Exercise 2. Reading 1. Monetary System.

Different International Monetary Systems

Before reading the text, discuss the following questions.

1. What is monetary system based on?

2. What monetary systems do you know?

3. Can the gold be part of the International Monetary System?

4. What various forms of money have been used for thousands of years?

Now read the text and answer the questions which follow.

Let’s take a look at the last century of the international monetary system evolution. International monetary system refers to the system and rules that govern the use and exchange of money around the world and between countries. Each country has its own currency as money and the international monetary system governs the rules for valuing and exchanging these currencies.

The Gold and Gold Bullion Standards

The first modern international monetary system was the gold standard. Operating during the late 19th and early 20th cents, the gold standard provided for the free circulation between nations of gold coins of standard specification. Under the system, gold was the only standard of value.

The advantages of the system lay in its stabilizing influence. A nation that exported more than it imported would receive gold in payment of the balance; such an influx of gold raised prices, and thus lowered the value of the domestic currency. Higher prices resulted in decreasing the demand for exports, an outflow of gold to pay for the now relatively cheap imports, and are turn to the original price level.

A major defect in such a system was its inherent lack of liquidity; the world’s supply of money would necessarily be limited by the world’s supply of gold. Moreover, any unusual increase in the supply of gold, such as the discovery of a rich lode, would cause prices to rise abruptly. For these reasons and others, the international gold standard broke down in 1914.

During the 1920s the gold standard was replaced by the gold bullion standard, under which nations no longer minted gold coins but backed their currencies with gold bullion and agreed to buy and sell the bullion at a fixed price. This system, too, was abandoned in the 1930s.

The Gold-Exchange System

In the decades following World War II, international trade was conducted according to the gold-exchange standard. Under such a system, nations fix the value of their currencies not with respect to gold, but to some foreign currency, which is in turn fixed to and redeemable in gold. Most nations fixed their currencies to the U.S. dollar and retained dollar reserves in the United States, which was known as the “key currency” country. At the Bretton Woods international conference in 1944, a system of fixed exchange rates was adopted, and the International Monetary Fund (IMF) was created with the task of maintaining stable exchange rates on a global level.

The Two-Tier System

During the 1960s, as U.S. commitments abroad drew gold reserves from the nation, confidence in the dollar weakened, leading some dollar-holding countries and speculators to seek exchange of their dollars for gold. A severe drain on U.S. gold reserves developed and, in order to correct the situation, the so-called two-tier system was created in 1968. In the official tier, consisting of central bank gold traders, the value of gold was set at $35 an ounce, and gold payments to noncentral bankers were prohibited. In the free-market tier, consisting of all nongovernmental gold traders, gold was completely demonetized, with its price set by supply and demand. Gold and the U.S. dollar remained the major reserve assets for the world’s central banks, although Special Drawing Rights were created in the late 1960s as a new reserve currency. Despite such measures, the drain on U.S. gold reserves continued into the 1970s, and in 1971 the United States was forced to abandon gold convertibility, leaving the world without a single, unified international monetary system.

Floating Exchange Rates and the European Monetary System (EMS)

Widespread inflation after the United States abandoned gold convertibility forced the IMF to agree (1976) on a system of floating exchange rates, by which the gold standard became obsolete and the values of various currencies were to be determined by the market. In the late 20th century, the Japanese yen and the German deutschmark strengthened and became increasingly important in international financial markets, while the U.S. dollar – although still the most important national currency – weakened with respect to them and diminished in importance.

A 1979 arrangement between several European countries which links their currencies in an attempt to stabilize the exchange rate. This system was succeeded by the European Monetary Union (EMU), an institution of the European Union (EU), which established a common currency called the euro.

The European Monetary System originated in an attempt to stabilize inflation and stop large exchange-rate fluctuations between European countries. Then, in June 1998, the European Central Bank was established and, in January 1999, a unified currency, the euro, was born and came to be used by most EU member countries. The euro replaced the European Currency Unit, which had become the second most commonly used currency after the dollar in the primary international bond market. Many large companies use the euro rather than the dollar in bond trading, with the goal of receiving a better exchange rate. The record deficits incurred by the United States in the wake of the financial crisis that began in 2007 and the resulting weaker dollar led many central banks to diversify their foreign reserves and greatly increase the percentage held in yen and euros. The growing economic importance of China in the 21st century led, by 2015, to its currency (the renminbi, whose main unit is the yuan) displacing the euro as the second most commonly used currency in world trade.

Questions.

1. What was the first modern monetary system?

2. What does the ‘gold standard’ mean?

3. What are the advantages of this system? What are its disadvantages?

4. What is the ‘gold bullion standard’?

5. What does the ‘gold-exchange standard’ mean?

6. What was the “key currency” country? Why?

7. What did the Bretton Woods international conference adopt?

8. What is the main task of the International Monetary Fund?

9. Why was the two-tier system created? What did it lead to?

10. Why was a system of floating exchange rates adopted? How does it function?

11. What currencies, except the US dollar, were important in international financial markets?

12. What are the current reserve currencies? Comment.

Exercise 1. Vocabulary.

Find in the text the English equivalents to the Ukrainian words and phrases. Learn them by heart.

1. золотий стандарт

2. золотовалютний стандарт

3. золотозлитковий стандарт

4. вливання (фінансів)

5. витікання (фінансів)

6. вільна циркуляція

7. цінність

8. внутрішня валюта

9. рівень цін

10. невід’ємний

11. ліквідність

12. багате джерело (жила)

13. різко

14. чеканити (монети)

15. підкріпляти (фінансувати)

16. злиток золота

17. залишати (покидати)

18. підлягати обміну

19. встановлювати

20. обмінний курс валюти

21. Бреттон-Вудська конференція

22. фіксований валютний курс

23. приймати

24. Міжнародний валютний фонд

25. дворівнева система

26. впевненість

27. перекупщик

28. виснаження

29. унція

30. трейдери золота

31. забороняти

32. вилучати монету з обігу

33. спеціальні права запозичення (розрахункові грошові одиниці МВФ)

34. конвертування

35. “плаваючий” курс валюти

36. (широко) розповсюджений

37. Застарілий

38. Зменшуватися

39. Європейський валютний союз

40. коливання валютного курсу

41. спільна валюта

42. ринок облігацій

43. біржові операції з облігаціями

44. валютний резервний фонд

Exercise 2. Reading 1. Monetary System.

Punctuate the following passage. Provide capital letters, commas, full stops, brackets, colons, apostrophe etc., where applicable.

a monetary system is a scheme developed by a government to facilitate exchange it also provides a means to generate and measure wealth and debt these measurements are generally made using currency which is an important part of a monetary system banks are another essential part of the system which play roles such as distributing money and converting monetary instruments into cash one of the most essential functions of a monetary system is that it provides a means to establish and gain value currency or cash is an essential part of each system this includes paper money and coins both of which are commonly made by state-owned facilities these are generally the most widely accepted mediums of exchange within a monetary system but there are others such as checks debit cards and credits cards when a cost is placed on goods and services, currency allows for an exchange one person gets the desired item and the other gets an instrument of monetary value if that instrument is cash, it can immediately be used for further exchange within that same system the currency used within one monetary system however is generally not valid in another this means that exchanges between citizens of different governments often require conversion of their monetary instruments