The document discusses the evolution of international monetary systems throughout history. It begins by defining money and its three main functions. It then outlines several international monetary systems: bimetallism before 1875; the classical gold standard from 1875-1914; the unstable interwar period from 1915-1944; the Bretton Woods system from 1945-1972, which pegged currencies to the US dollar; and the current flexible exchange rate regime since 1973. The Bretton Woods system collapsed in the early 1970s due to US economic policies undermining the dollar-gold peg. Overall, the document traces the progression of global exchange rate regimes over time.
2. 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. Three 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
4. International Monetary System
International monetary systems are sets of internationally
agreed rules, conventions and supporting institutions, that
facilitate international trade, cross border investment and
generally there allocation of capital between nation states.
International monetary system refers to the system
prevailing in world foreign exchange markets through
which international trade and capital movement are
financed and exchange rates are determined.
5. • It defines over all financial environment in which multinational corporation
operate. The IMS consist of elements such as laws, rules, agreements,
institutions, and procedures which affect foreign exchange rates, balance of
payments adjustments, international trade and capital flows. This system
evolves in the future as the international business and political environment of
the world economy continues to change. The IMS plays a role in the financial
management of a multinational business and economic and financial policies
of each country.
6. Features that IMS should possess
Efficient and unrestricted flow of international trade and
investment.
Stability in foreign exchange aspects.
Promoting Balance of Payments adjustments to prevent
disruptions associated.
Providing countries with sufficient liquidity to finance
temporary balance of payments deficits.
Should at least try avoid adding further uncertainty.
Allowing member countries to pursue independent monetary
and fiscal policies.
7. Requirements of good international monetary system
Adjustment : a good system must be able to adjust imbalances in
balance of payments quickly and at a relatively lower cost;
Stability and Confidence: the system must be able to keep exchange
rates relatively fixed and people must have confidence in the stability
of the system;
Liquidity: the system must be able to provide enough reserve assets for
a nation to correct its balance of payments deficits without making the
nation run into deflation or inflation.
8. STAGES IN INTERNATIONAL MONETARY
SYSTEM
1. Bimetallism: Before 1875
2. Classical Gold Standard: 1875-1914
3. Interwar Period: 1915-1944
4. Bretton Woods System: 1945-1972
4. The Flexible Exchange Rate Regime: 1973-Present
9. Bimetallism: Before 1875
o A “double standard” in the sense that both gold and silver
were used as money.
o Some countries were on the gold standard, some on the
silver standard, some on both.
o 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.
o Gresham’s Law implied that it would be the least valuable
metal that would tend to circulate.
10. 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”
11. Gresham’s Law Contd…
The law was named in 1860 by Henry Dunning
Macleod, after Sir Thomas Gresham (1519–1579),
who was an English financier during the Tudor
dynasty. However, there are numerous predecessors.
The law had been stated earlier by Nicolaus
Copernicus; for this reason, it is occasionally known as
the Copernicus Law.
12. Image of first United States gold coin - the 1795
Gold Eagle.
13.
14. 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.
Gold Standard
15. 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.
16. Classical Gold Standard : Exchange rate determination
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
17. Classical Gold Standard:
Highly stable exchange rates under the classical
gold standard provided an environment that was
favorable to international trade and investment
Misalignment of exchange rates and international
imbalances of payment were automatically
corrected by the price-specie-flow mechanism.
18. 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.
19. 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
20. 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.
21. Decline of the gold standard
• There are several rules why the gold standard could not function well over the
long period. One problem involved the price specie flow mechanism. For this
mechanism to function effectively certain ‘rules of thumb’. One rule is that the
currencies must be valued in terms of gold. Another rule is that the flow of
gold between countries cannot be restricted. The last rule requires the
issuances of notes in some fixed relationship to a country’s gold holdings.
• Because the gold is a scare commodity, gold volume could not grow fast
enough to allow adequate amounts of money to be created to finance the
growth of world trade. The problem was further gold was taken out for art and
industrial consumption.
22.
23. Interwar Period: 1915-1944
Exchange rates fluctuated as countries widely used
“predatory” 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 world economy characterized by tremendous
instability and eventually economic breakdown, what
is known as the Great Depression (1929– 39)
24. Interwar Period: 1915-1944
International Economic Disintegration
– Many countries suffered during the Great Depression.
– Major economic harm was done by restrictions on international
trade and payments.
– These beggar-thy-neighbor policies provoked foreign retaliation
and led to the disintegration of the world economy.
– All countries’ situations could have been bettered through
international cooperation
• Bretton Woods agreement
25. • The role of Great Britain as the world’s major creditor nation also came to an end after the 1 world
war. The united states began to assume the role of leading creditor nation. As countries began to
recover from the war and stabilize their economies they made several attempts to return to gold
standard. The US returned to gold in 1919 and UK in 1925. countries like Switzerland, France and
Scandinavian countries restored the gold standard by 1928.
• The key currency involved in the attempt to restore the international gold standard was the pound
sterling which returned to gold in 1925. This was a great mistake since the UK had experienced
considerably more inflation rather than the US and because UK had liquidated most of its foreign
investment in financing the war. The result was increased unemployment and economic stagnation in
Britain.
26. • In 1934, the US returned to a modified gold standard and the US dollar was
devalued from the previous. The modified gold standard was known as Gold
exchange standard. Under this standard the US traded gold only with foreign
central bank not with private citizens. World war II also resulted in many of
the world’s major currencies losing their convertibility. The only major
currency that continued to remain convertibility was the dollar.
• Thus the inter war period was characterized by half heartedly attempts and
failures to restore the gold standard, economic and political instability widely
fluctuation exchange rates, bank failure and financial crisis. The great
depression in 1929 and the stock market crash also resulted in the collapse of
many banks.
27.
28. Bretton Woods System: 1945- 1972
Named for a 1944 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 without the gold
standard.
29. Resulted in ;
The result was the creation of the IMF and the World Bank
1. IMF: maintain order in monetary system
2. International bank for reconstruction and development
World Bank: promote general economic
development
30. Features of Bretton Woods System
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 fixed : within ±1% of the adopted par value by buying
or selling foreign reserves as necessary.
The Bretton Woods system was a dollar-based gold exchange
standard.
31. Bretton Woods System:1945-1972
Par value / pegged exchange rate system
German
mark
British
pound
French
franc
Par
V
alue
U.S. dollar
Pegged at $35/oz.
Gold
32. The Demise of the Bretton Woods System
• In the early post-war period, the U.S. government had to provide
dollar reserves to all countries who wanted to intervene in their
currency markets.
• The increasing supply of dollars worldwide, made available
through programs like the Marshall Plan, meant that the credibility
of the gold backing of the dollar was in question.
• U.S. dollars held abroad grew rapidly and this represented a claim
on U.S. gold stocks and cast some doubt on the U.S.’s ability to
convert dollars into gold upon request.
33. 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.
34. The Demise of the Bretton Woods System
• 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.
35. Smithsonian Agreement
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.
The Smithsonian Agreement reestablished an international
system of fixed exchange rates without the backing of silver or
gold, and allowed for the devaluation of the U.S. dollar. This
agreement was the first time in which currency exchange rates
were negotiated.
36.
37. 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
38. 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..
• No national currency
• Some countries do not bother printing their own, they just use the U.S.
dollar. For example, Ecuador, Panama, and have dollarized.
39. “give a man a fish and you feed him
for a day; teach a man to fish and
you feed him for a lifetime”
Editor's Notes
Mercantile theory—its present form
Sum total concept
Whenever a country or empire has regional or global control of trade, its currency becomes the dominant currency for trade and governs the monetary system of that time
Imf provides loans to finance bop problems
International trade settlements
Its about the history - perception and views may be different to dofferent persons- there may be conflicting viws.
I am presenting my view
Eg : view about mahatma Gandhi , wars, events etc…
Some texts only 2
Pre- brettown woods
Bretton woods
present
Gresham’s law, observation in economics that “bad money drives out good.” More exactly, 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.
Sir Thomas Gresham, financial agent of Queen Elizabeth I, was not the first to recognize this monetary principle, but his elucidation of it in 1558 prompted the economist H.D. Macleod to suggest the term Gresham’s law in the 19th century.
Money functions in ways other than as a domestic medium of exchange; it also may be used for foreign exchange, as a commodity, or as a store of value. If a particular kind of money is worth more in one of these other functions, it will be used in foreign exchange or will be hoarded rather than used for domestic transactions. For example, during the period from 1792 to 1834 the United States maintained an exchange ratio between silver and gold of 15:1, while ratios in Europe ranged from 15.5:1 to 16.06:1. This made it profitable for owners of gold to sell their gold in the European market and take their silver to the United States mint. The effect was that gold was withdrawn from domestic American circulation; the “inferior” money had driven it out.
Gresham’s law, observation in economics that “bad money drives out good.” More exactly, 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. Sir Thomas Gresham, financial agent of Queen Elizabeth I, was not the first to recognize this monetary principle, but his elucidation of it in 1558 prompted the economist H.D. Macleod to suggest the term Gresham’s law in the 19th century.
Money functions in ways other than as a domestic medium of exchange; it also may be used for foreign exchange, as a commodity, or as a store of value. If a particular kind of money is worth more in one of these other functions, it will be used in foreign exchange or will be hoarded rather than used for domestic transactions. For example, during the period from 1792 to 1834 the United States maintained an exchange ratio between silver and gold of 15:1, while ratios in Europe ranged from 15.5:1 to 16.06:1. This made it profitable for owners of gold to sell their gold in the European market and take their silver to the United States mint. The effect was that gold was withdrawn from domestic American circulation; the “inferior” money had driven it out.
"Good" money is money that shows little difference between its nominal value (the face value of the coin) and its commodity value (the value of the metal of which it is made, often precious metals, nickel, or copper)
On the other hand, "bad" money is money that has a commodity value considerably lower than its face value and is in circulation along with good money, where both forms are required to be accepted at equal value as legal tender.
Silver coins were widely circulated in Canada (until 1968) and in the United States (until 1964 for dimes and quarters and 1970 for half-dollars) when the Coinage Act of 1965 was passed. However, these countries debased their coins by switching to cheaper metals thereby inflating the new debased currency in relation to the supply of the former silver coins. The silver coins disappeared from circulation as citizens retained them to capture the steady current and future intrinsic value of the metal content over the newly inflated and therefore devalued coins, using the newer coins in daily transactions.[citation needed] In the late 1970s, the Hunt brothers attempted to corner the worldwide silver market but failed, temporarily driving the price far above its historic levels and intensifying the extraction of silver coins from circulation.[7] The same process occurs today with the copper content of coins such as the pre-1997 Canadian penny, the pre-1982 United States penny and the pre-1992 UK copper pennies and two pence.[citation needed] This also occurred even with coins made of less expensive metals such as steel in India.[8]
22nd June 1816, Great Britain declared the gold currency as official national currency (Lord Liverpool’s Act).
On 1st May 1821 the convertibility of Pound Sterling into gold was legally guaranteed.
Other countries pegged their currencies to the British Pound, which made it a reserve currency. This happened while the British more and more dominated international finance and trade relations.
Why vaious defeats and dominace in international market britan is is ideally positioned to impose its own order on the international system, and that oder came to be called gold standard
British govt become the guranteer of gold standard.
At the end of the 19th century, the Pound was used for two thirds of world trade and most foreign exchange reserves were held in this currency.
The gold standard gained acceptance as in international monetary system in the 1870s
Board - Price-specie flow mechanism:
Deficit gold flow out of the country
gold reserve decrease money supply decrease quantity theory of money price level decrease exchange rate fixed export go up, import go down, deficit disappear
The adjustment of surplus is the opposite
Price-specie flow mechanism
Adjustment mechanism under the classic gold standard allowing disturbances in the price level in one country to be wholly or partly offset by a countervailing flow of specie (gold coins) that would act to equalize prices across countries and automatically bring international payments into balance.
What happened then if one country enjoyed a surplus in its balance of trade with another country?
It attracted more gold, which saw its gold reserves rise and consequently the amount of paper money in circulation would rise as well. As more money circulated the demand for goods increased and along with the demand prices would also increase as well.
The opposite would happen in a country experiencing a trade deficit. This is known as the specie flow mechanism of the gold standard system.
Price-specie flow mechanism:
Deficit gold flow out of the country
gold reserve decrease money supply decrease quantity theory of money price level decrease exchange rate fixed export go up, import go down, deficit disappear
The adjustment of surplus is the opposite.
The growth of output and the growth of gold supplies needs to be closely linked. For example, if the supply of gold increased faster than the supply of goods did there would be inflationary pressure. Conversely, if output increased faster than supplies of gold did there would be deflationary pressure.
Volatility in the supply of gold could cause adverse shocks to the economy rapid changes in the supply of gold would cause rapid changes in the supply of money and cause wild fluctuations in prices that could prove quite disruptive
If it was so good, what happened?
The gold standard eventually collapsed from the impact of World War I. During the war, nations on both sides had to finance their huge military expenses and did so by printing more paper currency. As the currency in circulation exceeded each country’s gold reserves, many countries were forced to abandon the gold standard
Predatory meaning - seeking to exploit others.
The years between the world wars have been described as a period of de-globalization, as both international trade and capital flows shrank compared to the period before World War I (1914- 1918 ). During World War I (1939- 1945) countries had abandoned the gold standard and, except for the United States.
The onset of the World Wars saw the end of the gold standard as countries, other than the U.S., stopped making their currencies convertible and started printing money to pay for war related expenses
After the war, with high rates of inflation and a large stock of outstanding money, a return to the old gold standard was only possible through a deep recession inducing monetary contraction as practiced by the British after WW I.
The focus shifted from external cooperation to internal reconstruction and events like the Great Depression (1930-39)further illustrated the breakdown of the international monetary system, bringing such bad policy moves such as a deep monetary contraction in the face of a recession.
in economics, a beggar-thy-neighbour policy is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries.
The Fleeting Return to Gold
1919
U.S. returned to gold
1922
A group of countries (Britain, France, Italy, and Japan) agreed on a program calling for a general return to the gold standard and cooperation among central banks in attaining external and internal objectives.
1925
Britain returned to the gold standard
1929
The Great Depression was followed by bank failures throughout the world
1931
Britain was forced off gold when foreign holders of pounds lost confidence in Britain’s commitment to maintain its currency’s value.
1934 Global trade ha fallen to 1/6 th
The features of the Bretton Woods system can be described as a “gold-exchange” standard rather than a “gold-standard”. The key difference was that the dollar was the only currency that was backed by and convertible into gold. (The rate initially was $35 an ounce of gold)
Other countries would have an “adjustable peg” basically, they were exchangeable at a fixed rate against the dollar, although the rate could be readjusted at certain times under certain conditions
Each country was allowed to have a 1% band around which their currency was allowed to fluctuate around the fixed rate. Except on the rare occasions when the par value was allowed to be readjusted, countries would have to intervene to ensure that the currency stayed in the required band.
The IMF was created with the specific goal of being the multilateral body that monitored the implementation of the Bretton Woods agreement.
Its role was to hold gold reserves and currency reserves that were contributed by the member countries and then lend this money out to other nations that had difficulty meeting their obligations under the agreement.
The borrowing was classified into tranches, each with attached conditions that became progressively stricter. This enabled the IMF to force countries to adjust excess fiscal deficits, tighten monetary policy etc, and force them to be more consistent with their obligations under the agreement.
Initially, the Bretton Woods system operated as planned. Japan and Europe were still rebuilding their postwar economies and demand for US goods and services—and dollars—was high. Since the United States held about three-quarters of the world’s official gold reserves, the system seemed secure.
In the 1960s, European and Japanese exports became more competitive with US exports. The US share of world output decreased and so did the need for dollars, making converting those dollars to gold more desirable. The deteriorating US balance of payments, combined with military spending and foreign aid, resulted in a large supply of dollars around the world. Meanwhile, the gold supply had increased only marginally. Eventually, there were more foreign-held dollars than the United States had gold.
In the early post-war period, the U.S. government had to provide dollar reserves to all countries who wanted to intervene in their currency markets. Lead to problem of lack of international liquidity.
The increasing supply of dollars worldwide, made available through programs like the Marshall Plan, meant that the credibility of the gold backing of the dollar was in question. U.S. dollars held abroad grew rapidly and this represented a claim on U.S. gold stocks and cast some doubt on the U.S.’s ability to convert dollars into gold upon request.
The Marshall Plan (officially the European Recovery Program, ERP) was an American initiative to aid Western Europe, in which the United States gave $13 billion (approximately $130 billion in current dollar value as of August 2015) in economic support to help rebuild Western European economies after the end of World War II. The plan was in operation for four years beginning in April 1947. The goals of the United States were to rebuild war-devastated regions, removetrade barriers, modernize industry, make Europe prosperous again, and prevent the spread of communismThe initiative is named after Secretary of State George Marshall.
Under the Bretton Woods system, the external values of foreign currencies were fixed in relation to the U.S. dollar, whose value was in turn expressed in gold at the congressionally-set price of $35 per ounce. By the 1960s, a surplus of U.S. dollars caused by foreign aid, military spending, and foreign investment threatened this system, as the United States did not have enough gold to cover the volume of dollars in worldwide circulation at the rate of $35 per ounce; as a result, the dollar was overvalued.
A negative balance of payments, growing public debt incurred by the Vietnam War and Great Society programs, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued in the 1960s.
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. Although they pursue this for a while a few countries began to become growingly less keen on holding dollars and more keen on holding gold.
In 1971, the U.S. government “closed the gold window” by decree of President Nixon.
The Bretton Woods Conference of 1944 established an international fixed exchange rate system based on the gold exchange standard, in which currencies were pegged to the United States dollar, itself convertible into gold at $35/ounce.
On August 15, 1971, President Richard Nixon unilaterally suspended the convertibility of US dollars into gold. The United States had deliberately offered this convertability in 1944; it was put into practice by the U.S. Treasury. The suspension made the dollar effectively a fiat currency.
Nixon's administration subsequently entered negotiations with industrialized allies to reassess exchange rates following this development.
Meeting in December 1971 at the Smithsonian Institution in Washington D.C., the Group of Ten signed the Smithsonian Agreement. The US pledged to peg the dollar at $38/ounce (instead of $35/ounce; in other words: the USD rate lost 7,9 %) with 2.25% trading bands, and other countries agreed to appreciate their currencies versus the dollar: Yen + 16,9 %; Deutsche Mark + 13,6 %, French Franc + 8,6 %, British pound the same, Italian lira + 7,5 %.[3] The group also planned to balance the world financial system using special drawing rights alone
G10. The Group of Ten is made up of eleven industrial countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland
Meeting in December 1971 at the Smithsonian Institution in Washington D.C., the Group of Ten signed the Smithsonian Agreement. The US pledged to peg the dollar at $38/ounce with 2.25% trading bands, and other countries agreed to appreciate their currencies versus the dollar. The group also planned to balance the world financial system using special drawing rights alone.d, the United Kingdom and the United States)
The snake in the tunnel was the first attempt at European monetary cooperation in the 1970s, aiming at limiting fluctuations between different European currencies. It was an attempt at creating a single currency band for the European Economic Community (EEC), essentially pegging all the EEC currencies to one another.
Pierre Werner presented a report on economic and monetary union to the EEC on 8 October 1970.[1] The first of three recommended steps involved the coordination of economic policies and a reduction in fluctuations between European currencies.[2][3]
With the failure of the Bretton Woods system with the Nixon shock in 1971, the Smithsonian agreement set bands of ±2.25% for currencies to move relative to their central rate against the US dollar. This provided a tunnel within which European currencies could trade. However, it implied much larger bands in which they could move against each other: for example if currency A started at the bottom of its band it could appreciate by 4.5% against the dollar, while if currency B started at the top of its band it could depreciate by 4.5% against the dollar.[4]