The international monetary system has evolved over time from the Gold Standard to the Bretton Woods system to the current floating exchange rate regime. Under the Gold Standard, currencies were backed by gold reserves and countries maintained fixed exchange rates. The Bretton Woods system established the IMF, pegged currencies to the US dollar which was pegged to gold, and allowed adjustable pegged rates. However, the system collapsed in the 1970s due to US balance of payments deficits. Currently most currencies float freely though some are managed to stabilize rates.

2.  It is a set of internationally agreed rules, conventions
and supporting institutions that facilitate
international trade, cross border investment and
reallocation of capital between nations.

3. Gold Standard 1876-1913
Inter-war years 1914-1944
The Bretton Wood system 1945-1971
The Smithsonian Agreement 1971-1973
Post 1973

4.  Gold as a standard to determine value of a currency
 Each country’s government agreed to buy or sell gold
at its own fixed rate of demand
 Currency’s value to be backed by adequate reserves of
gold
 Free import and export of gold
 Two-way convertibility between gold and national
currencies
 Exchange rate determination

5. Eg:-
 Value of dollar in terms of gold $20.67/ounce of gold
 Value of pound in terms of gold £4.2474/ounce of gold
 $20.67/ounce of gold = $4.86656/£
£4.2474/ounce of gold

6.  Gold export point(upper limit)
 Gold import point(lower limit)
 Trade surpluses

7.  Gold is a scarce commodity
 Rigidity of the system
 Shifting the burden of BOP adjustments to domestic
variables

8.  Interrupted trade flows and disturbed stability of
exchange rates
 US became the leading creditor nation
 US returned to gold standard in 1919, UK in 1925 and
others by 1928
 Great mistake by UK to return at parity exchange rate
of $4.87/£
 In 1934, US devalued its currency at $35/ounce of gold
 Gold exchange standard

9.  Conference held in 1944 at Bretton woods, New
Hampshire
 Monetary units in terms of gold or dollars
 US dollar pegged to gold and other currencies pegged
to US dollar
 Fixed but adjustable rates(+1%)

10.  Creation of IMF and IBRD
 US dollar designated as reserve currency
 Currencies were to become convertible
 IMF subscription quotas were based on member’s size
and resources

11.  Lead to problem of lack of international liquidity.
 Any pressure to devalue the dollar would cause problems
throughout the world.
 Large amount of US dollars was held outside the USA
that it was more than the total gold holdings of the USA.
 Conditionality issue of IMF
 On 15th Aug 1971, President Nixon suspended the system
of convertibility of gold and dollar and decided for
floating exchange rate system.

12.  Most of the currencies were allowed to fluctuate from
August to December 1971
 US dollar fell in value in comparison to other
currencies
 Protective measures limited the international
commerce
 “Group of ten” entered into Smithsonian agreement on
December 18, 1971
 US dollar devalued to $38/ounce of gold
 Establishment of parity rates
 Wider band 2.25% from central rates and 9% against
any currency except dollar

13.  Currencies no longer backed by gold
 Flexible exchange rates accepted by IMF
 Central banks were allowed to intervene in the
exchange rate markets to iron out unwarranted
volatilities.
 Less-developed countries were given greater access to
IMF funds.

14. Within the flexible exchange rate regime there are 3
categories,
 Floating
 Independent floating system
 Managed floating systems
 Pegging
 Target Zone Arrangements

15.  Independent floating system does not involve
intervention and so termed as ‘clean floating’.
 The purpose of intervention is simply to moderate the
exchange rate and to prevent any undue fluctuation.
 But no attempt is undertaken to achieve/maintain a
particular rate.

16.  Involves direct or indirect intervention by the
monetary authorities of the country to stabilize the
exchange rate.
 Indirect intervention - The monetary authorities
stabilize the exchange rate through changing the
interest rates.
 Direct intervention - The monetary authorities
purchase and sell foreign currency in the domestic
market.
 Managed floating is also known as ‘dirty floating’.

17.  Periodic adjustment of fixed exchange rate to catch up
with market determined rates.
 Combine the advantages of fixed exchange rate with
flexibility of floating exchange rate.
 It fixes the exchange rate at a given level which is
responsive to changes in market conditions (i.e,) it is
allowed to crawl pegging.
 When exchange rate crosses limits, the monetary
policies push the exchange rate within the target zone.
 If economic indicators are being disturbed, the
monetary authorities let the exchange rate depreciate
or appreciate as the case may be.

18.  Target zone arrangement involves member countries
having fixed exchange rate among their currencies.
Alternatively, they may use a common currency

19.  Flow of international trade
 Investment according to comparative advantage
 Stability in foreign exchange
 Promoting Balance of Payments
 Providing countries with sufficient liquidity
 Plan for avoiding uncertainty
 Allowing member countries to pursue independent
monetary and fiscal policies

20.  Accelerating integration and globalization in financial
markets
 Increased Securitization
 Continued expansion of derivatives market
 Deregulation of financial markets
 Increase in cross border mergers and acquisitions and
MNCs
 Countries re-balancing their import export trade
 Negative interest rates in developed countries