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INTERNATIONAL

MONETARY
SYSTEM
DEFINITION
The International Monetary System can be defined
as the institutional framework within which
international payments are made, movements of
capital are accommodated and exchange rates
among currencies are determined.
The International Monetary System consists of
laws, rules, monetary standards, instruments, and
institutions that facilitate international trade and
cross-border flow of funds.
Efficient Monetary System
The IMS should address the following problems
efficiently:
Liquidity problem
Degree of stability
Least volatility of exchange rate (exchange risk)

Problem of adjustment (demand-supply imbalance)


Temporary imbalance (war, crop failure, social
unrest)
Structural imbalance
EVOLUTION OF INTERNATIONAL MONETARY
SYSTEM
Bimetallism: before 1875.
Classical Gold Standard: 1875-1914.
Interwar Period: 1915-1944.
Bretton Woods System: 1945-1972
Flexible exchange rate regime: since 1973
Bimetallism: before 1875
The IMS before 1875 can be characterised as
bimetallism in the sense that both gold and
silver were used as international means of
payment and the exchange rate among currencies
were determined by either gold or silver contents.
Classical Gold Standard: 1875-1914
According to the gold exchange standard, only the
United State and the United Kingdom could hold gold
reserves, while other countries could hold both gold
and U.S. Dollars or British Pound.
Under International Gold Standard system:
1. Gold alone is assured of unrestricted coinage.
2. There is two way convertibility between gold and
currency.
3. Gold may be freely exported or imported.
This system required each country to establish
. Parity with gold
. Or with currencies convertible to gold and the
exchange rate between currencies were fixed.
. E.g. $ 20/ounce of gold = Pound 4/ounce of gold
. Pound 1 = $ 5
Contd...
Advantages
Automatic correction of disequilibrium through
transfer of gold
Inflation (if export > import, gold will flow from
importing country to exporting country)
Balance of payment

Limitations
Limited supply of gold hampered the growth of trade
and investment
Deflationary pressure
Govt can abandon maintaining gold standard in
order to pursue their national objective.
Interwar Period: 1915-1944
WWI ended the classical gold standard in 1914.
Major country like Britain, France, Germany,
Russia etc. Suspended redemption of bank
notes in gold.
Many country like Germany, Poland etc suffered
hyperinflation.
Country devalued their currencies in order to
gain advantages in world export market.
All these development hindered international
trade and also adversely affected the global
economic growth.
The Bretton Woods System: 1945-1972
In 1944, the International Monetary Fund (IMF) was
created by an international agreement called the
Bretton Woods Agreement because it was signed
at Bretton Woods, New Hampshire.
The objectives of IMF were to:
Promote exchange rate stability
Maintain orderly exchange rate arrangements
Avoid competitive currency devaluations
Assist in the elimination of exchange restrictions
Create standby reserves
This system required that each country should fix a
par value of its currency in relation to the U.S.
Dollar, which was pegged to gold at USD 35/ounce.
Contd..
Also known as fixed exchange rate system and
adjustable peg system.
Countries were allowed to devalue their
currencies if they experienced fundamental
disequilibrium,.
The Bretton Woods Agreement allowed exchange
rates to fluctuate in a 1% band around the
chosen parity value.