INTERNATIONAL

MONETARY SYSTEM

PREPARED BY:
NASIR JAVED MUGHAL
MS: 23 1054
INTERNATIONAL MONETARY
SYSTEM

is a rules and procedures by which different

national currencies are exchanged for each
other in world trade. Such a system is
necessary to define a common standard of
value for the world's currencies.
 A HISTORICAL VIEW

International Monetary System was divided into many

phases
 The period form 1815 to 1873 was a period of bimetallism,
for which gold and silver were the basic reserve assets and
the main countries were France and the United States.

 From 1914 to 1924, we had an anchored dollar standard

because the United States was the only major currency on
gold and the other countries started to base their currencies
more on the dollar than on gold.
 Britain went off gold in 1931, and America in 1933.
America then went back to gold after devaluing the
dollar in 1934. France was still on gold, but in 1936,
France had to devalue and was the last country to
leave the Reformed Gold Standard of the post war
period.

 In June 1973, the Committee of Twenty decided to

abandon the International Monetary System and
move to flexible exchange rates until the inflation
problem had been solved.
In 1985, the Plaza Accord came about, moving
the system into a kind of managed dollar
system relative to European currencies. It was
focused mainly on the need to get Japan to
appreciate the yen against the dollar.
The Evolution of the Dollar Standard

From 1666 to 1934, seven great powers existed. With the possible
exception of Britain, there was no superpower, Britain was the first of
equals.
 EXAMPLE:
Think of gold as the sun and these superpowers as the planets. If one of
the planets in our solar system, say Jupiter, keeps getting bigger and
bigger until it becomes bigger than the sun. Eventually, if it gets really
big, Jupiter is going to take the position of the sun and the other planets
are going to move around Jupiter and eventually, the sun itself would
orbit around Jupiter.
 Same was the case with the USA. It got so big that dollar
took place of gold.
 The Gold and Gold Bullion
Standards
 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.

 Advantages:
1. stabilizing influence.
2. 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.
3. 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.
 The Gold-Exchange 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 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.
 Bretton Woods system
 Features:
1. to adopt a monetary policy that maintained the
exchange rate of its currency within a fixed value in
terms of gold;
2. and the ability of the IMF to bridge temporary
imbalances of payments.

 Until the early 1970s, the Bretton Woods system

was effective in controlling conflict and in
achieving the common goals of the leading states
that had created it, especially the United States.
 International Monetary fund
 The IMF describes itself as "an organization of 185
countries.”
 OPERATIONS
 working to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and
reduce poverty".

 It oversees:
 global financial system by observing exchange rates and
balance of payments
 as well as offering financial and technical assistance.
 The Two-Tier System
During the 1960s, confidence in the dollar weakened, which led to an
exchange of dollar for gold. To correct the situation, the two-tier
system was created in 1968.

1. The official tier: consisted of central bank gold traders, the value of
gold was set at $35 an ounce, and gold payments to non central
bankers were prohibited.

2. The Free Market Tier: consisted of nongovernmental traders, and

gold was completely demonetized, prices were set by demand and
supply
 Floating Exchange Rates and Recent
Developments

 After abandoning gold convertibility IMF had to agree on a

system of floating exchange rates.
 According to 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
 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 International Monetary System:
Facing the Challenge of
Globalization
The collapse of the Bretton Woods system left the
world torn. The powerful concept was that the
floating exchange rates have ideological climate of
economic liberalism. The weaker was, that its
harmful for growth and free trade. Many attempts
were made- the most important-creation of Euro
The Long Run/Future Prospects

Presently dollar is the preeminent currency of

the world. However Europe is going to be
much more successful than people generally
believe. By the year 2010, we will probably
have European currency firmly in place and
generally accepted.
 CONCLUSION

Bismarck once said

“the most important event in the 19th century was that England and America
spoke the same language”

 In the same spirit, the most important event in the 20th century was the
creation of the Federal Reserve System, the vehicle for the spread of the
dollar.

 We can look upon the period of the gold standard, the free coinage gold
standard, as being a period that was unique in history, when there was a
balance among the powers and no single superpower dominated.