SMU COR2100 Economics and Society Week 5 PDF

03/08/2024 SMU COR2100 Economics and Society Week 5 Dr Lam San Ling 2024-25 Term 1 1...

03/08/2024 SMU COR2100 Economics and Society Week 5 Dr Lam San Ling 2024-25 Term 1 1 Slide 2 Week 5: agenda  Money - Functions of money - SGD vs Bitcoin - Money supply, interest rate - Exchange rate, exchange rate regimes  International monetary system - History - Money in Singapore 2  03/08/2024 Slide 3 what is Money anything that serves the function(s) of money? 3 Slide 4 Money - three functions  Money as medium of exchange - “Something that can be exchanged in return for goods & services” [AL&L] - Readily accepted as form of payment for good/service  Money as unit of account - Universal yardstick that expresses the price of goods & services - Numerical unit to measure the value of good/service  Money as store of value - Enables people to transfer purchasing power into the future - Can be saved, stored, retrieved for future payments 4  03/08/2024 Slide 5 Money - Singapore  Money as medium of exchange - “Something that can be exchanged in return for goods & services” [AL&L] - Readily accepted as form of payment for good/service Singapore - Notes and coins issued (since 1967) by MAS are legal tender in Singapore - Legal tender: recognised by law to be valid means of payment o All coin denominations can be used by a customer to make payment, up to a limit of 20 coins per denomination for each transaction. [e.g. 20 x 5-cents to make a $1 purchase.] [Or vendor has to issue prior written notice.] o Legal tender limit to minimise inconvenience to vendors and waiting customers. o No legal tender limit for notes. [Or vendor can issue written notice.] 5 Slide 6 Money - Singapore dollar  Singapore dollar: functions of money? - Means of payment? - Unit of account? - Store of value?  Other qualities? – are they important? - Backed by government or central bank?  S$: Yes. Legal tender; notes and coins backed by MAS assets - Transmission, clearing through banks?  S$: Yes, credit creation/intermediation through banking system - Monetary policy tool?  S$: MAS manages trade-weighted S$ exchange rate 6  03/08/2024 Slide 7 Money - private cryptocurrencies?  Bitcoin? - Means of payment? o Not quite taking off in Singapore? o Tesla has been fickle? o Criminals? - Unit of account? o Even criminals demand ransom expressed in USD? o Still evolving? - Store of value? o Has appreciated (a lot) since 2009, but highly volatile? o Not a reliable store of value…even for criminals? 7 Slide 8 Money - private cryptocurrencies?  Cryptos have changed the way we think about money - But the three functions of money remain relevant?  Other qualities traditionally associated with “money”? - Backed by government or central bank (CB)?  Privately created, no CB involvement - Transmission, clearing through banks?  DLT transmission and record-keeping, can bypass banking system  Is this good or bad? - Monetary policy tool?  Quantity and price outside central bank control.  Do we care? Ought we trust central banks and governments more?  Rising calls for regulation/oversight of crypto space. 8  03/08/2024 Slide 9 Money - private cryptocurrencies?  What about Stablecoins? Intended to be… - Crypto assets with more stable values…? - Bridging gap between volatile cryptocurrencies and traditional money?  The jury is still out? 9 Slide 10 other related definitions Money money supply, interest rate, exchange rate 10  03/08/2024 Slide 11 Money supply - definitions  Money supply - “Currency in circulation, checking accounts, savings accounts, and most other types of bank accounts” [AL&L] o Currency in circulation (notes and coins) is a subset of money supply o Narrowest to broadest: M1, M2, M3 o M1 (US) = money in circulation + checkable deposits in banks o M2 (US) = M1 + savings deposits ( bullion, other forms - Currency for trade based on regional hegemony o Persian daric o Roman currency: denarius o Ottoman empire: Gold Dinar o European colonial powers: Spanish dollar, Dutch guilder, French franc, British pound sterling 28  03/08/2024 Slide 29 International monetary system - historical overview  Gold Standard - 19th and early-20th century (Wiki); 1870-1914 (Krugman) - Use of gold coins as medium of exchange, unit of account, store of value - Originated in Britain - Later in 19th century: US, Germany Japan, others adopted gold standard. [Britain was world's leading economic power.] 29 Slide 30 International monetary system - historical overview  WWI (1914-1918) - Gold standard suspended as governments financed massive military expenditures by printing money - Labour forces and productive capacity reduced due to war losses  high price levels, runaway inflation in some countries  Interwar Years (1918-1939) - Fleeting return to gold o US (returned to gold) in 1919, abandoned gold standard in 1933 o Britain in 1925, by pegging gold at pre-war price o Britain left gold in 1931. - Great Depression (1929-1939), in the US (and industrialised world)  countries curtailed trading links with rest of the world 30  03/08/2024 Slide 31 International monetary system - historical overview  Bretton Woods system - July 1944: representatives of 44 countries met in Bretton Woods, New Hampshire, drafted and signed the Articles of Agreement of the IMF. - Aim: international monetary system that would foster full employment and price stability while allowing individual countries to attain external balance without restrictions on international trade. - "Gold exchange standard", with USD as principal reserve currency o Fixed exchange rates against USD; unvarying price of gold (US$35 an ounce). o Member countries held official international reserves largely in the form of gold or dollar assets. o Right to sell USD to the US Federal Reserve for gold at the official price.  Fixed exchange rate regime (and international trade) was salvaged? 31 Slide 32 End of Bretton woods system - US' problem  US and the end of Bretton Woods - US' obligation to hold sufficient gold reserves, hold dollar price of gold at US$35 an ounce. o US inflation in the late-1960s: higher monetary growth and higher government spending on social programmes and the Vietnam War. o Recession in 1970: market concerns that USD would be devalued to restore full employment and a balanced current account. o August 1971 ("Nixon shock"): unilateral US decision to end completely USD's link to gold, i.e. US closed the gold window. o March 1973: USD floated => end of fixed exchange rates. - Jamaica Accords in 1976: end of Bretton Woods formally ratified. 32  03/08/2024 Slide 33 International monetary system - today  Spectrum of flexible to fixed exchange rate regimes - Most advanced economies have fully floating exchange rates. - Reserve currencies: US dollar, euro, British pound, Swiss franc, Japanese yen [also Australian dollar, Canadian dollar, Chinese renminbi?] - Many others (including Singapore) have exchange rates that fall in the spectrum between fixed and fully floating.  Still evolving? - Cryptocurrencies - Central bank digital currencies (CBDC) 33 Slide 34 meanwhile… in Singapore 34  03/08/2024 Slide 35 Singapore War years, pre-Independence - ref: NLB (2016), "History of Singapore currency"  War years and after - 1942-1945: Japanese military yen ("banana money") - 1940-1942, 1945-1953: Malayan dollar - 1952: Board of Commissioners of Currency, Malaya and British Borneo was formed - 1953-1967: Malaya and British Borneo dollar  Towards independence - 1957: Malayan independence - 1959: Singapore self-government - 1965: Singapore separation from Malaysia - 1967- present: Singapore dollar 35 Slide 36 Singapore Independence – early years  On the currency board system - "The currency board system was an invention of the British Raj…to ensure that the currencies issued by its colonies were fully backed by sterling reserves held in London". [Orchard (2016)] - Currencies pegged to an international reserve currency (in this case, sterling) at a fixed rate; issue limited by sterling held.  Singapore dollar - 1967: Singapore leaves the sterling standard. The Board of Commissioners of Currency, Singapore, was established. - 1971: Monetary Authority of Singapore was established. 36  03/08/2024 Slide 37 Singapore post-Independence - ref: Freddy Orchard, Safeguarding the Future  Shift towards central bank system - Ability to create money without it being fully backed by reserves.  Currency Interchangeability Agreement (CIA) - 12 June 1967: Singapore dollar, Malaysian dollar (renamed Malaysian ringgit in Aug 1975), Brunei dollar were issued. Currency interchangeability established. - 8 May 1973: Malaysia opted out of CIA  Sterling devaluation [18 November 1967]  Singapore’s exchange rate system today [week 9] 37 Slide 38 End of Week 5 Thank you  38  03/08/2024 Slide 39 References  AL&L (2021), Economics - Chap 24-25 o Chap 25.1 (Money) o Chap 24.1 (real and nominal interest rates) - Chap 29: open economy macroeconomics o Chap 29.1 (exchange rates)  Other references: - IMF (July 2023), Annual Report on Exchange Arrangements and Exchange Restrictions 2022. - Krugman et al (2018), International Economics, chap 19, "International monetary systems: an historical overview". - Freddy Orchard e-book (2016), Safeguarding the Future. 39