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International Monetary System

The international monetary system has evolved over time, from bimetallism to the gold standard to the Bretton Woods system to the current flexible exchange rate system. It provides rules and standards to facilitate international trade and capital flows. It aims to promote stability in foreign exchange rates and balance of payments while allowing independent monetary policies.

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146 views15 pages

International Monetary System

The international monetary system has evolved over time, from bimetallism to the gold standard to the Bretton Woods system to the current flexible exchange rate system. It provides rules and standards to facilitate international trade and capital flows. It aims to promote stability in foreign exchange rates and balance of payments while allowing independent monetary policies.

Uploaded by

Devyani Grover
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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International Monetary System

International Monetary System


• International monetary system refers to a
system that forms rules and standards for
facilitating international trade among the
nations.
• IMS prevails in world foreign exchange
markets through which international trade
and capital movements are financed and
exchange rates are determined.
Why do we need IMS?
• Flow of international trade and investment
• Stability in foreign exchange
• Providing countries with sufficient funds to
manage temporary Balance of Payments (BOP)
• Promotes BOP adjustment
• Managing uncertainties
• Allowing member countries to pursue
independent monetary and fiscal policies
Evolution of the
International Monetary System

• Bimetallism: Before 1875


• Classical Gold Standard: 1875-1914
• Interwar Period: 1915-1944
• Bretton Woods System: 1945-1972
• The Flexible Exchange Rate Regime: 1973-
Present
Bi-mettalism: Before 1875
• A monetary system in which a government
recognizes coins composed of gold or silver as
legal tender.
• A nation’s monetary unit by law - in terms of
fixed quantities of gold and silver (thus
automatically establishing a rate of exchange
between the two metals).
• There was no restriction on the use and coinage
of both metals
Why the system did not survive?
• A major problem in the international use of bimetallism was that, with each
nation independently setting its own rate of exchange between the two
metals, the resulting rates often differed widely from country to country.
• In an attempt to establish the bimetallic system on an international scale,
France, Belgium, Italy, and Switzerland formed the Latin Monetary Union in
1865. The union established a ratio between the two metals and provided
for use of the same standard units and issuance of coins
• The system was undermined by the monetary manipulations of Italy and
Greece (which had been admitted later) and came to a speedy end with the
Franco-German War (1870–71).
• The future of the bimetallic standard apparently had been sealed at an
international monetary conference held in Paris in 1867, when most of the
delegates voted for the gold standard.
Classic Gold Standard: 1875-1914
• A gold standard is a monetary system in which the
standard economic unit of account is based on a fixed
quantity of gold.
• Country that uses the gold standard sets a fixed price for
gold and buys and sells gold at that price. That fixed price
is used to determine the value of the currency. For
example, if the U.S. sets the price of gold at $500 an
ounce, the value of the dollar would be 1/500th of an
ounce of gold.
Classic Gold Standard
• Highly stable exchange rates under the
classical gold standard provided an
environment that was conducive to
international trade and investment.
• Misalignment of exchange rates and
international imbalances of payment were
automatically corrected
Classic Gold Standard
• There are shortcomings:
• The supply of minted gold is so restricted that
the growth of world trade and investment can
be hampered for the lack of sufficient
monetary reserves.
Interwar Period: 1915-1944
• Exchange rates fluctuated as countries widely
used depreciations of their currencies as a
means of gaining advantage in the world export
market.
• Attempts were made to restore the gold
standard, but participants lacked the political
will to “follow the rules of the game”.
• The result for international trade and
investment was profoundly detrimental.
Bretton Woods System: 1945-1972

• Named for a 1944 UN meeting of 44 nations at


Bretton Woods, New Hampshire.
• The purpose was to design a postwar
international monetary system.
• The goal was exchange rate stability (through
fixed exchange rates) without the gold standard.
• The result was the creation of the IMF(to
maintain order of IMS) and the World
Bank(Promoting general economic stability).
Bretton Woods System: 1945-1972

• Under the Bretton Woods system, the U.S. dollar


was pegged to gold at $35 per ounce and other
currencies were pegged to the U.S. dollar.
• Each country was responsible for maintaining its
exchange rate within ±1% of the adopted par
value by buying or selling foreign reserves as
necessary (no voluntary devaluation of money)
• The Bretton Woods system was a dollar-based
gold exchange standard.
The Flexible Exchange Rate Regime: 1973-Present

• Flexible exchange rates were declared acceptable


to the IMF members.
• Central banks were allowed to intervene in the
exchange rate markets to iron out unwarranted
volatilities.
• Gold was abandoned as an international reserve
asset.
• Non-oil-exporting countries and less-developed
countries were given greater access to IMF funds.
Current Exchange Rate Arrangements
• Free Float: The largest number of countries, about 48,
allow market forces to determine their currency’s value.
• Managed Float: About 25 countries combine government
intervention with market forces to set exchange rates
• Pegged to another currency: Such as the U.S. dollar or
euro
• No national currency: Some countries do not bother
printing their own, they just use the U.S. dollar. For
example, Ecuador, Panama, and El Salvador have
dollarized.
European Monetary System
• Eleven European countries maintain exchange
rates among their currencies within narrow
bands, and jointly float against outside currencies.
• Objectives: a) To establish a zone of monetary
stability in Europe.
b) To coordinate exchange rate policies vis-à-vis
non- European currencies.
c) To pave the way for the European Monetary
Union.

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