International monetary system

1. International Monetary System
By-Dnyaneshwar Ugalmugale

2. What is money
• What is money? – A current medium of
exchange in the form of coins and banknotes;
coins and banknotes collectively – Any good
that is widely accepted in exchange of goods
and services, as well as payment of debts.

3. Introduction
1. International monetary system refers to a system that
forms rules and standards for facilitating international
trade among the nations.
2. It helps in reallocating the capital and investment
from one nation to another.
3. It is the global network of the government and
financial institutions that determine the exchange
rate of different currencies for international trade. It is
a governing body that sets rules and regulations by
which different nations exchange currencies with
each other.

4. Definition
• The international monetary system can be
defined as the institutional framework within
which international payments are made the
movements of capital are accommodated and
exchange rates among currencies are
determined .
• Narrowly speaking it refers to international
exchange rate system

5. Functions of money
1. Medium of
exchange – money
used for buying and
selling goods and
services
2. Unit of account –
common standard
for measuring
relative worth of
goods and services
3. Store of value –
convenient way to
store wealth

6. Features that IMS should possess
1. Efficient and unrestricted flow of international
trade and investment.
2. Stability in foreign exchange aspects.
3. Promoting Balance of Payments adjustments to
prevent disruptions associated.
4. Providing countries with sufficient liquidity to
finance temporary balance of payments deficits.
Should at least try avoid adding further
uncertainty.
5. Allowing member countries to pursue
independent monetary and fiscal policies.

7. STAGES IN 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

8. Bimetallism: Before 1875
Both gold and silver were used as international means of payment and the
exchange rates among currencies were determined by either their gold or silver
contents.
Some countries were on the gold standard, some on the silver standard, some
on both.
A “double standard” in the sense that both gold and silver were used as money.

9. Gresham's law
Gresham's law is an economic principle that states: "if
coins containing metal of different value have the
same value as legal tender, the coins composed of the
cheaper metal will be used for payment.
while those made of more expensive metal will be
hoarded or exported and thus tend to disappear from
circulation.” It is commonly stated as: "“Bad”
(abundant) money drives out “Good” (scarce) money”

10. Classical gold standard
During this
period in most
major
countries:
Gold alone
was assured of
unrestricted
coinage
There was
two-way
convertibility
between gold
and national
currencies at a
stable ratio.
Gold could be
freely exported
or imported. The
exchange rate
between two
country’s
currencies would
be determined
by their relative
gold contents.

11. Rules of the system
Each country defined the value of its currency in terms of gold.
Exchange rate between any two currencies was calculated as X currency per ounce of
gold/ Y currency per ounce of gold.
These exchange rates were set by arbitrage depending on the transportation costs of
gold.
Central banks are restricted in not being able to issue more currency than gold reserves.
For example, if the dollar is pegged to gold at U.S.$30 = 1 ounce of gold, and the British
pound is pegged to gold at £6 = 1 ounce of gold, it must be the case that the exchange
rate is determined by the relative gold contents$30 = £6 $5 = £1

12. Classical Gold Standard
• Classical Gold Standard:
1. Highly stable exchange rates under the classical gold standard provided
an environment that was favorable to international trade and
investment
2. Misalignment of exchange rates and international imbalances of
payment were automatically corrected by the price-specie-flow
mechanism.
3. Price-Specie-Flow Mechanism
Suppose Great Britain exported more to France than France imported from
Great Britain. –
Net export of goods from Great Britain to France will be accompanied by a
net flow of gold from France to Great Britain.
This flow of gold will lead to a lower price level in France and, at the same
time, a higher price level in Britain. The resultant change in relative price
levels will slow exports from Great Britain and encourage exports from
France.

13. Arguments in
Favor of a Gold
Standard
• Price Stability.
• By tying the money supply to the supply of gold, central
banks are unable to expand the money supply.
• Facilitates BOP adjustment automatically
• price-specie-flow mechanism
Arguments
against Gold
Standard
• The growth of output and the growth of gold supplies are
closely linked.
• Volatility in the supply of gold could cause adverse shocks
to the economy,
• In practice monetary authorities may not be forced to
strictly tie their hands in limiting the creation of money.
• Countries with respectable monetary policy makers cannot
use monetary policy to fight domestic issues like
unemployment.

14. Interwar Period: 1915-1944
1. Exchange rates fluctuated as countries widely used “predatory” depreciations
of their currencies as a means of gaining advantage in the world export
market.
2. Attempts were made to restore the gold standard, but participants lacked the
political will to “follow the rules of the game”
3. The world economy characterized by tremendous instability and eventually
economic breakdown, what is known as the Great Depression (1930 – 39)
4. Interwar Period: 1915-1944
5. International Economic Disintegration
6. Many countries suffered during the Great Depression.
7. Major economic harm was done by restrictions on international trade and
payments. –
8. These beggar-thy-neighbor policies provoked foreign retaliation and led to the
disintegration of the world economy.
9. –All countries’ situations could have been bettered through international
cooperation

15. Bretton Woods System: 1945- 1972
1. Named for a 1944 meeting of 44 nations at Bretton Woods, New Hampshire.
2. The purpose was to design a postwar international monetary system.
3. The goal was exchange rate stability without the gold standard.
4. Resulted in ;
5. The result was the creation of the IMF and the World Bank
6. 1. IMF: maintain order in monetary system
7. 2. World Bank: promote general economic
8. development
Features of Bretton Woods System
1. 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.
2. Each country was responsible for maintaining its exchange rate fixed : within±1% of
the adopted par value by buying or selling foreign reserves as necessary.
3. The Bretton Woods system was a dollar-based gold exchange standard.

17. The Demise of the Bretton Woods
System
• Domestic U.S. policies, such as the growing expenditure associated
with Vietnam resulted in more printing of dollars to finance
expenditure and forced foreign governments to run up holdings of
dollar reserves.
• The dollar was overvalued in the 1960s
• In 1971, the U.S. government “closed the gold window” by decree
of President Nixon.
• The world moved from a gold standard to a dollar standard from
Bretton Woods to the Smithsonian Agreement. Growing increase in
the amount of dollars printed further eroded faith in the system
and the dollars role as a reserve currency.
• By 1973, the world had moved to search for a new financial
system: one that no longer relied on a worldwide system of pegged
exchange rates.

18. Smithsonian Agreement
1. An agreement reached by a group of 10 countries (G10) in
1971 that effectively ended the fixed exchange rate
system established under the Bretton Woods Agreement.
2. The Smithsonian Agreement re-established an
international system of fixed exchange rates without the
backing of silver or gold, and allowed for the devaluation
of the U.S. dollar.
3. This agreement was the first time in which currency
exchange rates were negotiated.
Concepts…
Snake in the tunnel
Nixon Shock

19. The Flexible Exchange Rate Regime
• 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.
• The currencies are no longer backed by gold
• 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 etc..
• Some countries do not bother printing their own, they just use the U.S. dollar. For
example, Ecuador, Panama, and have dollarized.

20. International Monetary Fund

21. ABOUT
International Monetary Fund was created on 27 December
1945.It is also known as ‘The fund’It is an International financial
institution created to promote international monetary
cooperation ,facilitate international trade ,foster sustainable
economic growth ,make resources available to members
experiencing balance of payment difficulties.
IMF is headquarter at Washington .D . C. and has 189 member
countries.
Financial year of IMF is from 1st may to 31 April.
IMF is regarded as “Guardian to good conduct” in area of BOP.

22. Countries contributes funds to a pool through a Quota system
from which countries experiencing balance of payment problems
can borrow money .As of 2016 , the fund has SDR 177 billion

23. SPECIAL DRAWING RIGHTS
The main motive of IMF is to provide economic assistance to its
members countries for eliminating the adverse BOP. To solve the
problem of international liquidity it IMF started the concept of
Paper Gold (SDR)
The SDR is a international reserve asset, created by the imf in the
year 1969 to supplement its members countries official reserves.
The value of SDR is determined by the basket of 5 currencies:
1. US Dollar
2. Japanese Yen
3. Euro
4. British Pound
5. Chinese Renminbi

24. FUNCTIONS
The IMF functions
in 3 main areas:
• Overseeing the economies
of the member countries.
• Lending the countries with
the BOP issues.
• Offering technical assistance
to its member countries.

25. Difference between World Bank & IMF
World Bank gives loan for growth.(
building dams, etc. )
IMF give loan when country
desperately needs money (IMF loan
means the economy is not doing well.)

26. Formation
The IMF and World bank (IBRD) was conceived at a UN
conference of 44 Nations held at a Bretton Wood , New
Hampshire , united states in 7 July 1944 primarily by the ideas of
Harry Dexter White and john Maynard Keynes.
These 2 international institutions are known as Bretton Woods
Twins.
IMF came into formal existence in 1945 with 29 member
countries and the goal of reconstructing the international
payment system. It now plays a central role in the management
of balance of payment difficulties and international financial
crises.

27. Main Objectives
To promote
international
monetary
cooperation.
To ensure
balanced
international
trade.
To
ensure
exchang
e rate
stability.
To eliminate
and
minimize
exchange
restrictions.
To grant economic
assistance to
member countries
for eliminating the
adverse imbalance
in BOP.
To minimize
imbalance the
quantum and
duration of
international
trade.

28. India is a founding member of IMF and has 8th place in general quota.
IMF is controlled and managed 24 Board of Directors . Voting rights of the
members depends upon their quota in IMF
The finance Minister is the ex-officio governor in IMF Board of Governor.
IMF provides periodic assessment of Global prospects in its ‘World economic
Outlook’ and of financial markets in “Global Financial Stability report”

29. Types of loan
Extended fund
facility.
Flexible
credit
line.
Precautionary
lending.
Stand by
Arrange
ment.

30. IMF is comprised of 4 key credit lines:
FCL( Flexible Credit Line): This is given to the
countries usually before they get into a problem .
they are ones with better policies.
PPL (Precautionary Lending ): this is given to the
countries that are beginning to get weak.
SBA( Stand By agreement):This is given to the countries
that are quite weak , but can be rescued quickly.
EFF( Extended Fund Facility): This is for the countries that
are in a lot of trouble and will need a help for a long time.

31. Type of Membership
Original
membership:
All those countries
whose representatives
took part in Bretton
Woods conference
Who agreed to be the
members of the fund
prior to 31st December
1945.
Ordinary
membership:
All those who became
its members
subsequently.
BANK has the authority
to suspend any
member and similarly
every member is free to
resign.

32. Who Runs the IMF ?
Member
Countries
Board of
Governors
Executive Board
IMF Managing
Director
First Deputy
Managing Dir Deputy
Managing
Dir
Deputy
Managing
Dir

33. INTERNATIONAL FINANCIAL
SYSTEM (IFS)

34. • The international financial system is the financial
system consisting of institutions are regulators that
act on the international level ,as opposed to those
that act on a national or regional level.
• The international financial system is basically a
broader regional systems that encompasses all
financial institutions ,borrowers and lenders within
the global economy.

35. ESSENTIALS CONSIDERATION
SUPERVISION
INTERMEDIATION PROCESS
SETTLEMENT SYSTEM
ECONOMIC INSTABILITY
PROLIFERATION

36. ECONOMIC FUNCTIONS
The financial system is important in our daily life
as it performs various functions .
SAVINGS FUNCTION
WEALTH FUNCTION
LIQUIDITY FUNCTION

37. .
CREDIT FUNCTION
PAYMENTS FUNCTION
RISK PROTECTION FUNCTION
POLICY FUNCTION
FUNCTION

38. Types of financial market within international
financial system
The money market versus the capital market
Open versus negotiated markets
Primary versus secondary Markets
Spot versus Futures,Forward and Option Market

39. Thank you