traditional focus on the federal funds rate. It will have to scale back the use of emergency lending programs and reduce the size of the balance sheet and level of excess reserves; some of this scaling back will occur as market conditions improve on account of how these programs have been designed.
Still, financial market participants need to be prepared for the eventual dismantling of the facilities that have been put in place during the financial turmoil" At the end of January 2009, excess reserve balances within the Federal Reserve System stood at $793 billion but less than two weeks on February 11, 2009, total reserve balances had fallen to $603 billion. On April 1, 2009, reserve balances had again increased to $806 billion. By August 2011, they had reached $1.6 trillion. On March 20, 2013, excess reserves stood at $1.76 trill
Stefan Ingves
Stefan Nils Magnus Ingves is a Swedish banker and civil servant serving as the Governor of Sveriges Riksbank, the central bank of Sweden. Ingves has a Finland Swedish background. In 1984, he earned a Ph. D. in Economics at the Stockholm School of Economics. Ingves was named Governor of Sveriges Riksbank in 2006. In response to the Icelandic financial crisis of 2008, Ingves argued that "in times of uncertainty and turmoil, the central banks have a responsibility to cooperate." Ingves confronted the "task of safeguarding macroeconomic and financial stability" in 2008. In 2011, Ingves became the Chairman of the Basel Committee on Banking Supervision. Bank for International Settlements, Ex-Officio Member of the Board of Directors Financial Stability Board, Ex-Officio Member of the Standing Committee on Supervisory and Regulatory Cooperation International Monetary Fund, Ex-Officio Member of the Board of Governors In a statistical overview derived from writings by and about Stefan Ingves, OCLC/WorldCat encompasses 40+ works in 50+ publications in 3 languages and 150+ library holdings.
Den oreglerade kreditmarknaden: en expertrapport från 1980 års kreditpolitiska utredning Aspects of Trade Credit The Nordic Banking Crisis from an International Perspective Issues in the Establishment of Asset Management Companies Lessons Learned from Previous Banking Crises: Sweden, Japan and Mexico Central Bank Management
Alfred Nobel
Alfred Bernhard Nobel was a Swedish businessman, engineer and philanthropist. Nobel held 355 different patents; the synthetic element nobelium was named after him. Known for inventing dynamite, Nobel owned Bofors, which he had redirected from its previous role as an iron and steel producer to a major manufacturer of cannon and other armaments. After reading a premature obituary which condemned him for profiting from the sales of arms, he bequeathed his fortune to institute the Nobel Prizes, his name survives in modern-day companies such as Dynamit Nobel and AkzoNobel, which are descendants of mergers with companies Nobel himself established. Born in Stockholm, Alfred Nobel was the third son of Immanuel Nobel, an inventor and engineer, Carolina Andriette Nobel; the couple had eight children. The family was impoverished, only Alfred and his three brothers survived past childhood. Through his father, Alfred Nobel was a descendant of the Swedish scientist Olaus Rudbeck, in his turn the boy was interested in engineering explosives, learning the basic principles from his father at a young age.
Alfred Nobel's interest in technology was inherited from his father, an alumnus of Royal Institute of Technology in Stockholm. Following various business failures, Nobel's father moved to Saint Petersburg in 1837 and grew successful there as a manufacturer of machine tools and explosives, he started work on the torpedo. In 1842, the family joined him in the city. Now prosperous, his parents were able to send Nobel to private tutors and the boy excelled in his studies in chemistry and languages, achieving fluency in English, French and Russian. For 18 months, from 1841 to 1842, Nobel went to the only school he attended as a child, the Jacobs Apologistic School in Stockholm; as a young man, Nobel studied with chemist Nikolai Zinin. There he met Ascanio Sobrero. Sobrero opposed the use of nitroglycerin, as it was unpredictable, exploding when subjected to heat or pressure, but Nobel became interested in finding a way to control and use nitroglycerin as a commercially usable explosive, as it had much more power than gunpowder.
At age 18, he went to the United States for one year to study, working for a short period under Swedish-American inventor John Ericsson, who designed the American Civil War ironclad USS Monitor. Nobel filed his first patent, an English patent for a gas meter, in 1857, while his first Swedish patent, which he received in 1863, was on'ways to prepare gunpowder'; the family factory produced armaments for the Crimean War, but had difficulty switching back to regular domestic production when the fighting ended and they filed for bankruptcy. In 1859, Nobel's father left his factory in the care of the second son, Ludvig Nobel, who improved the business. Nobel and his parents returned to Sweden from Russia and Nobel devoted himself to the study of explosives, to the safe manufacture and use of nitroglycerin. Nobel invented a detonator in 1863, in 1865 designed the blasting cap. On 3 September 1864, a shed used for preparation of nitroglycerin exploded at the factory in Heleneborg, killing five people, including Nobel's younger brother Emil.
Dogged and unfazed by more minor accidents, Nobel went on to build further factories, focusing on improving the stability of the explosives he was developing. Nobel invented dynamite in 1867, a substance easier and safer to handle than the more unstable nitroglycerin. Dynamite was patented in the US and the UK and was used extensively in mining and the building of transport networks internationally. In 1875 Nobel invented gelignite, more stable and powerful than dynamite, in 1887 patented ballistite, a predecessor of cordite. Nobel was elected a member of the Royal Swedish Academy of Sciences in 1884, the same institution that would select laureates for two of the Nobel prizes, he received an honorary doctorate from Uppsala University in 1893. Nobel's brothers Ludvig and Robert exploited oilfields along the Caspian Sea and became hugely rich in their own right. Nobel amassed great wealth through the development of these new oil regions. During his life Nobel was issued 355 patents internationally and by his death his business had established more than 90 armaments factories, despite his pacifist character.
In 1888, the death of his brother Ludvig caused several newspapers to publish obituaries of Alfred in error. One French newspaper published an obituary titled "Le marchand de la mort est mort". Nobel was appalled at the idea that he would be remembered in this way, his decision to posthumously donate the majority of his wealth to found the Nobel Prize has been credited at least in part to him wanting to leave a behind a better legacy. Nobel found that when nitroglycerin was incorporated in an absorbent inert substance like kieselguhr it became safer and more convenient to handle, this mixture he patented in 1867 as "dynamite". Nobel demonstrated his explosive for the first time that year, at a quarry in Redhill, England. In order to help reestablish his name and improve the image of his business from the earlier controversies associated with the dangerous explosives, Nobel had considered naming the powerful substance "Nobel's Safety Powder", but settled with Dynamite instead, referring to the Greek word for "power".
Nobel combined nitroglyce
Economy of Sweden
The economy of Sweden is a developed export-oriented economy aided by timber and iron ore. These constitute the resource base of an economy oriented toward foreign trade; the main industries include motor vehicles, telecommunications, industrial machines, precision equipment, chemical goods, home goods and appliances, forestry and steel. Traditionally a modern agricultural economy that employed over half the domestic workforce, today Sweden further develops engineering, mine and pulp industries that are competitive internationally, as evidenced by companies like Ericsson, ASEA/ABB, SKF, Alfa Laval, AGA, Dyno Nobel. Sweden is a competitive mixed economy featuring a generous universal welfare state financed through high income taxes that ensures that income is distributed across the entire society, a model sometimes called the Nordic model. In 2014 the percent of national wealth owned by the government was 24.1%. Due to Sweden being a neutral country that did not participate in World War II, it did not have to rebuild its economic base, banking system, country as a whole, as did many other European countries.
Sweden has achieved a high standard of living under a mixed system of high-tech capitalism and extensive welfare benefits. Sweden has the second highest total tax revenue behind Denmark, as a share of the country's income; as of 2012, total tax revenue was 44.2% of GDP, down from 48.3% in 2006. The National Institute of Economic research predicts GDP growth of 1.8%, 3.1% and 3.4% in 2014, 2015 and 2016 respectively. A comparison of upcoming economic growth rates of EU countries revealed that the Baltic states and Slovakia are the only countries that are expected to keep comparable or higher growth rates. In the 19th century Sweden evolved from a agricultural economy into the beginnings of an industrialized, urbanized country. Poverty was still widespread. However, incomes were sufficiently high to finance emigration to distant places, prompting a large portion of the country to leave to the United States. Economic reforms and the creation of a modern economic system and corporations were enacted during the half of the 19th century.
During that time Sweden was in a way the "powerhouse" of the Scandinavian region with a strong industrialization process commencing in the 1860s. Moreover, the Swedish Riksdag had developed into a active Parliament during the "Era of Liberty", this tradition continued into the nineteenth century, laying the basis for the transition towards modern democracy at the end of said century. Apart from high levels of human capital formation, the result of the Reformation and related government policies, such local democratic traditions were the other asset that made the "catching up" of the Scandinavian countries, including Sweden and this economic rise was the most remarkable phenomenon in that region during the nineteenth century. By the 1930s, Sweden had what Life magazine called in 1938 the "world's highest standard of living". Sweden declared itself neutral during both world wars, thereby avoiding much physical destruction and instead after the First World War, profiting from the new circumstances – such as booming demand for raw materials and foodstuffs and the disappearance of international competition for its exports.
The postwar boom, the continuation of strong inflationary tendencies during the war itself, propelled Sweden to greater economic prosperity. Beginning in the 1970s and culminating with the deep recession of the early 1990s, Swedish standards of living developed less favorably than many other industrialized countries. Since the mid-1990s the economic performance has improved. In 2009, Sweden had the world's tenth highest GDP per capita in nominal terms and was in 14th place in terms of purchasing power parity. Sweden has had an economic model in the post-World War II era characterized by close cooperation between the government, labour unions, corporations; the Swedish economy has extensive and universal social benefits funded by high taxes, close to 50% of GDP. In the 1980s, a real estate and financial bubble formed. A restructuring of the tax system, in order to emphasize low inflation combined with an international economic slowdown in the early 1990s, caused the bubble to burst. Between 1990 and 1993 GDP went down by 5% and unemployment skyrocketed, causing the worst economic crisis in Sweden since the 1930s.
According to an analysis published in Computer Sweden in 1992, the investment level decreased drastically for information technology and computing equipment, except in the financial and banking sector, the part of the industry that created the crisis. The investment levels for IT and computers were restored as early as 1993. In 1992 there was a run on the currency, the central bank jacking up interest to 500% in an unsuccessful effort to defend the currency's fixed exchange rate. Total employment fell by 10% during the crisis. A real estate boom ended in a bust; the government took over nearly a quarter of banking assets at a cost of about 4% of the nation's GDP. This was known colloquially as the "Stockholm Solution". In 2007, the United States Federal Reserve noted, "In the early 1970s, Sweden had one of the highest income levels in Europe. So well-managed financial crises don't have a happy ending"; the welfare system, growing since the 1970s could not be sustained with a falling GDP, lower employment and larger welfare payments.
In 1994 the government budget deficit exceeded 15% of GDP. The response of the government was to cut spending and institute a multitude of reforms to improve Sweden's competitiveness; when t
Inflation
In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys services; the measure of inflation is the inflation rate, the annualized percentage change in a general price index the consumer price index, over time. The opposite of inflation is deflation. Inflation affects economies in various negative ways; the negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include reducing unemployment due to nominal wage rigidity, allowing the central bank more leeway in carrying out monetary policy, encouraging loans and investment instead of money hoarding, avoiding the inefficiencies associated with deflation.
Economists believe that the high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Today, most economists favor a steady rate of inflation. Low inflation reduces the severity of economic recessions by enabling the labor market to adjust more in a downturn, reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy; the task of keeping the rate of inflation low and stable is given to monetary authorities. These monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, through the setting of banking reserve requirements.
Rapid increases in the quantity of money or in the overall money supply have occurred in many different societies throughout history, changing with different forms of money used. For instance, when gold was used as currency, the government could collect gold coins, melt them down, mix them with other metals such as silver, copper, or lead, reissue them at the same nominal value. By diluting the gold with other metals, the government could issue more coins without increasing the amount of gold used to make them; when the cost of each coin is lowered in this way, the government profits from an increase in seigniorage. This practice would increase the money supply but at the same time the relative value of each coin would be lowered; as the relative value of the coins becomes lower, consumers would need to give more coins in exchange for the same goods and services as before. These goods and services would experience a price increase. Song Dynasty China introduced the practice of printing paper money to create fiat currency.
During the Mongol Yuan Dynasty, the government spent a great deal of money fighting costly wars, reacted by printing more money, leading to inflation. Fearing the inflation that plagued the Yuan dynasty, the Ming Dynasty rejected the use of paper money, reverted to using copper coins. Large infusions of gold or silver into an economy led to inflation. From the second half of the 15th century to the first half of the 17th, Western Europe experienced a major inflationary cycle referred to as the "price revolution", with prices on average rising sixfold over 150 years; this was caused by the sudden influx of gold and silver from the New World into Habsburg Spain. The silver spread throughout a cash-starved Europe and caused widespread inflation. Demographic factors contributed to upward pressure on prices, with European population growth after depopulation caused by the Black Death pandemic. By the nineteenth century, economists categorized three separate factors that cause a rise or fall in the price of goods: a change in the value or production costs of the good, a change in the price of money, a fluctuation in the commodity price of the metallic content in the currency, currency depreciation resulting from an increased supply of currency relative to the quantity of redeemable metal backing the currency.
Following the proliferation of private banknote currency printed during the American Civil War, the term "inflation" started to appear as a direct reference to the currency depreciation that occurred as the quantity of redeemable banknotes outstripped the quantity of metal available for their redemption. At that time, the term inflation referred to the devaluation of the currency, not to a rise in the price of goods; this relationship between the over-supply of banknotes and a resulting depreciation in their value was noted by earlier classical economists such as David Hume and David Ricardo, who would go on to examine and debate what effect a currency devaluation has on the price of goods. The adoption of fiat currency by many countries, from the 18th century onwards, made much larger variations in the supply of money possible. Rapid increases in the money supply have taken place a number of times in countries experiencing political crises, produ
Financial crisis of 2007–2008
The financial crisis of 2007–2008 known as the global financial crisis and the 2008 financial crisis, is considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s. It began in 2007 with a crisis in the subprime mortgage market in the United States, developed into a full-blown international banking crisis with the collapse of the investment bank Lehman Brothers on September 15, 2008. Excessive risk-taking by banks such as Lehman Brothers helped to magnify the financial impact globally. Massive bail-outs of financial institutions and other palliative monetary and fiscal policies were employed to prevent a possible collapse of the world financial system; the crisis was nonetheless followed by the Great Recession. The European debt crisis, a crisis in the banking system of the European countries using the euro, followed later. In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the US following the crisis to "promote the financial stability of the United States".
The Basel III capital and liquidity standards were adopted by countries around the world. Following is a timeline of major events during the financial crisis: February 20, 2007: The Dow Jones Industrial Average hit its peak level of 12,786. Existing home sales peaked this month and began to decline. April 2007: New Century, an American REIT specializing in sub-prime mortgages, filed for Chapter 11 bankruptcy protection; this propagated the sub-prime crisis, to banks around the world. August 9, 2007: BNP Paribas, a French investment bank, blocked withdrawals from two of its hedge funds – a clear sign that banks were refusing to do business with each other. August 2007: The Federal Open Market Committee began reducing the federal funds rate from its peak of 5.25% in response to worries about liquidity and confidence. December 12, 2007: The Federal Reserve instituted the Term Auction Facility to supply short-term credit to banks with sub-prime mortgages. February 13, 2008: The Economic Stimulus Act of 2008 was enacted, which included a tax rebate.
March 17, 2008: The Federal Reserve guaranteed Bear Stearns' bad loans to facilitate its acquisition by JPMorgan Chase. July 11, 2008: IndyMac failed. July 30, 2008: The Housing and Economic Recovery Act of 2008 was enacted. September 7, 2008: Fannie Mae and Freddie Mac were taken over by the federal government. September 15, 2008: Lehman Brothers went bankrupt after the Federal Reserve declined to guarantee its loans, causing the Dow Jones to drop 504 points, its worst decline in seven years; the same day, Bank of America purchased Merrill Lynch. September 16, 2008: The Federal Reserve took over American International Group; the Reserve Primary Fund "broke the buck" as a result of massive withdrawals from money market accounts. September 21, 2008: Goldman Sachs and Morgan Stanley converted themselves from investment banks to bank holding companies to increase their protection by the Federal Reserve. September 26, 2008: Washington Mutual went bankrupt after a bank run. September 29, 2008: The House of Representatives rejected the Emergency Economic Stabilization Act of 2008 instituting the $700 billion Troubled Asset Relief Program.
In response the Dow Jones dropped its largest single-day decline. October 3, 2008: Congress passed the Emergency Economic Stabilization Act of 2008. November 25, 2008: The Term Asset-Backed Securities Loan Facility was announced. December 16, 2008: The federal funds rate was lowered to zero percent. January 2009: The Big Three automobile manufacturers received a bailout from the TARP program. February 13, 2009: Congress approved the American Recovery and Reinvestment Act of 2009, a $787 billion economic stimulus package. March 6, 2009: The Dow Jones hit its lowest level of 6,443.27. The precipitating factor for the Financial Crisis of 2007–2008 was a high default rate in the United States subprime home mortgage sector – the bursting of the "subprime bubble." While the causes of the bubble are disputed, some or all of the following factors must have contributed. Low interest rates encouraged mortgage lending. Securitization. Many mortgages were bundled together and formed into new financial instruments called mortgage-backed securities, in a process known as securitization.
These bundles could be sold as low-risk securities because they were backed by credit default swaps insurance. Because mortgage lenders could pass these mortgages on in this way, they could and did adopt loose underwriting criteria. Lax regulation allowed predatory lending in the private sector after the federal government overrode anti-predatory state laws in 2004; the Community Reinvestment Act, a 1977 US federal law designed to help low- and moderate-income Americans get mortgage loans encouraged banks to grant mortgages to higher risk families. Reckless lending by, for example, Bank of America's Countrywide Financial unit, caused Fannie Mae and Freddie Mac to lose market share and to respond by lowering their own standards. Mortgage guarantees. Many of the subprime loans were bundled and sold accruing to the quasi-government agencies Fannie Mae and Freddie Mac; the implicit guarantee by the US federal government created a moral hazard and contributed to a glut of risky lending. The accumulation and subsequent high default rate of these subprime mortgages led to the financial crisis and the consequent damage to the world economy.
High mortgage approval rates led to a large pool of homebuyers. This appreciation in value led large numbers of homeowners to borrow against their homes as an apparent windfall; this "bubble" would be burst by a r
Fixed exchange-rate system
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed against either the value of another single currency, a basket of other currencies, or another measure of value, such as gold. There are risks to using a fixed exchange rate. A fixed exchange rate is used to stabilize the value of a currency by directly fixing its value in a predetermined ratio to a different, more stable, or more internationally prevalent currency to which the value is pegged. In doing so, the exchange rate between the currency and its peg does not change based on market conditions, unlike flexible exchange regime; this makes trade and investments between the two currency areas easier and more predictable and is useful for small economies that borrow in foreign currency and in which external trade forms a large part of their GDP. A fixed exchange-rate system can be used to control the behavior of a currency, such as by limiting rates of inflation.
However, in doing so, the pegged currency is controlled by its reference value. As such, when the reference value rises or falls, it follows that the value of any currencies pegged to it will rise and fall in relation to other currencies and commodities with which the pegged currency can be traded. In other words, a pegged currency is dependent on its reference value to dictate how its current worth is defined at any given time. In addition, according to the Mundell–Fleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy to achieve macroeconomic stability. In a fixed exchange-rate system, a country’s central bank uses an open market mechanism and is committed at all times to buy and/or sell its currency at a fixed price in order to maintain its pegged ratio and, the stable value of its currency in relation to the reference to which it is pegged. To maintain a desired exchange rate, the central bank during the devaluation of the domestic money, sells its foreign money in the reserves and buys back the domestic money.
This creates an artificial demand for the domestic money. In case of an undesired appreciation of the domestic money, the central bank buys back the foreign money and thus flushes the domestic money into the market for decreasing the demand and exchange rate; the central bank from its reserves provides the assets and/or the foreign currency or currencies which are needed in order to finance any imbalance of payments. In the 21st century, the currencies associated with large economies do not fix or peg exchange rates to other currencies; the last large economy to use a fixed exchange rate system was the People's Republic of China, which, in July 2005, adopted a more flexible exchange rate system, called a managed exchange rate. The European Exchange Rate Mechanism is used on a temporary basis to establish a final conversion rate against the euro from the local currencies of countries joining the Eurozone; the gold standard or gold exchange standard of fixed exchange rates prevailed from about 1870 to 1914, before which many countries followed bimetallism.
The period between the two world wars was transitory, with the Bretton Woods system emerging as the new fixed exchange rate regime in the aftermath of World War II. It was formed with an intent to rebuild war-ravaged nations after World War II through a series of currency stabilization programs and infrastructure loans; the early 1970's saw the breakdown of the system and its replacement by a mixture of fluctuating and fixed exchange rates. Timeline of the fixed exchange rate system: The earliest establishment of a gold standard was in the United Kingdom in 1821 followed by Australia in 1852 and Canada in 1853. Under this system, the external value of all currencies was denominated in terms of gold with central banks ready to buy and sell unlimited quantities of gold at the fixed price; each central bank maintained gold reserves as their official reserve asset. For example, during the “classical” gold standard period, the U. S. dollar was defined as 0.048 troy oz. of pure gold. Following the Second World War, the Bretton Woods system replaced gold with the U.
S. dollar as the official reserve asset. The regime intended to combine binding legal obligations with multilateral decision-making through the International Monetary Fund; the rules of this system were set forth in the articles of agreement of the IMF and the International Bank for Reconstruction and Development. The system was a monetary order intended to govern currency relations among sovereign states, with the 44 member countries required to establish a parity of their national currencies in terms of the U. S. dollar and to maintain exchange rates within 1% of parity by intervening in their foreign exchange markets. The U. S. dollar was the only currency strong enough to meet the rising demands for international currency transactions, so the United States agreed both to link the dollar to gold at the rate of $35 per ounce of gold and to convert dollars into gold at that price. Due to concerns about America's deteriorating payments situation and massive flight of liquid capital from the U.
S. President Richard Nixon suspended the convertibility of the dollar into gold on 15 August 1971. In December 1971, the Smithsonian Agreement paved the way for the increase in the value of the dollar price of gold from US$35.50 to US$38 an ounce. Speculation against the dollar in March 1973 led to the birth of the independent float, thus terminating the Bretton Woods system. Since March 1973, the floating exchange rate has been followed and formally recognize
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