This document discusses the history and evolution of international monetary systems. It begins by describing the barter system used before currencies. It then explains how the gold standard system established relatively stable exchange rates between currencies from the 19th century until World War I by pegging currencies to gold. However, the gold standard broke down during the interwar years and WWII. In 1944, the Bretton Woods Agreement established the US dollar as the global reserve currency and created the IMF and World Bank to manage the new system of fixed exchange rates tied to the dollar. However, the system collapsed in the early 1970s due to US deficits and the Nixon administration ending dollar convertibility to gold. This led to a transition to a system of floating exchange rates

1. THE INTERNATIONAL MONETARY
SYSTEM
Before the introduction of any common currency
all deals were completed by exchanging goods or
services of nearest equivalent value.
After that, when currencies were put into the
system, there arose a complication.
In this system, one party of the two, received
money instead of goods.

2. THE INTERNATIONAL MONETARY
SYSTEM
The party receiving the money, at times, had to
hold it for a length of time, before exchanging it
for equivalent amount of goods or services.
Problem arose, as the party holding the money
was not always convinced that his stock of money
was a genuine store of value and would hold its
value for a considerable period of time.

3. THE INTERNATIONAL MONETARY
SYSTEM
This “Store of value” problem was partially solved
by introducing relatively scarce metals as coins,
for example : Gold, Silver, Copper.
These metal already had a market value according
to weight and the exchange value could be found
out by simply weighing the coins.
A foreign trader could exchange cloth in India for
gold coins as long as he had confidence in the
purity of the gold.

4. THE INTERNATIONAL MONETARY
SYSTEM
This system as an international monetary system
was by no means perfect.
For example, the purity of the gold could be
diluted making it difficult for a trader to assess
the value of the gold in the coin.

5. THE GOLD STANDARD
During the 19th century international trading was
done, using a system called the “Gold Standard”.
The principles of this system were :

6. THE RULE OF THE GAME
Each country would set the rate at which its currency unit
(Paper or coin) could be converted into a weight of gold.
The USA for example declared that the dollar would be
convertible into gold at a rate of $ 26.67 per ounce.
The British Pound was pegged at Pound 4.2474 per ounce
of gold.
Now, as long as both currencies were freely convertible
into gold the dollar / pound exchange rate was :
Dollar 26.67/ ounce of gold
Pound 4.2474 / ounce of gold = Dollar 6.2791 / Pound

7. THE RULE OF THE GAME
Each country on Gold Standard agreed to buy or
sell gold on demand with anyone at its own fixed
parity rate.
Exchange rates between currencies were fixed.
Countries had to maintain adequate reserves of
gold to back its currencies value.
Expanding money supply was limited for each
country on the basis of gold they carried.
The Gold Standard worked adequately until the
outbreak of World war – I (1914) after which it
was suspended.

8. 1914 – 1944- The inter-war years
Due to interruptions in international trade, the
balance which was created by the Gold Standard
was finished.
The Great depression of the 1930’s added fuel to
the fire.
In 1934 the US adopted a Modified Gold Standard
and devalued its currency from $ 26.67 / ounce to
$ 35 / ounce of gold.

9. 1914 – 1944- The inter-war years
During the World War – II and its chaotic aftermath,
many of the currencies lost their convertibility into
other currencies.
The Dollar remained the only major currency which
was convertible.
As the second war drew to a close in 1944 , the allied
powers met at BRETTON WOODS, NEW HAMSPHIRE
to create a new post war international economic
system.

10. BRETTON WOODS AGREEMENT
The Bretton Woods Agreement established a US
Dollar based international monetary system and
provided for two new institutions.
THE INTERNATIONAL MONETARY FUND (IMF)
THE WORLD BANK.

11. BRETTON WOODS AGREEMENT
The IMF aids countries with BOP and exchange
rate problems.
The International Bank for reconstruction &
development (World Bank) helped the post war
funding and reconstruction and supports general
economic development.

12. FIXED EXCHANGE RATES REGIME
Under the original provisions of the Bretton Woods
Agreement, all countries fixed the value of their
currency in terms of gold, but were not required to
exchange their currencies for gold.THIS WAS THE
ERA OF FIXED EXCHANGE RATES (1945 – 1973).
Only, the Dollar remained convertible into gold ($35
per ounce).
Each country established their exchange rate viz a viz
the Dollar.

13. FALL OF FIXED EXCHANGE RATES
REGIME
Till 1973 the system worked fairly well, with total
dependency and reliability on the American
Dollar and Gold.
However, during this period the US had persistent
deficits in its BOP.
The International demand for dollars was very
heavy and growing.

14. FALL OF FIXED EXCHANGE RATES
REGIME
The nation itself required huge outflow of dollars
to fund their deficits in BOP.
Eventually, the world lost the confidence in the
ability of the US to meet its commitment to
convert dollars to gold.
This lack of confidence forced President Nixon to
suspend official purchases or sales of gold by the
US treasury on 15th August’1971.

15. FALL OF FIXED EXCHANGE RATES
REGIME
The US lost roughly one third of its gold reserve in
the first seven months of the year.
The dollar was devalued.
The dollar again was devalued in 1973 at $42.22 per
ounce of gold.
By the end of Feb’1973, the fixed exchange rate
system was no longer feasible.

16. THE ELECTRIC CURRENCY
ARRANGEMENT – 1973 TO DATE
The major foreign exchange markets were actually
closed for several weeks in March’1973.
WHEN THEY REOPENED, THE CURRENCIES WERE
ALLOWED TO FLOAT TO THE LEVELS DETERMINED
NOT ONLY BY THE DOLLAR BUT BY THE FORCES OF
THE MARKET ALSO.
The exchange rates have become much volatile and
less predictable than they were during the Fixed rate
period.