Monetary system

From Wikipedia:Monetary system:

A commodity money system is a monetary system in which a commodity such as gold or silver is made the unit of value and physically used as money.

One step away from commodity money is "representative money", also known as "commodity-backed money". Many currencies have consisted of bank-issued notes which have no inherent physical value, but which may be exchanged for a precious metal, such as gold. (This is known as the gold standard.)
The alternative to a commodity money system is fiat money which is defined by a central bank and government law as legal tender even if it has no intrinsic value. Originally fiat money was paper currency or base metal coinage, but in modern economies it mainly exists as data such as bank balances and records of credit or debit card purchases.

The total amount of US paper money in circulation is 1.7 trillion dollars. 5,250 per person.
Money is mostly created, contrary to what is written in most textbooks, by banks when they loan to customers. Put simply, banks lending currency to customers creates more deposits and deficit spending. Although commercial banks create money through lending, they cannot do so freely without limit.

Central banks control the creation of money by commercial banks, by setting interest rates on reserves. This limits the amount of money the commercial banks are willing to lend, and thus create, as it affects the profitability of lending in a competitive market. This is the opposite of what many people believe about the creation of fiat money. The most common misconception was that central banks print all the money, this is not reflective of what actually happens.

Quantitative easing (QE) is the practice in which a central bank tries to mitigate a potential or actual recession by increasing the money supply for its domestic economy.

## Central banks

From Wikipedia:Central bank:

By far the most visible and obvious power of many modern central banks is to influence market interest rates. The mechanism to move the market to within a narrow band around a 'target rate' is generally to lend money or borrow money in theoretically unlimited quantities, until the targeted market rate is sufficiently close to the target.

Qualified banks borrow from each other within this band, but never above or below, because the central bank will always lend to them at the top of the band, and take deposits at the bottom of the band.

## Currency war

A decrease in the value of a country's money is called a devaluation, while an increase in the value of the country's money is called a revaluation.

From Wikipedia:Currency war:

Currency war, also known as competitive devaluations, is a condition in international affairs where countries seek to gain a trade advantage over other countries by causing the exchange rate of their currency to fall in relation to other currencies.

After a devaluation, the new lower value of the domestic currency will make it less expensive for foreign consumers to obtain local currency with which to buy locally produced export goods, so more exports will be sold, helping domestic businesses. Further, the new exchange rate will make it more expensive for local consumers to obtain foreign currency with which to import foreign goods, hurting domestic consumers and causing less to be imported.

Devaluation can lead to a reduction in citizens' standard of living as their purchasing power is reduced both when they buy imports and when they travel abroad. It also can add to inflationary pressure.

A currency war broke out in the 1930s when countries abandoned the gold standard during the Great Depression and used currency devaluations in an attempt to stimulate their economies. Since this effectively pushes unemployment overseas, trading partners quickly retaliated with their own devaluations. The period is considered to have been an adverse situation for all concerned, as unpredictable changes in exchange rates reduced overall international trade.

## Bretton Woods system

From Wikipedia:Bretton Woods system:

Before the war, the French and the British realized that they could no longer compete with U.S. industries in an open marketplace. During the 1930s, the British created their own economic bloc to shut out U.S. goods.

Free trade relied on the free convertibility of currencies. Negotiators at the Bretton Woods conference, fresh from what they perceived as a disastrous experience with floating rates in the 1930s, concluded that major monetary fluctuations could stall the free flow of trade.

The new economic system required an accepted vehicle for investment, trade, and payments. Unlike national economies, however, the international economy lacks a central government that can issue currency and manage its use. In the past this problem had been solved through the gold standard.

Imbalances in international trade were theoretically rectified automatically by the gold standard. A country with a deficit would have depleted gold reserves and would thus have to reduce its money supply. The resulting fall in demand would reduce imports and the lowering of prices would boost exports; thus the deficit would be rectified.
Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend. This decrease in the amount of money would act to reduce the inflationary pressure.
But the architects of Bretton Woods did not consider this option feasible for the postwar political economy. Instead, they set up a system of fixed exchange rates managed by a series of newly created international institutions using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency.

The strength of the U.S. economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold.

The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained its external exchange rates within 1 percent and the ability of the IMF to bridge temporary imbalances of payments.

The IMF is provided with a fund composed of contributions from member countries in gold and their own currencies. The original quotas were to total $8.8 billion. The IMF was designed to advance credits to countries with balance of payments deficits. Short-run balance of payment difficulties would be overcome by IMF loans, which would facilitate stable currency exchange rates.
Member nations were permitted to adjust their currency exchange rate by 1%.

On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency.

## Statistics

US GDP (PPP) per hour worked = $67.30

Average annual productivity growth is 2.25%

Productivity doubles every 30 years
US annual population growth is below 1%

US annual inflation is about 2.29%

For comparison:

## Companies that control the world

* The network of global corporate control

1. Barclays plc

2. Capital Group Companies Inc

3. FMR Corporation

4. AXA

5. State Street Corporation

6. JP Morgan Chase & Co

7. Legal & General Group plc

8. Vanguard Group Inc

9. UBS AG

10. Merrill Lynch & Co Inc

11. Wellington Management Co LLP

12. Deutsche Bank AG

13. Franklin Resources Inc

14. Credit Suisse Group

15. Walton Enterprises LLC

16. Bank of New York Mellon Corp

17. Natixis

18. Goldman Sachs Group Inc

19. T Rowe Price Group Inc

20. Legg Mason Inc

21. Morgan Stanley

22. Mitsubishi UFJ Financial Group Inc

23. Northern Trust Corporation

24. Société Générale

25. Bank of America Corporation

26. Lloyds TSB Group plc

27. Invesco plc

28. Allianz SE 29. TIAA

30. Old Mutual Public Limited Company

31. Aviva plc

32. Schroders plc

33. Dodge & Cox

34. Lehman Brothers Holdings Inc\*

35. Sun Life Financial Inc

36. Standard Life plc

37. CNCE

38. Nomura Holdings Inc

39. The Depository Trust Company

40. Massachusetts Mutual Life Insurance

41. ING Groep NV

42. Brandes Investment Partners LP

43. Unicredito Italiano SPA

44. Deposit Insurance Corporation of Japan

45. Vereniging Aegon

46. BNP Paribas

47. Affiliated Managers Group Inc

48. Resona Holdings Inc

49. Capital Group International Inc

50. China Petrochemical Group Company