The document provides an overview of the international monetary system, including key historical systems like the gold standard and Bretton Woods system, as well as the current floating exchange rate regime. It describes the evolution from commodity money to representative money backed by gold or silver to modern fiat currencies. The gold standard fixed currency values to gold, while Bretton Woods pegged most currencies to the US dollar, which was convertible to gold. The system broke down in the 1970s and was replaced by floating exchange rates determined by supply and demand.

1. International
Monetary
System
Deepthi Neethu

2. Contents
• International Monetary System
• Gold Standard ( 1876-1913)
• Bretton Woods System ( 1944-
71)
• Floating Rate Regime
International Monetary System
• Features
• Classification
Gold Standard ( 1876-1913)
• Features
• The Two-Tier System
• Floating Exchange Rates and Recent Developments
Bretton Woods System ( 1944-71)
• The Bretton Woods Agreement
• The System of Bretton Woods ( 1944-71)
• Features
Floating Rate Regime
• Definition
• Exchange Rate Regime In India

3. International Monetary
System

4. International Monetary System
The international monetary system refers to the institutional
arrangements that countries adopt to govern exchange rates.
International monetary systems are sets of internationally agreed rules,
conventions and supporting institutions that facilitate international
trade, cross border investment and generally the reallocation of
capital between nation states. They provide means of payment acceptable
between buyers and sellers of different nationality, including deferred
payment. To operate successfully, they need to inspire confidence, to
provide sufficient liquidity for fluctuating levels of trade and to provide
means by which global imbalances can be corrected. The systems can
grow organically as the collective result of numerous individual
agreements between international economic actors spread over several
decades. Alternatively, they can arise from a single architectural vision as
happened at BrettonWoods in 1944.

5. Cont…
The first modern international monetary system was the gold standard.
Operating during the late 19th and early 20th cents., the gold standard
provided for the free circulation between nations of gold coins of standard
specification. Under the system, gold was the only standard of value.
The advantages of the system lay in its stabilizing influence. A nation
that exported more than it imported would receive gold in payment of the
balance; such an influx of gold raised prices, and thus lowered the value of the
domestic currency. Higher prices resulted in decreasing the demand for
exports, an outflow of gold to pay for the now relatively cheap imports, and a
return to the original price level (see balance of trade and balance of
payments).

6. Cont…
A major defect in such a system was its inherent lack of liquidity;
the world's supply of money would necessarily be limited by the world's
supply of gold. Moreover, any unusual increase in the supply of gold, such
as the discovery of a rich lode, would cause prices to rise abruptly. For
these reasons and others, the international gold standard broke down in
1914.
During the 1920s the gold standard was replaced by the gold
bullion standard, under which nations no longer minted gold coins but
backed their currencies with gold bullion and agreed to buy and sell the
bullion at a fixed price. This system, too, was abandoned in the 1930s.

7. 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

8. Classification Of
International
Monetary System
1. Gold Standard
2. Gold Exchange
Standard
3. Fiduciary Standard
4. Floating Exchange Rate
System
5. Fixed Exchange Rate
System

9. Gold Standard ( 1876-1913)

10. Gold Standard ( 1876-1913)
The first modern international monetary system was the
gold standard. Put in effect in 1850. Participants – UK, France,
Germany & USA.
The oldest exchange rate regime which prevailed from the
late half of the 19th century till the First World War was the Gold
Standard. Money is basically a medium of exchange and a store of
value. Three phases can be identified in the evolution of money:
commodity money, representative money and fiat money.
In the first phase namely the commodity money phase,
valuable objects were used as the medium of exchange. It was also
known as the barter system.

11. Cont…
In second phase, the representative phase , coins or notes, backed by
valuable metals such as gold or silver were used as money. These coins or
notes were representing the metals stored for providing value to the money.
In the third phase, the fiat money phase, paper currencies are used as
money. These currencies are not backed by any valuable commodities but
only by the ‘faith and credit’ in the government issuing these currencies. Fiat
money is the money that is intrinsically useless and is used only as a medium
of exchange.

12. Cont…
As commodity money was inconvenient, it gave way to the representative
money where metals were used to represent money. Silver was the first metal to be
used as money. Gold replaced it later as representative money. In the beginning,
gold coins were used to be exchanged for goods and services. The value of the coin
was determined on the basis of the weight of gold in the coin. Later on, the exact
correspondence between the value of the coin and its weight was relaxed and gold
coins became representative money. Further modifications were made in the
monetary system but gold still continued to be the base foe the monetary system.
The monetary system which used gold as the base for determining the value
of money, was known as the Gold Standard. Gold Standard is defined as the use
of gold for determining the value of money of a country. The Gold Standard was
adopted by the Western European countries and the United States during the later
half of the 19th century and continued still the outbreak of the FirstWorld War.

13. FEATURES
The Government adopting it fixed
the value of currency in terms of
specific weight and fineness of the
gold and guaranteed a two-way
convertibility.
Export and Import of gold were
allowed so that it could flow freely
among the gold standard countries.
The Central Bank, acting as the
apex monetary institution, held
gold reserves in direct relationship
with the currency it had issued.
The Government allowed
unrestricted minting of gold and
melting of gold coins at the option
of the holder

14. Cont…
There were different versions of the Gold Standard such as the gold specie
standard, the gold bullion standard, the gold exchange standard. Under the gold standard,
the value of the domestic currency of a country is stated in terms of weight of gold. The
exchange rate between two currencies depend on the relative weight of gold specified for
each currency. The exchange rate is the ratio of weight of gold of the currencies. This
rate was known as the mini parity or mint exchange rate. Thus the gold standard
resulted in a fixed exchange rate system.
In the decades following World War II, international trade was conducted
according to the gold-exchange standard. Under such a system, nations fix the value of
their currencies not with respect to gold, but to some foreign currency, which is in turn
fixed to and redeemable in gold. Most nations fixed their currencies to the U.S. dollar
and retained dollar reserves in the United States, which was known as the "key currency"
country. At the Bretton Woods international conference in 1944, a system of fixed
exchange rates was adopted, and the International Monetary Fund (IMF) was created
with the task of maintaining stable exchange rates on a global level.

15. The Two-Tier System
During the 1960s, as U.S. commitments abroad drew gold reserves from
the nation, confidence in the dollar weakened, leading some dollar-holding
countries and speculators to seek exchange of their dollars for gold. A severe
drain on U.S. gold reserves developed and, in order to correct the situation, the
so-called two-tier system was created in 1968. In the official tier, consisting of
central bank gold traders, the value of gold was set at $35 an ounce, and gold
payments to non-central bankers were prohibited. In the free-market tier,
consisting of all nongovernmental gold traders, gold was completely
demonetized, with its price set by supply and demand. Gold and the U.S. dollar
remained the major reserve assets for the world's central banks, although Special
Drawing Rights (SDR) were created in the late 1960s as a new reserve currency.
Despite such measures, the drain on U.S. gold reserves continued into the 1970s,
and in 1971 the United States was forced to abandon gold convertibility, leaving
the world without a single, unified international monetary system.

16. Floating Exchange Rates and Recent
Developments
Widespread inflation after the United States abandoned gold convertibility
forced the IMF to agree (1976) on a system of floating exchange rates, by which
the gold standard became obsolete and the values of various currencies were to be
determined by the market. In the late 20th cent., the Japanese yen and the German
Deutschmark strengthened and became increasingly important in international
financial markets, while the U.S. dollar—although still the most important
national currency—weakened with respect to them and diminished in importance.
The euro was introduced in financial markets in 1999 as replacement for the
currencies (including the Deutschmark) of 11 countries belonging to the European
Union (EU); it began circulating in 2002 in 12 EU nations. The euro replaced the
European Currency Unit, which had become the second most commonly used
currency after the dollar in the primary international bond market. Many large
companies use the euro rather than the dollar in bond trading, with the goal of
receiving a better exchange rate.

17. Bretton Woods System
( 1944-71)

18. Bretton Woods System ( 1944-71)
After the conclusion of the Second World War, there emerged a
consensus among the major countries of the world that an orderly global
monetary system that ensured stability in exchange rates between currencies
was necessary. In July, 1944, 44 countries met in Bretton Woods, New
Hampshire, USA – a new International Monetary System was created John
Maynard Keynes of Britain and Harry Dexter White of USA were the key
movers.

19. Cont…
The objective was to create an order that combined the benefits of an integrated and
relatively liberal international system with the freedom for governments to pursue domestic
policies aimed at promoting full employment and social wellbeing. The principal architects of
the new system, John Maynard Keynes and Harry Dexter White, created a plan which was
endorsed by the 42 countries attending the 1944 Bretton Woods conference. The plan involved
nations agreeing to a system of fixed but adjustable exchange rates where the currencies were
pegged against the dollar, with the dollar itself convertible into gold. So in effect this was a
gold – dollar exchange standard. There were a number of improvements on the old gold
standard. Two international institutions, the International Monetary Fund (IMF) and the World
Bank were created; A key part of their function was to replace private finance as more reliable
source of lending for investment projects in developing states. At the time the soon to be
defeated powers of Germany and Japan were envisaged as states soon to be in need of such
development, and there was a desire from both the US and Britain not to see the defeated
powers saddled with punitive sanctions that would inflict lasting pain on future generations.
The new exchange rate system allowed countries facing economic hardship to devalue their
currencies by up to 10% against the dollar (more if approved by the IMF) – thus they would
not be forced to undergo deflation to stay in the gold standard.

20. The Bretton Woods Agreement
Creation of International Monetary Fund (IMF) to promote
consultations and collaboration on international monetary problems and
countries with deficit balance of payments. Establish a par value of currency
with approval of IMF. Maintain exchange rate for its currency within one
percent of declared par value.
Each member to pay a quota into IMF pool – one quarter in gold and
the rest in their own currency. The pool to be used for lending Dollar was to be
convertible to gold till international instrument was introduced. International
Bank for Reconstruction and Development (IBRD) was created to rehabilitate
war-torn countries and help developing countries

21. The System of Bretton Woods ( 1944-71)
At the Bretton Wood conference, an attempt was made to establish a
fully negotiated monetary order intended to govern currency relations among
sovereign states. A compromise was sought between polar alternatives of
freely floating rates or irrevocably fixed rates so that some agreements that
could reap the advantages of both without having the disadvantage of either
could be made.

22. Features
 Each countries was required to set a
fixed value for its currency in terms of
gold or the US dollar. This value
would be known as the par value of
the currency.
 The exchange rates between currencies
would be determined on the basis of
their par values.
 Minor fluctuations in exchange rate
within narrow band of 1% above or
below the central parity were
permissible.
 Fluctuations beyond 1% had to be corrected by
the monetary authorities of the country through
market intervention.
 In the event of any ‘fundamental
disequilibrium’ in balance of payments, a
country was free to readjust the par value of its
currency. However, changes beyond 1% of the
existing par value in either direction required
the consent and approval of IMF.
 The US Government fixed the par value of the
US dollar in terms of gold as US $ 35 per ounce
of gold. Further, the US Government agreed to
convert the UD dollar freely into gold at the
fixed parity of US $35 per ounce of gold.

23. The end of the
Bretton Woods
System (1972–
81)
• Allowing the currency to float
freely.
• Pegging it to another currency or a
basket of currencies.
• Adopting the currency of another
country, participating in a currency
bloc.
• Forming part of a monetary union.
The system dissolved between 1968
and 1973. By March 1973, the major
currencies began to float against each
other IMF members have been free to
choose any form of exchange
arrangement they wish (except
pegging their currency to gold):

24. Collapse of the Fixed
Exchange System

25. Collapse of the Fixed Exchange System
The system of fixed exchange rates established at Bretton Woods
worked well until the late 1960’s.Under this system. The US dollar became the
international money and the intervention currency. Hence the success of the
system depended on the confidence in the stability of the US dollar. The
system worked fairly well till the beginning of the 1960s.
Any pressure to devalue the dollar would cause problems throughout
the world. The trade balance of the USA became highly negative and a very
large amount of US dollars was held outside the USA ; it was more than the
total gold holdings of the USA. During end of sixties, European governments
wanted gold in return for the dollar reserves they held. On 15th Aug. 1971,
President Nixon suspended the system of convertibility of gold and dollar and
decided for floating exchange rate system

26. Floating Rate Regime

27. Floating Rate
Regime
“A country's exchange rate
regime where its currency is set by the
foreign-exchange market through supply
and demand for that particular currency
relative to other currencies. Thus,
floating exchange rates change freely
and are determined by trading in the
forex market. This is in contrast to a
"fixed exchange rate regime”
Definition

28. Cont…
In some instances, if a currency value moves in any one direction at a
rapid and sustained rate, central banks intervene by buying and selling its own
currency reserves (i.e. Federal Reserve in the U.S.) in the foreign-exchange
market in order to stabilize the local currency. However, central banks are
reluctant to intervene, unless absolutely necessary, in a floating regime.

29. Cont…
The objective of evolving a global monitory system is to promote
continued growth of world trade without excessive fluctuations in exchange
rates. The evolution of international monitory system can be divided in to four
distinct periods, each with some fuzzy edges. The first period roughly covers
the years from 1870 to 1914.During this period, most countries adopted the
gold standard for their domestic currency resulting, a fixed exchange rate
among the currencies . This period ended with the outbreak of the first World
War when most countries abandoned with gold standard regime

30. Cont…
The second period extending from 1914to1946,was a period of
instability in the international monitory system . During the third period from
1946 to 1973, the exchange rate policy was dominated by the Breton Woods
Agreements of 1944.This was system of par value for currencies with a narrow
band of permissible fluctuations .However the Breton Woods system came
under increasing strain in the mid 1960s and by early1973the system
abandoned. We are now in the fourth period which commenced in 1976. The
present international monitory system is essentially a floating exchange rate
regime is not a uniform system but a mixture of different variants of the
floating rate system.

31. Cont..
The international monitory fund has classified member countries in to different categories
based on the exchange rate regime that each country has adopted by countries are also
follows:
• Exchange rate arrangements with no separate legal tender(41)
• Currency board(7)
• Conventional fixed peg(52)
• Pegged exchange rates within horizontal bands(6)
• Crawling pegs(5)
• Exchange rates within crawling band(2)
• Managed floating with no predetermined path for exchange rate(51)
• Independently floating(25)

32. Exchange Rate Regime In India
From 1950 until mid-December 1973 India followed a exchange rate regime with
rupee linked to the pound sterling, expect for the devaluation in 1966 and 1971. When the
Pound Sterling floating on June 23,1972,the rupees linked to the British currency was
maintained, effecting a de facto devaluation to reflect the Pounds depreciation. From
September 24 ,1975,the rupees ties to the pounds Sterling were removed and India shifted to a
managed floating exchange regime with the rupees exchange rate placed on a controlled
,floating basis and linked to a ‘ of currencies ‘of India’s major trading partners.
In the early 1990s the above exchange rate regime came under severe pressure from the
increase in trade deficit and net invisible deficit, which lead the RBI to undertake downward
adjustment of rupee in two stage on July 1 and 3, 1991.this adjustment was followed by the
introduction of the Liberalised Exchange Rate Management System in march 1992,and the
adoption of a dual exchange rate in India . all foreign exchange transactions would be
conducted by authorised dealers at market determined rates. However the RBI did note
relinquishes its right to intervene in the market to enable orderly control. The foreign exchange
market of India was also characterised by the existence of both official and black market rates
with medium premium steadily declined in the subsequent decades.

33. Thank You