|
Information
> This page
History and Development of Bank Instruments
Introduction
Picture the world at war in 1944. All of Europe, except for Switzerland,
is pounding its infrastructure, manufacEagle Tradersg base and population
into rubble and death. Asia is locked into a monumental straggle which
is destroying Japan, China, and the Pacific Rim countries. North Africa,
the Baltic's, and the Mediterranean countries are clutched in a life and
death struggle in the fight to throw off the yoke of occupation. A world
gone mad! Economic destruction, mad, human misery and dislocation exists
on a scale never before experienced in human history. What went wrong?
How could the world rebuild and recover from such devastation? How could
another war be avoided?
Keynes,
Harry White and Bretton Woods
This was the world as it existed in July 1944 when a relatively small
group of 130 of the western worlds most accomplished economic, social
and political minds met in upstate New Hampshire at a small vacation town
called Bretton Woods. John Maynard Keynes, the man who had predicted the
current catastrophe in his book, The Economic Consequences of the Peace,
written in 1920, was about to become the principal architect of the post-World
War II reconstruction Keynes presented a rather radical plan to rebuild
the worlds economy, and hopefully avoid a third world war. This time the
world listened, for Keynes and his supporters were the only ones who had
a plan that in any way seemed grand enough in foresight and scope to have
a chance at being successful. Yet Keynes had to fight hard to convince
those rooted in conventional economic theories and partisan political
doctrines to adopt his proposals. In the end, Keynes was able to sell
about two-thirds of his proposals through sheer force of will and the
support of the United States Secretary of the Treasury, Harry Dexter White.
At the hart of Keynes proposals were two
basic principals: first the Allies must rebuild the Axis Countries, not
exploit them as had been done after WW 1; second, a new international
monetary system must be established, headed by a strong international
banking system and a common world currency not tied to a gold standard.
Keynes went on to reason that Europe and
Asia were in complete economic devastation with their means of production
seriously crippled, their trade economies destroyed and their treasuries
in deep dept. If the world economy was to emerge from its current state,
it obviously needed to expand. This expansion would be limited if paper
currency were still anchored to gold.
The United States, Canada, Switzerland and
Australia were the only industrialized western countries to have their
economies, banking systems and treasuries intact and fully operational.
The enormous issue at the Bretton Woods Convention in 1944 was how to
completely rebuild the European and Asian economies on a sufficiently
solid basis to foster the establishment of stable, prosperous pro-democratic
governments.
At the time, the majority of the world's
gold supply, hence its wealth, was concentrated in the hands of the United
States, Switzerland and Canada. A system had to be established to democratize
trade and wealth; and redistribute, or recycle, currency from strong trade
surplus countries back into countries with weak or negative trade surpluses.
Otherwise, the majority of the world's wealth would remain concentrated
in the hands of a few nations while the rest of the world would remain
in poverty.
Keynes and White proposed that the United
States supported by Canada and Switzerland would become the banker to
the world, and the U.S. Dollar would replace the pound sterling as the
the medium of international trade. He also suggested that the dollar's
value be tied to the good faith and credit of the U.S. Government not
to gold or silver, as had traditionally been the support for a nation's
currency.
Keynes concept of how to accomplish all of
this was radical for its time, but was based upon the centuries old framework
of import/export finance. This form of finance was used to support certain
sectors of international commerce which did not use gold as collateral,
but rather their own good faith and credit, backed by letters of credit,
avals, or guarantees.
Keynes reasoned that even if his plans to
rebuild the world's economy were adopted at the Bretton Woods Convention,
remaining on a Gold standard would seriously restrict the flexibility
of governments to increase the money supply. The rate of increase of currency
would not be sufficient to insure the continued successful expansion of
international commerce over the long term. This condition could lead to
a severe economic crisis, which, in turn, could even lead to another world
war. However, the economic ministers and politicians present at the convention
feared loss of control over their own national economies, as well as,
run-away inflation, unless a "hard-currency" standard were adopted.
The Convention accepted Keynes' basic economic
plan, but opted for a gold-backed currency as a standard of exchange.
The "official" price of gold was set at its pre-WW II level
of $ 35.00 per ounce One U.S. Dollar would purchase 1/35 an ounce of gold.
The U.S. dollar would become the standard world currency, and the value
of all other currencies in the western. non-communist world would be tied
to the U.S. dollar as the medium of exchange.
Marshall
plan - lMF - World Bank and Bank of International Settlements
The Bretton Woods Convention produced the Marshall Plan, the Bank for
Reconstruction and development known as the World Bank. the International
Monetary Fund (IMF) and the Bank of International Settlements (BIS). These
four would re-establish and revitalize the economies of the western nations.
The World Bank would borrow from rich nations and lend to poorer nations.
The IMF working closely with the World Bank, with a pool of funds, controlled
by a board of governors. would initiate currency adjustments and maintain
the exchange rates among national currencies within defined limits. The
Bank of International Settlements would then function as a "central
bank" to the world.
The International Monetary Fund was to be
a lender to the central bank of countries which were experiencing a deficit
in the balance of payments. By lending money to that country's central
bank, the IMF provided currency, allowing the underdeveloped country to
continue in business. building up is export base until it achieved a positive
balance of payments. Then, that nation's central bank could repay the
money borrowed from the lMF, with a small amount of interest and continue
on its own as an economically viable nation. If the country experienced
an economic contraction, the IMF would be standing ready to make another
loan to carry it through.
Bank
of International Settlements
The Bank of International Settlements (BIS) was created as a new central
bank to the central banks of each nation. It was organized along the lines
of the U.S. Federal Reserve System and it's principally responsible for
the orderly settlement of transactions among the central banks of individual
countries. In addition, it sets standards for capital adequacy among the
central banks and coordinates the orderly distribution of a sufficient
supply of currency in circulation necessary to support international trade
and commerce.
The Bank of International Settlements is
controlled by the Basel Committee which is comprised of ministers sent
from each of the G-10 nations central banks. It has been traditional for
the individual ministers appointed to the Basel Committee to be the equivalent
of the New York "Fed's" chairperson controlling the open market
desk. ..............
More
information is provided in the Member Area
Recommended further
reading:
Introduction
to Financial Markets
Type of
Instruments
Introduction
to Institutional Trading
|
