NATIONAL ECONOMICS UNIVERSITY

SCHOOL OF BANKING AND FINANCE

CHAPTER 2: INTERNATIONAL
MONETARY SYSTEMS

Ha noi, Aug 2023

Dr. Phan Thị Thanh Hương

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 Chapter 2:
International monetary system
Objective
• The formation and development of monetary
regimes: Basis and rules for determining and
regulating exchange rates in historical periods
• Methods and instruments regulating the
determination and maintenance of the value of each
country's currency
• The formation and development of international
financial institutions
• The impact of the international financial system on
the stability and development of countries
 Chapter 2:
International monetary system
❖ The International Monetary System is a set of rules that
governs international payments (exchange of money).
❖ Historical overview of exchange rate regimes:
➢ Classical Gold Standard: Pre - 1914
➢ Bretton Woods System: 1944 - 1973
➢ Floating Exchange Rates: 1973 -
➢ European Monetary Union

❖ How is this relevant today? We know what does and doesn’t

work!
Terminology
1.Commodity Standard (Bản vị hàng hóa): A country's currency
is determined by a fixed weight of two metals (usually gold and
silver). For example: in 1792, 1 dollar of gold was equal to 1,603
grams of pure gold; 1 silver dollar equals 24.06 grams of net
silver. Thus, the weight of 1 silver dollar is 15 times the weight
of 1 gold dollar. This regime was applied in England and the
United States before the 19th century.
2. The gold standard (bản vị vàng) is a monetary system where a
country's currency or paper money has a value directly linked to
gold. With the gold standard, countries agreed to convert paper
money into a fixed amount of gold. A country that uses the gold
standard sets a fixed price for gold and buys and sells gold at that
price.
Terminology

3. Gold exchange standard (bản vị hối đoái vàng): This

is a regime that stipulates that national banknotes
cannot be directly converted into gold. To exchange for
gold, you need to go through a foreign currency. That
foreign currency must be freely converted into gold
such as USD, British Pound... This regime was applied
in India in 1898, in Germany in 1924, in the
Netherlands in 1928...

4. Special Drawing Rights (SDR) (quyền rút vốn đặc

biệt): defined in terms of a basket of currencies,
including the major currencies used in international
trade and finance. Since 1999, the basket of currencies
includes EUR, GBP, JPY, USD.
Terminology

5. Bartering: direct trade of good and service

6. Fiat currency: đồng tiền pháp định
7. Balance of payment: Cán cân thanh toán quốc tế
8. Current account: Cán cân vãng lai
9. Surplus: thặng dư
10. Deficit: thâm hụt
11. Floating: thả nổi
12. Fixed: cố định
 Content
1.1 Overview of the international monetary system
1.2 International Monetary System Before World War I
(1914)
1.3 International monetary system in the second period
of world war (1914-1944)
1.4 International monetary system after World War II
(1944-1990s)1.5 International financial institutions
 Starting question
◼ On 25/08/2022, 1 EUR converted to 1 USD. It
happens the same on 18/10/2022.
◼ This is the lowest exchange rate of EUR/USD in the
last 20 years, specially on the regression of EUR in
2022.
Who issued the euros and why did it plummet? Chapter
2 will present the history of the formation of the world
monetary system, including the formation of the EUR.
 1.1 Overview of international monetary
system
◼ Formed on the basis of trade - financial relations between countries
◼ A system consisting of monetary regimes and sanctions regulating
financial relations between countries and international financial
institutions, including:
➢ Monetary regimes and rules determine and regulate exchange rates between
currencies of different countries
➢ Sanctions regulate international and national financial relationships and activities.
➢ The international financial market system
➢ International financial institutions

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1.2 IMS before the first World War(1914)
1.2 IMS before the first World War(1914)

1.2.1 Commodity money (before 1870)

- Commodity money (bartering system) – bản vị hàng hóa
- “Undervalue” metal coin (1540-1560) – Tiền đúc thiếu giá
- Thomas Gresham (UK) '' bad money drives out good‘’ (tiền xấu
đuổi tiền tốt ra khỏi lưu thông)
- Bimetallic standards (1792-1861): gold and silver (song bản vị:
vàng và bạc)
- Broken bimetallic standards (1861) – chế độ song bản vị sụp đổ
- Convert USD note to gold (1879) Gold standard Act signed in
the US (1900) : Quyết định chuyển đổi USD ra vàng (1879) và
Đạo luật bản vị vàng ở Mỹ (1900)
1.2 IMS before the first World War(1914)
1.2.2 Gold standard (1880-1914)
- The golden age of the gold standard (1880-1914): the international
monetary system operated stably and cooperatively among countries
in the region and the world
- Principles
1. Secure the value of money with gold.
2. Freely minting gold coins of full value
3. Freely export and import golds
4. Having a large enough gold reserve is required to ensure the
purchasing power of the currency – money backs to gold.
- Advantage and disadvantage
1. Advantage: limit power of Government and reducing inflation
2. Disadvantage: countries with limited gold resources
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1.3 IMS during the two World War
(from 1914 to 1944)
▪ The end of the gold standard and the floating exchange rate system: war
financing and explosive inflation, disrupting the ability to maintain money-
gold relations
▪ The redefinition of the 1920 gold standard: the revival of the gold standard
and its characterization of the 1925-1931 gold standard.
▪ The collapse of the international trading and financial system after the Great
Depression 1929-1933: The disintegration of the monetary blocs (GBP,
USD, and others continued to be tied to gold), ending the regime gold
standard.
▪ Negotiations on the reconstruction of the international monetary system
▪ 1941 Bretton Woods Conference 1944 and the form of the Bretton Woods
System

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1.4 IMS after World War II (1944 – 1990s)

1.4.1 Bretton Woods system 1944-1971

1.4.2 Post Bretton Woods:
- Special Drawing Rights (SDR)
- European Monetary System (EMS)
- European Union (EU)
1.4 IMS post World War 2(1944 – 1990s)
1.4.1 Bretton Woods system
- Forming of Bretton Woods system in 1944
- Characteristics and operations of the Bretton Woods 1944
monetary system: the USD standard
- The positive effects of the Bretton Woods regime
- The fall of Bretton Woods
• Pressures and efforts
• The collapse of the Bretton Woods system was officially
announced on August 15, 1971
 1.4.2 IMS post Bretton Woods
•Two amendments to the terms of International Monetary Fund (IMF):
+ The forming of SDR (Special Drawing Right – Quyền rút vốn
đặc biệt)
+ Countries are not allowed to attach the value of their currency
to gold and choose the exchange rate regime by themselves
•European Monetary system (EMS)
•European Monetary Union
•International Bank for Reconstruction and Development – IBRD)

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 1.4.2 IMS post Bretton Woods
•1969: SDR = 1/35 gold ounce = 1 USD
•1973: SDR detached from USD and is weighted by money basket with
countries who have international payment over 1%
•1982 SDR is weighted by DEM, JPY, GBP, FRF, USD
•2001 SDR is weighted by JPY, GBP, FRF, USD
•2010 SDR = 44% USD, 34% EUR, 11% JPY, 11%GBP

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 1.4.2 IMS post Bretton Woods
- USA current a/c Surplus, European CA deficits
- European countries short of USD for
reconstructions
- 1948: Marshall grant made by USA to Europe
- 1949 : European countries inflates
- 1950s: Balance of payment of US deficits
- 1958: European currencies freely converted
- 1971: Bretton Woods collapsed.

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 1.4.2 IMS post Bretton Woods
•European Monetary System (EMS):
+ The bilateral exchange rate system between member
currencies fluctuates within a certain margin of maximum
±2.25% for strong currencies and ±6% for weak currencies
such as the Italian lira or Irish pounds.
+ Forming of European Currency Unit (ECU) – forming
exchange rate and capital market (European Snake Monetary
system)
+ Assessment of EMS : 1979
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 1.4.2 IMS post Bretton Woods
•European Monetary Union
+ Forms of economic association: Free trade area; Customs
Union; Common market; Economic Union; Currency Union
+ Forming the European economic and monetary union

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 1.4.2 IMS post Bretton Woods
European Monetary Union
- The European Economic and Monetary Union was officially established on January
1, 1999. Conditions for joining the European Economic and Monetary Union:
+ Low inflation, not exceeding 1.5% compared to the average of the three countries
with the lowest inflation.
+ Budget deficit does not exceed 3% of GDP.
+ Public debt is less than 60% of GDP and exchange rate fluctuation between
currencies is stable for two years under the conversion mechanism (ERM).
+ The interest rate (based on the interest rate on bonds with a term of 10 years or more)
is not more than 2% compared to the average rate of the 3 countries with the lowest
interest rates.
- On January 1, 2002, the EUR was officially operated in 12 member countries
including: France, Germany, Austria, Belgium, Finland, Ireland, Italia, Luxembourg,
Netherland, Spain, Portugal.

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 1.4.2 IMS post Bretton Woods
European Monetary Union
- Benefits and Costs
Benefit Cost

-Enhancement of trade development -Reducing of independent in

within the EU monetary policymaking
- Factors of production are allocated -Reducing of independent in
more efficiently within the EU macroeconomic policy
- Reducing foreign exchange - Regional inequality
reserves and benefits from issuing -Transition period costs
money.
-Enhance liquidity for financial
markets

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 1.4.2 IMS post Bretton Woods
Current IMS
- The international monetary system is characterized by the multilateral
cooperation of countries based on the regulated floating exchange rate
regime, the trend of global integration and globalization of countries.
- Activities of international financial institutions are enhanced and
expanded in many areas: life - economy - society of countries.
- The development and stability of the European monetary system opens
the possibility of monetary cooperation in regions and in the world:
Southeast Asia and Asia

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1.5 International Finance Organisations

▪ International Monetary Fund (IMF)

▪ World Bank (WB)
▪ Asian Development Bank (ADB)
▪ European Central Bank (ECB)
▪ African Development Bank (AFDB)
Questions
What is Euro and why is it declining sharply in 2022??
Answer
- On January 1, 2002, the EUR was officially operated in 12 member
countries including: France, Germany, Austria, Belgium, Finland,
Ireland, Italia, Luxembourg, Netherland, Spain, Portugal.
- Aggressive monetary policy tightening from the U.S. Federal
Reserve
- The European Central Bank was much later out of the blocks in
hiking interest rates to contain runaway inflation.

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Questions
Analyse the opportunities for monetary
cooperation in Southeast Asia or Asia
Answers
- Economic development conditions and the need for
financial and monetary cooperation in the region
- The ability to cooperate in monetary and financial
terms
- Difficulties

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Multiple choice question 1

Benefits of joining a currency union:

a/ Promote international trade within the union
b/ Be proactive in making monetary policy
c/ Create equality with other countries in the alliance
d/ None of the options are correct
Answer: a

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Multiple choice question 2
The basic features of the gold standard are:
a/ The central bank of each country must always maintain a
reserve of gold in direct relation to the amount issued
b) There was no devaluation or appreciation among major
currencies during the golden age of the gold standard.
c/ In countries with a scarcity of gold, the money supply will
be limited and this is the cause of economic growth
d/ Discovering gold mines that causes inflation
Suggested answer: a

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Questions

Benefits and Costs of Joining the European Monetary

Union?

Answer: Slide 23

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Summary

After studying this lesson, students have:

- Overview and the historical development of
the monetary system
- Forming of common currencies.
- The formation of international financial
institutions
 Chapter 2:
International monetary system
Discussion
1. Characteristics and role of the current international
financial system in the economic development of
countries
2. European Monetary Union: Advantages,
disadvantages and implications of the research.
3. Activities and roles of international financial
institutions which have relations with Vietnam
◼ Dr Phan Thanh Hương 0976572130
ptthuong2005@yahoo.com

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