The document summarizes key aspects of different international monetary systems throughout history: (1) The gold standard (1880-1914) which fixed exchange rates to gold and allowed adjustment through price-specie flows. It lacked flexibility but provided stable rates. (2) The Bretton Woods system (1944-1973) which fixed rates within 1% bands and used capital controls. It was more flexible than the gold standard but collapsed due to the Triffin dilemma. (3) The present floating rate system (1973-onward) where exchange rates are set by market supply and demand with no obligation to maintain fixed rates. Monetary policy aims to smooth short-term variability.

1. Chapter 8-9 International
Monetary System
You should master:
(1) Features of a good international monetary system;
(2) Rules of the games, and the advantages and
disadvantages of the three international monetary
systems;
(3) The fundamental and immediate cause for the
collapse of the Bretton Woods system;
(4) Some terms, like gold points,

2. 1.1. What is an international
monetary system?
Narrowly speaking, it refers to international
exchange rate system.
There are three international exchange rate
systems in history: the gold standard, the
Bretton Woods, and the floating exchange
rate system.

3. 1.2. Features of a 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.

4. 1.3 Classification of international
monetary system
gold standard,
gold exchange standard
fiduciary standard
Floating exchange rate system
Fixed exchange rate system

5. II. The gold standard system(1880---1914)
Fixed Rate System
The world economy operated under a
system of fixed dollar exchange rates
between the end of World War II and 1973,
with central banks routinely trading foreign
exchange to hold their exchange rates at
internationally agreed levels.

6. Two kinds of the fixed
exchange rates
1. The fixed exchange rate system under the gold
standard
2. Notes in circulation system of fixed exchange
rate system
3. Gold Standard: provisions of the gold content of
the monetary unit.
4. The gold content of the contrast determine the
exchange rate.
5. Coins can freely casting; freely convertible;
freedom of input and output.

7. 2.1 Rules of the game
Fix an official gold price or “mint parity” and allow free
convertibility between domestic money and gold at that
price.
Impose no restrictions on the import or export of gold by
private citizens, or on the use of gold for international
transactions.
Issue national currency and coins only with gold backing,
and link the growth in national bank deposits to the
availability of national gold reserves.
In the event of a short-run liquidity crisis associated with
gold outflows, the central bank should lend freely to
domestic banks at higher interest rates (Bagehot’s Rule).
If Rule I is ever temporarily suspended, restore
convertibility at the original mint parity as soon as
practical.

8. 2.2 Factors that determine or affect
the exchange rates
Factors that determine the exchange rates:
the mint parity
E.g. US$1= British ￡
Factors that influence the exchange rates:
gold points and the demand for and supply
of foreign exchange

9. 2.3 Adjustment of balance of
payments deficits or surpluses
Price-specie flow mechanism:
Deficit gold flow out of the country
gold reserve decrease money
quantity theory of money
supply decrease price level
exchange rate fixed
decrease export go up, import go
down, deficit disappear
The adjustment of surplus is the opposite.

10. 2.4 Remarks and comments
An international gold standard avoids the
asymmetry inherent in a reserve currency
standard by avoiding the “Nth currency”
problem. Under a gold standard, each
country fixes the price of its currency in
terms of gold by standing ready to trade
domestic currency for gold whenever
necessary to defend the official price.

11. The collapse of the gold standard system
It is virtually a pound standard system :
Britain and British pound’s position in the
system
Outbreak of World War I.

12. Advantage of the Gold Standard
Because there are N currency and N
prices of gold in terms of those
currencies, no single country occupies a
privileged position within the system: each
is responsible for pegging its currency’s
price in terms of the official international
reserve asset, gold. Gold standard rules
also require each country to allow
unhindered imports and exports of gold
across its borders.

13. Benefits and drawbacks of the
Gold Standard
Benefits:
1. Symmetry
2. Price level and value of national money
are more stable and predictable
3. Enhance international transactions

14. Drawbacks:
1. Constraints on the use of monetary policy to
fight unemployment.
2. Tying currency values to gold ensures a stable
overall price level only if the relative price of
gold is stable.→gold discovery in South America
3. An international payments system based on gold
is problematic because central banks cannot
increase their holdings of international reserves
as their economies grow unless there are
continual new gold discoveries.
4. The gold standard gives gold-producing
countries power to influence the world economy

15. The Gold Exchange Standard
Halfway between the gold standard and a pure
reserve currency standard is the gold exchange
standard. Central banks’ reserves consist of gold
and currencies whose prices in terms of gold are
fixed, and each central bank fixes its exchange
rate to a currency with a fixed gold price.
More flexibility in the growth of international
reserves.

16. 3. The Bretton Woods System1944-1973
3.1 How this system came into being
The harms and disasters that the two Wars
brought the world.

17. 3.2 Rules of the game
Fix an official par value for domestic currency in
terms of gold or a currency tied to gold as a
numeraire.
In the short run, keep the exchange rate pegged
within 1% of its par value, but in the long-run
leave open the option to adjust the par value
unilaterally if the IMF concurs.
Permit free convertibility of currencies for current
account transactions, but use capital controls to
limit currency speculation.

18. Fixed Exchange Rates under
currency-circulation system
Notes in circulation under the Bretton Woods
system. 1944 Bretton Woods agreement
The result of a compromise by the United
Kingdom to the United States "double hook"
system. 1% 幅度波动
National
1 盎司 =35 美 currencies
元 美元 dollar Yen ...
Lire ...
金块

19. How to sustain the Fixed Rate
1. Use gold reserves （储备项目）
2. By making use of discount policies （资
本项目）
3. Foreign exchange controls （或签订互换
货币协定）
4. Official devaluations （ last resort ）

20. 3.3 Features of the system
IMF to see that this system runs on
smoothly
More flexibility in exchange rates
More channels to correct imbalances in
balance of payments

21. 3.4 Adjustment of balance of
payments imbalances
Offset short-run balance of payments
imbalances by use of official reserves and
IMF credits, and sterilize the impact of
exchange market interventions on the
domestic money supply
Adjust fundamental imbalances by change
the par value permanently, provided agreed
by the IMF

22. 3.4 Adjustment of balance of
payments imbalances
Subordinate domestic monetary and fiscal policies
to maintain fixed exchange rate (use monetary
policy to keep price level and fiscal policy---
government expenditures minus tax revenues--- to
offset imbalances between private savings and
investment):
Deficit contractionary monetary or fiscal
policy price level decrease exchange rate fixed
export go up, import go down, deficit disappear
The adjustment of surplus is the opposite.

23. 3.5 Remarks and comments
Advantages
Disadvantages: exchange rates are not
flexible, Triffin Paradox

24. Triffin Paradox
liquidity
U.S. run deficits
U.S. run surplus
confidence

25. 3.6 Collapse of the Bretton Woods
System: Process of dollar devaluation
ounce of gold
Dollar value per
1 盎司值美元
35
38
42.22 脱钩浮动
1944 1971 1973

26. Abandoned Gold Exchange
Standard
The post-World War II reserve currency system
centered on the dollar was, in fact, originally set up
as a gold exchange standard. While foreign central
banks did the job of pegging exchange rates, the
U.S. Federal Reserve was responsible for holding
the dollar price of gold at $35 an ounce. By the
mid-1960s, the system operated in practice more
like a pure reserve currency system than a gold
standard. President Nixon unilaterally severed the
dollar’s link to gold in August 1971, shortly
before the system of fixed dollar exchange rates
was abandoned.

27. 4. The present Floating Exchange Rate
System (1973-present)
4.1 How this system came into being
“A system of no system” “An order of no order”----
Features of this system
1. No par values, between home currency and foreign
currency or gold
2. No upper or lower limits of exchange rate fluctuations
3. The government has no obligation to maintain exchange
rate fixed, it can choose any kind of exchange rate
system, flexible rates are legal
4. 外汇市场 供求决定汇率
5. 国际收支 变化是影响汇率的主要因素

28. 4.2 Rules of the game
Smooth short-term variability in the dollar exchange rate,
but do not commit to an official par value or to long-term
exchange rate stability
Permit free convertibility of currencies for current account
transactions, while endeavoring to eliminate all remaining
restrictions on capital account transactions
Use the U.S. dollar as the intervention currency and keep
official reserves primarily in U.S. treasury bonds
Modify domestic monetary policy to support major
exchange rate interventions, reducing the money supply
when the national currency is weak against the dollar and
expanding the money supply when the national currency is
strong

29. 4.3 Features of this system
More currencies can be used as reserve
assets
Governments began to cooperate to
intervene in the foreign exchange markets
and to coordinate their domestic policies to
achieve “common prosperity”
Many different kinds of exchange rates
appear

30. Types of floating exchange rates
Whether there is a dirty hand:
1. Free Float/Clean Float
2. Managed Float/Dirty Float
Whether there is a Connection with other
currencies:
1. Single Float 英镑，美元，日元等 27 个国家。
2. Pegged Float(1) 钉住某一种货币： (2) 钉住一
揽子货币： SDR; ECU; 。
3. Joint Float 欧共体。
4. Crawling peg

31. 4.4 Adjustment of imbalances in
balance of payments
IMF credits
Change of exchange rates: devaluations or
revaluations
Coordination between governments: the
Plaza Agreement, the Lourve Accord, etc
Domestic policies: “Two-gap theory”
C+I+G+X=C+S+T+M
X-M=(S-I)+(T-G)

32. 5. Should we return to a fixed rate
system?
What kind of international monetary system
should we adopt?
What are the advantages and disadvantages
of fixed and floating exchange rate system
respectively?

33. 5.1 Arguments favoring floating rates
1. Better adjustment
2. Better confidence
3. Better liquidity
4. Gains from freer trade
5. Avoiding the so-called “Peso Problem”
6. Increased independence of policy

34. 5.2 Arguments against floating
exchange rates: Flexible rates
1. Cause uncertainty and inhibit international
trade and investment
2. Cause destabilizing speculation
3. Will not work for open economies
4. Are inflationary
5. Are unstable because of small trade
elasticities
6. Cause structural unemployment

35. Krugman & Obstfeld (1)
1. Discipline. Central banks freed from the
obligation to fix their exchange rates might
embark on inflationary policies.
2. Destabilizing speculation and money market
disturbances. Speculation on changes in
exchange rates could lead to instability in foreign
exchange markets.
3. Injury to international trade and investment.
Floating rates would make relative international
prices more unpredictable.

36. Krugman & Obstfeld (2)
4. Uncoordinated economic policies. The door
would be opened to competitive currency practices
harmful to the would economy.
5. The illusion of greater autonomy. Floating
exchange rates would not really give countries
more policy autonomy. Changes in exchange rates
would have such pervasive macroeconomic effects
that central banks would feel compelled to
intervene heavily in foreign exchange markets
even without a formal commitment to peg.

37. 5.3 Selection of Fixed & Floating
Exchange Rates
固定汇率制和浮动汇率制的选择取决于
一国的国情：
大国还是小国；
发展中国家还是发达国家；
此事古难全