Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

flight that we discuss further in this chapter. Statistical discrepancy was a minus $89.2 billion in
2011.

Table 3. The U.S. Official Reserve Assets

U.S. official reserve assets Amount
($ million)
Gold 0
Special drawing rights 1,752
Reserve position in the International Monetary Fund - 18,079
Foreign currencies 450
Total - 15,877

China and the Asian tigers weaken their currencies because they boost their exports.
Consequently, these countries experience trade surpluses, causing more money to flow in than
out. The governments can use this money inflow to purchase U.S. government debt, real estate,
and stocks and bonds in U.S. corporations. Thus, the U.S. debt and trade deficits go together,
and we discuss them under the Hegemony section in this chapter. Furthermore, the Asian
countries can use this money inflow to buy machines and equipment from developed countries,
boosting their investment even further.

The Exchange Rate Regimes

Nations implement a regime or system to settle international payments arising from
international trade and finance because nations must use a system to settle payments between
themselves. This system is the exchange rate regime.
First and oldest exchange rate regime is the gold standard that started with the Greek and
Roman civilizations. Then, the world used the gold standard between 1876 and 1913 before
World War I plunged the world into war. A gold standard is a central bank sets an exchange
rate of their currency to gold. Subsequently, the central bank agrees to convert their currency to
gold on demand. For example, the United States, Japan, and Britain establish the following
exchange rates as Equations 2.

2,0 00 U.S. dollars = 1 ounce of gold ( 2 )

200 ,000 Japanese yen = 1 ounce of gold

4,000 British pounds = 1 ounce of gold

If the U.S. central bank wants a money supply of $4 0 million, it must buy and hold 20,000
ounces of gold, which is $40 million ÷ $2,000 per ounce. For a central bank to boost the money
supply or grant emergency loans to banks, it must buy and store more gold.