The document discusses the history and components of international monetary systems. It describes how the Bretton Woods system established fixed exchange rates between currencies pegged to the US dollar, which was pegged to gold. This system broke down in the 1970s and the current system lacks rules for exchange rates. The document also outlines earlier gold standards and the volatile interwar period, and examines factors like currency wars and slowing growth that impact the modern international monetary system.

2. GROUP NO. - 3

3. MEANING
 MONETARY SYSTEM:
Set of mechanisms by which a
government provides money
(cash) in a country's economy. It
usually consists of a mint, central
bank, and commercial banks.
 INTERNATIONAL
MONETARY SYSTEM:
 Set of internationally agreed
rules, conventions and
supporting institutions
 Provide means of payment
acceptable between buyers and
sellers of different nationality

4. CHARACTERISTICS OF INTERNATIONAL
MONETARY SYSTEM
1. Provision of adequate liquidity
2. Operation of a smooth adjustment mechanism
3. Confidence in the system
ROLE OF INTERNATIONAL MONETARY SYSTEMS
 The international monetary system (IMS) is analogous to
the domestic monetary system. It caries out similar
functions

5. PRINCIPAL COMPONENTS OF THE IMS
 International monetary fund
 Foreign exchange market
 Official reserves
 Private demand for foreign exchange
 Intervention and swap network
Example:
To see how the swap network operates, suppose that
United States wants to sell 200 million deutsche marks to
support the US dollar.

6. STAGES IN INTERNATIONAL MONETARY SYSTEM
 Classic Gold Standard (1816 – 1914)
 Interwar Period (1918 – 1939)
 Bretton Woods System (1944 – 1971)
 Present International Monetary System
(1971

7. BRETTON WOOD SYSTEM (1944 – 1971)
In July 1944 representatives of 44 countries met in Bretton
Woods, New Hampshire, and signed the Articles of
Agreement of the International Monetary Fund, known as
the Bretton Wood agreement. The Bretton Woods
agreement attempted to recreate key parts of the gold
standard and produced a fixed but adjustable exchange
regime, which was implemented in 1946. The agreement
recognized the more important role of U.S. in world
economy and incorporated the US dollar in international
reserves. Two important international financial institutions,
the International Monetary Fund (IMF) and the World
Bank, were born out of Bretton Woods agreement.

8. Features of Bretton Woods
System
 Reserves
 Fixed parity
 Adjustable parities
 Narrow band
 Gold-exchange” standard rather than a “gold-
standard”
 “Adjustable peg”
 Each country was allowed to have a 1% band
around which their currency was allowed to
fluctuate around the fixed rate.

9. CLASSIC GOLD STANDARD (1816 – 1914)
 Historically, the most important fixed-exchange-rate
system was the gold standard, which was used off and
on from 1717 until 1933 (Samuelson and Nordhaus,
2005, p. 610)
 In this system, each country defined the value of its
currency in terms of a fixed amount of gold, thereby
establishing fixed exchange rates among the countries
on the gold standard

10. ADVANTAGES:-
1. limits the power of governments
2. creates certainty in international trade
DISADVANTAGES:-
1. may not provide sufficient flexibility
2. may not be able to isolate its economy
3. payments deficit can be long and painful

11. WHY DID GOLD STANDARD
FAIL?
The outbreak of World War I was a direct
cause for the collapse of the gold standard.
Governments abandoned the gold
standard during the war and financed part
of their massive military expenditures by
printing money without the backing of gold.

12. ARGUMENTS IN FAVOUR OF GOLD STANDARDS
 Price stability
 Facilitates BOP adjustments
automatically
ARGUMENTS AGAINST GOLD STANDARDS
• The growth of output and the growth of gold supplies
needs to be closely linked.
• Volatility in the supply of gold could cause adverse
shocks to the economy
• monetary authorities may not be forced
• cannot use monetary policy

13. INTERWAR PERIOD (1918 – 1939)
• International monetary system was unstable and
exchange rates were highly volatile due to the World
Wars.
• 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. During World War I 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.

14. The World Has Changed, the
International Monetary System
Needs Some Serious Re-
Thinking
The international monetary system (IMS) is neither preventing
currency volatility ….. nor fostering an efficient allocation of global
capital.
At the macro level, money needs to flow smoothly across countries
…but fears of currency wars are limiting prosperity prospects.
At the micro level, firms need stability … but exchange rate
uncertainty is hampering business.

15. FACTORS AFFECTING IMS
 Global growth is slowing below-trend increasing
the risk of competitive currency devaluations.
 Emerging markets have emerged but their
currencies have yet to appreciate in real terms
 The fundamental structure of the world
economy has changed globalization increased co-
dependence and made the ”Trilemma” evident
 The world needs more reserve currencies, but
there are no viable alternatives
 USD and EUR still play a large role
 The IMS needs a multipolar evolution, but it will
not happen anytime soon

16. THANK YOU