The International Monetary System (2023)

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(Video) Group 5: Global Monetary System Explained

Regarding exchange rates, international payments and capital flow... Exchange rates fluctuated as countries widely used "beggar-you-neighbor" or "... - PowerPoint PPT presentation

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Title: The International Monetary System


  • The International Monetary System
  • (Shapiro chapters 2 and 3)

The International Monetary System

  • The International Monetary System is a set of
  • Agreements, rules and institutions
  • Regarding exchange rates, international rates
    Payments and flow of funds via national route
  • The current system is based on a floating system
    Exchange rates - emerged after the fall of the
    o sistema Bretton Woods
  • Development of international monetary systems
  • How do different currency systems affect currency?

Development of the International Monetary System

  • Bimetallism before 1875
  • Classic Gold Standard 1875-1914
  • interwar period 1915-1944
  • Bretton-Woods-System 1945-1973
  • Das Post-Bretton-Woods-System (The Flexible
    exchange rate regime) 1973-present

Bimetallism before 1875

  • A double standard in the sense that both are gold
    and silver were used as money.
  • Some countries were on the gold standard, others were on the
    the silver pattern, some in both.
  • Both gold and silver were used as international currency
    Payment methods and exchange rates between each other
    Coins were determined by their gold
    or silver content.

Classic Gold Standard (1875-1914)

  • gold standard rules
  • Set an official gold price in local currency
    e.g. 20.67 an ounce of gold in 1879
  • The money supply must be backed by gold
  • Prices around the world would depend on demand and
    gold supply


  • The exchange rate between 2 countries was determined
    by the gold content of the respective coins
  • For example, 1 ounce of gold was sold in Germany for 20 DM
  • 1 ounce of gold sells for 10 in the UK
  • This implied that DM 20 10
  • d.h. DM 1 0,5 (10/20)
  • 1 DM 2 (20/10)
  • linked to the domestic price level in a country
    the supply of gold from monetary reserves
  • The money was fully backed by gold
  • Governments need to find more gold to grow
    money stock


  • One motivation behind the gold standard is price.
  • As currencies are pegged to gold, prices depend on it.
    at the cost of producing gold
  • Hence the long-term cost of producing gold
    determine the price level

(no transcript)
How exactly does the gold standard work?

  • Assume you are assuming the balance
    Productivity gains in the US
  • Production costs go down
  • The price level falls (since prices are fixed
    based on how much gold is needed to make a
    goods package)
  • US export prices are falling relatively
    for imports
  • Demand for US exports is rising
  • Gold flows into the US, increasing money
    offer and prices
  • With respect to the initial equilibrium prices
    everywhere will be a little smaller than before
    how production costs have fallen
  • The reverse is true when prices rise in the US.


  • imbalances in exports and imports
  • For example, imagine a situation where Germany is exporting
    more to britain than it matters
  • UK net payment to Germany
  • Gold flows from Great Britain to Germany
  • UK gold supply falls
  • Price level in Great Britain falls
  • UK imports are relatively more
  • The imbalance changes


  • The period 1821-1914 was indeed marked by
    Price stability, stable exchange rates, expansion
    international trade and economic growth
  • While the average rate of inflation during gold
    The level was lower than in the post-war period
    was the variability of inflation in the US
    higher below the gold standard

Problems with the gold standard

  • World trade has been hampered by the availability of
  • Inflation rates across countries would have to be
  • Necessary coordination of the national currency
    politics with international politics
  • This is especially true in times of

interwar period 1915-1944

  • Exchange rates varied widely across countries
    beggar-your-neighbor used or voracious
    Depreciation as an advantage
    the world export market.
  • Nations cheapened their currencies to increase them
    its exports at other costs and reduce
    The imports led to a trade war.
  • Attempts were made to restore the gold standard
    but the participants lacked the political will to do so
    follow the rules of the game.
  • The result for international trade and investment
    it was deeply harmful.

Bretton Woods Agreement 1945-1973

  • Most countries abandoned the gold standard later
    the great depression
  • Bretton Woods Agreement
  • The Statutes led to the birth of the
    International Monetary Fund (IMF)
  • Rules of Conduct for International Monetary Policy
  • Birth of the International Bank of
    Reconstruction and Development (IBRD)
  • Financing of development projects


(Video) The Bretton Woods Monetary System (1944 - 1971) Explained in One Minute

  • Each country has established its own denomination
    Currency against US dollar
  • The exchange rate was allowed to float within
  • 1 ounce of gold (set) 35
  • Countries had the opportunity to change the parity
    Rate in response to a fundamental imbalance
  • Countries were allowed to seek their own
    domestic macroeconomic targets
  • Temporary imbalances in the balance of payments
    be covered by a buffer stock of reserves and
    IMF loan
  • When the demand for this versus that increases,
    the Bank of England must be ready for delivery
    extra pounds, so that's exchange rate parity

Bretton-Woods-System 1945-1973
American dollar
Mated to 35/oz.

  • Problem
  • Requires official intervention abroad
    stock market
  • Expect UK inflation.
  • This would lead to an increase in your prices.
  • Consequently, exports would decrease and imports would increase.
  • Pound supply should rise to the
    world currency markets
  • This offer would decrease the value of the pound
  • To reduce the oversupply, Great Britain would have
    repurchase with your reservations
  • This would reduce the domestic money supply and
  • Problems arise when governments are not prepared
    do it


  • In fact, most countries kept their exchanges
    dollar-linked interest rates and changes in a
  • Hence the dollar exchange rate
    corrected in this process
  • How the war devastated economies outside the US
    rebuilt, helped fixed rate stability
  • But US liabilities soon held out
    Alien was more than it could bear
    through gold reserves held in the US (using the
    fact that 35 an ounce of gold


  • US dollars had to be continually replenished
    world trade finance
  • Dollars transferred from the US to others
  • The US had to be willing to manage the balance of payments
    deficits continuously
  • Gradually this led to a loss of confidence in the
  • The basis of the system (trust in
    dollars) collapsed


  • In 1963, President Kennedy raised interest rates
    Equalization tax (IET)
  • Tax on U.S. purchases of foreign securities
  • Dollars would be less likely to leave the US
  • 1965 Foreign Credit Restriction Program
  • Regulates the amount of US dollars, banks
    could lend to multinational companies
  • 1970 IMF introduces Special Drawing Rights (SDR).
  • SDR is a basket of currencies allocated to the IMF
  • Can be used to finance transactions (instead of
    to die)


  • During the Vietnam wars in the late 1960s
    US inflation rose to 3.5 based on
    Producer prices (compared to 1951-67) -
  • The dollar has lost credibility
  • All these factors overload the system
  • In 1971, President Nixon suspended the dollar
    Gold Convertibility
  • Smithsonian Agreement
  • 1 ounce gold 38 (devalued dollar)
  • revalued coins
  • Flexible exchange rates - range from 1 to 2.5
  • This deal also failed a year later

The flexible exchange rate regime 1973 - today

  • Flexible exchange rates have been declared acceptable
    to IMF members.
  • Central banks were allowed to intervene
    resolve exchange rate markets unjustifiably
  • Gold was abandoned as an international reserve
  • Non-oil exporting countries and least developed countries
    Countries had better access to IMF funds.

Current exchange rate agreements

  • free floating
  • Most countries, around 48, allow this.
    Market forces to determine your currencies
  • float managed
  • About 25 countries unite the government
    Intervene with market forces to determine tradeoffs
  • Linked to another currency
  • Like US Dollar or Euro, for example, HK7.80
  • No local currency
  • Some countries don't bother to print their own,
    They only use the US dollar. For example,
    Ecuador, Panama and El Salvador gained dollars.

1973-present (Post Bretton Woods)

  • OPEC-Crisis 1973-74
  • Some nations like the US have tried to counteract this
    increase in oil prices due to the expansion
    Monetary policy and trying to control the price
    of oil, leading to BOP deficits
  • Others, like Japan, have allowed oil prices to rise
  • Dollar Crisis 1977-78
  • Enter Paul Volcker, who announced a big change
    in monetary policy
  • The Fed would focus on controlling money
  • Dollar on the Rise 1980-85
  • 1981-84- Inflation dropped and the dollar


  • Others, like Japan, have allowed oil prices to rise
    1981 Expansionary fiscal policy and tight monetary policy
    politics in usa
  • Led to a sustained appreciation of the dollar
    (estimated at nearly 50 in 1985 compared to
  • It remains of dollars 85-87 e a Plaza Louvre
    intervention agreement
  • On September 22, 1985, G-5 officers
    countries - Great Britain, France, West Germany, Japan
    and the US met at the Plaza Hotel in NY
  • ? Committed to supporting a reduction in
  • ?The dollar fell a lot and continued falling until


  • The dollar fell so low until 1987
    led to the Louvre Agreement on February 22, 1987
  • Countries pledged to maintain exchange rates
    children of soul
  • However, the target zones were never publicly announced.
    The zones are assumed to have been bands of /- 5
    around the value of 1.825 DM / and 153.50 /
    (these were the courses that were in the
    Friday before the session)
  • At the same time, the European Community
    Rallying to limit the exchange rate


  • 1988-Present
  • Fell against Yen and DM in 1993-95
  • Rally 1996
  • Recent dollar decline

The European Monetary System (EMS)

  • EMS was founded in 1979 to raise money
    Stability in the EC (European Community).
  • ECU (European Currency Unit) is weighted
    Average of various currencies in the EC.
  • The individual currencies are determined using the
  • Monetary Union - EMU (European Monetary Union)
    and or euros
  • Conditions of Participation

EMU and the euro

  • EMU single currency area within Europe, where
    People, goods, services and capital can be moved
    No restrictions.
  • The euro is the single currency of the European Union
    Monetary union adopted by 11 members
    United States on January 1, 1999.
  • The idea was that a single currency would be promoted
    stability in the region.
  • A single currency unit removes the exchange rate
    Instability, reduces transaction costs and makes
    more competitive companies.
  • Those original Member States were Belgium,
    Germany, Spain, France, Ireland, Italy,
    Luxembourg, Finland, Austria, Portugal and


  • Currently, member countries participating in it
    about euros
  • 1 Euro 40.3399 BEF (Belgian Franc)
  • 1.9558 DEM (German DM)
  • 340,750 GRD (Greek drachma)
  • 166,386 ESP (Spanish pesets)
  • 6.5595 FRF (French Franc)
  • 0.7875 IEP (Irish Point)
  • 1936,27 ITL (italian enemy)
  • 40.3399 LUF (Luxembourgish franc)
  • 2.2037 NLG (Dutch guilder)
  • 13.7603 ATS (Austrian Shilling)
  • 200,482 PTE (Portuguese Escudos)
  • 5.9457 FIM (Finnish brand)

euro notes
euro coins
common side
national page

(Video) The International Monetary Fund (IMF) and the World Bank Explained in One Minute

(Video) The International Monetary System

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