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Level 12

Evolution of Financial Systems


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Bretton Woods
730 delegates from 44 allies met to regulate international and financial order after WWII at the Mount Washington Hotel in Bretton Woods, New Hampshire July 1944
gold exchange standard
an international monetary system in which it is possible for central banks to convert their foreign exchange holdings into gold (one or more countries must guarantee that they will permit others to convert their curren…
gold standard
a monetary system in which the money supply is linked directly to the country's holdings of gold; citizens are usually entitled to exchange banknotes for gold. An international monetary system in which the valu…
hegemonic stability
argument that liberal (open) international economic regimes are associated with the presence of a dominant state
balance of payments
account of a country's transactions with foreign countries and international institutions in a specific period #currentaccount #balanceoftrade #capitalaccount
International Bank for Reconstruction and Development
(known as the World Bank) designed to provide and encourage longterm loans for reconstruction and development after the war, a task that the private markets were not trusted to perform well on their own
adjustable peg
a form of international monetary system in which governments are permitted to change their currencies' exchange rates, normally fixed in value against other currencies
multilateralism
policy coordination by three or more states on the basis of principles that specify appropriate conduct for a class of actions
transnational corporations
(also Multinational enterprises) companies that engage in Foreign direct investment; that is, which own, control, and manage assets in more than one country
liquidity
comprises the total gold and foreign exchange reserves and Special Drawing Rights (that is, all international reserves acceptable to other countries) held by all countries in the international financial system
Triffin Dilemma
pointed out in a 1960 book, the Bretton Woods monetary system rested on the confidence of other countries in the gold exchange standard--that is, that they could convert their dollar holdings into gold--yet, the capa…
Special Drawing Rights
an international reserve asset created by the International Monetary Fund in 1969. Over 30 billion have been created; these were distributed by the IMF to member countries in proportion to the size of their…
seigniorage
the profit that results from the difference between the cost of producing and distributing money and the face value of that money. Originally, the difference between the face value of a coin and the …
dollarization
the adoption by foreign countries of the US dollar as their national currency
most-favoured nation principle
the principle of non-discrimination, enshrined in Article I of the GATT/WTO, that members should give all other members the most favourable trade treatment they offer to any member
General Agreement on Tariffs and Trade
a 1947 agreement that became the principal component of the international trade regime following the failure of the international community to establish the International Trade Organization. Its provisions were incorporated into the World Trade Organiza…
NAFTA
A trade agreement between Canada, the United States and Mexico that encourages free trade between these North American countries.
Westphalia
1648 agreement
French revolution
1789-1799. Period of political and social upheaval in France, during which the French government underwent structural changes, and adopted ideals based on Enlightenment principles of nationalism, citizenship, and inalienable rights. Changes were accompanied by violent turmoil and executions.
American revolution
1775- 1787. Americans were fed up that Britain had been taxing them without representing them. (Stamp Act) They wanted to form their own government, so they rebelled against Britain
1971
What year did the U.S. suspend the convertibility of the US dollar into gold?
Zhou Xiachuan
released a prominent paper citing Keynes and Triffin
IMF
an institution of 188 members as of late 2013, providing extensive technical assistance and short-term flows of stabilization finance to any of those members experiencing temporarily distressed finances
League of Nations
A world organization established in 1920 to promote international cooperation and peace. It was first proposed in 1918 by President Woodrow Wilson, although the United States never joined the League. Essentially powerless, it was officially dissolved in 1946.
Wall Street collapse of October 1929
the stock market crash that led to economic depression in the 1930s; it was exacerbated by the gold standard because government efforts to maintain the link between their currencies and gold constrained the us…
Black Tuesday
October 29, 1929,the most devastating stock market crash in the history of the United States, when taking into consideration the full extent and duration of its fallout; he crash signaled the beginning of the 10-…
electorally motivated manipulations of exchange rates
(dotted half note) during an election, governments have an incentive to allow an unexpected rise in inflation that boosts economic activity; but private actors know, and they can ignore promises by the government to con…
foreign central banks
the U.S. Federal Reserve (the Fed), the European Central Bank (euros, 1999), Bank of England, Bank of Japan; feature: the dollar was seen to face is most serious post-war challenger with the creation of…
adjustable pegs
the exchange rate is fixed according to one particular currency that is agreed upon, such as Gold or the U.S. dollar
floating exchange rates
the exchange rate is regulated by nations individually
Base Currency
The denominator in a quoted exchange rate, or the currency that is to be purchased with another currency.
Bond
long term debt instrument
capital market
a financial market in which longer term debt and equity instruments are traded. (generally those with maturity of one year or greater)
Clearing
Process of aggregating the currencies that one bank owes another and then carrying out the transaction.
Convertible (Hard) Currency
Currency that trades freely in the foreign exchange market, with its price determined by the forces of supply and demand.
Countertrade
Practice of selling goods or services that are paid for, in whole or in part, with other goods or services.
Cross Rate
Exchange rate calculated using two other exchange rates.
Currency Arbitrage
Instantaneous purchase and sale of a currency in different markets for profit.
Currency Futures Contract
Contract requiring the exchange of a specific amount of currency on a specific date at a specific exchange rate, with all conditions fixed and not adjustable.
Currency Hedging
Practice of insuring against potential losses that result from adverse changes in exchange rates.
Currency Option
Right, or option, to exchange a specific amount of a currency on a specific date at a specific rate.
Currency Speculation
Purchase or sale of a currency with the expectation that its value will change and generate a profit.
Currency Swap
Simultaneous purchase and sale of foreign exchange for two different dates.
Debt
Obligation to repay
Derivative
Financial instrument whose value derives from other commodities or financial instruments.
Equity
Stake of Ownership
Eurobond
Bond issued outside the country in whose currency it is denominated.
Eurocurrency Market
Market consisting of all the world's currencies (referred to as "Eurocurrency") that are banked outside their countries of origin.
Exchange Rate
Rate at which one currency is exchanged for another.
Exchange-Rate Risk (Foreign Exchange Risk)
Risk of adverse changes in exchange rates.
Foreign Bond
Bond sold outside the borrower's country and denominated in the currency of the country in which it is sold.
Foreign Exchange Market
Market in which currencies are bought and sold and their prices are determined.
Forward Contract
Contract that requires the exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate.
Forward Market
Market for currency transactions at forward rates.
Forward Rate
Exchange rate at which two parties agree to exchange currencies on a specified future date.
Interbank Interest Rates
Interest rates that the world's largest banks charge one another for loans.
Interbank Market
Market in which the world's largest banks exchange currencies at spot and forward rates.
Interest Arbitrage
Profit-motivated purchase and sale of interest-paying securities denominated in different currencies.
International Bond Market
Market consisting of all bonds sold by issuing companies, governments, or other organizations outside their own countries.
International Capital Market
Network of individuals, companies, financial institutions, and governments that invest and borrow across national boundaries.
International Equity Market
Market consisting of all stocks bought and sold outside the issuer's home country.
Offshore Financial Center
Country or territory whose financial sector features very few regulations and few, if any, taxes.
Over-The-Counter (OTC) Market
A type of secondary market in which dealers at different locations who have an inventory of securities stand ready to buy and sell securities to anyone who comes to them and is willing to accept their prices
Quoted Currency
The numerator in a quoted exchange rate, or the currency with which another currency is to be purchased.
Securities Exchange
Exchange specializing in currency futures and options transactions.
Securitization
Unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments (or securities).
Spot Market
Market for currency transactions at spot rates.
Spot Rate
Exchange rate requiring delivery of the traded currency within two business days.
Stock
Capital raised by a corporation through the issue of shares entitling holders to an ownership interest (equity).
Vehicle Currency
Currency used as an intermediary to convert funds between two other currencies.