INTERNATIONAL MONETARY SYSTEM

Presented By:
Chaman Jangra
201210
MBA (2020-2022)
Presented To:
Dr. Anand Sharma Semester-IVth
MEANING
 MEANING
International monetary system refers to the system and rules that govern
the use and exchange of money around the world and between countries.
Each country has its own currency as money and the international monetary
system governs the rules for valuing and exchanging these currencies.
• It is a set of internationally agreed rules, conventions and supporting
institutions that facilitate international trade, cross border investment and
generally the reallocation of capital between states that have different
currencies
 HISTORY
• History shows that ancient Egypt and Mesopotamia—which encompasses the land
between the Euphrates and Tigris Rivers and is modern-day Iraq, parts of eastern Syria,
southwest Iran, and southeast Turkey—began to use a system based on the highly
coveted coins of gold and silver, also known as bullion, which is the purest form of the
precious metal. However, bartering remained the most common form of exchange and
trade.
• Gold and silver coins gradually emerged in the use of trading, although the level of pure
gold and silver content impacted the coins value. Only coins that consist of the pure
precious metal are bullions; all other coins are referred to simply as coins.
 Pre–World War I
• Ancient societies started using gold as a means of economic exchange.
Gradually more countries adopted gold, usually in the form of coins or bullion,
and this international monetary system became known as the gold standard.
This system emerged gradually, without the structural process in more recent
systems. The gold standard, in essence, created a fixed exchange rate system.
An exchange rate is the price of one currency in terms of a second currency. In
the gold standard system, each country sets the price of its currency to gold,
specifically to one ounce of gold. A fixed exchange rate stabilizes the value of
one currency vis-à-vis another and makes trade and investment easier.
 History of the International Monetary System

• There have been four phases/ stages in the evolution of the

international monetary system:
• Gold Standard (1875-1914)
• Inter-war period (1915-1944)
• Bretton Woods system (1945-1972)
• Present International Monetary system (1972-present)
 1) Gold standard

• From 1870 to world war 1

• The gold standard is a monetary system in which each country fixed the value of its currency in
terms of gold. The exchange rate is determined accordingly.
• Let’s say- 1 ounce of gold = 20 pounds (fixed by the UK) and 1 ounce of gold = 10 dollars (fixed by
the US).
• Hence, the dollar-pound exchange rate will be 20 pounds = 10 dollars or 1 pound = 0.5 dollars
• The Gold standard created a fixed exchange rate system.
• There was free convertibility between gold and national currencies.
• Also, all national currencies had to be backed by gold. Therefore, the countries had to keep
enough gold reserves to issue currency.
• The gold standard 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. That fixed price is used to
determine the value of the currency. For example, if the U.S. sets the price of gold at
$500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.

• The gold standard is a monetary system in which a currency's value is pegged to gold.
• The gold standard was completely replaced by fiat money, a term to describe currency that is
used because of a government's order, or fiat, that the currency must be accepted as a means of
payment. In the U.S., for instance, the dollar is fiat money, and for Nigeria, it is the naira.

• Fiat money is a government-issued currency that is not backed by a physical commodity, such
as gold or silver, but rather by the government that issued it. The value of fiat money is derived
from the relationship between supply and demand and the stability of the issuing government,
rather than the worth of a commodity backing it. Most modern paper currencies are fiat
currencies, including the U.S. dollar, the euro, and other major global currencies.
 2) Inter-war period

• After the world war started in 1914, the gold standard was abandoned.
• Countries began to depreciate their currencies to be able to export more. It
was a period of fluctuating exchange rates and competitive
devaluation.
 3) Bretton woods system

• The Bretton Woods agreement was created in a 1944 conference of all of the
World War II Allied nations. It took place in Bretton Woods, New Hampshire.
Under the agreement, countries promised that their central banks would
maintain fixed exchange rates between their currencies and the dollar.

• In the early 1940s, the United States and the United Kingdom began discussions
to rebuild the world economy after the destruction of two world wars. Their
goal was to create a fixed exchange rate system without the gold standard.
• The new international monetary system was established in 1944 in a conference
organised by the United Nations in a town named Bretton Woods in New Hampshire
(USA).
• The conference is officially known as the United Nations Monetary and Financial
Conference. It was attended by 44 countries.
• India was represented in the Bretton-woods conference by Sir C.D. Deshmukh, the
first Indian Governor of RBI.
• [The conference also led to the creation of the International Monetary Fund (IMF),
World Bank, and GATT. GATT is the predecessor of WTO.
• The Bretton-woods created a dollar-based fixed exchange rate system. 
• In the Bretton-woods system, only the US fixed the value of its currency to gold. (The initial peg
was 35 dollars = 1 ounce of gold). All the other currencies were pegged to the US dollar
instead. They were allowed to have a 1 % band around which their currencies could fluctuate.
• The countries were also given the flexibility to devalue their currencies in case of an emergency.
• It was similar to the gold standard and was described as a gold-exchange standard.
• There were some differences. Only the US dollar was backed by gold. Other currencies did not
have to maintain gold convertibility.
• Also, this convertibility was limited. Only governments (not anyone who demanded it) could
convert their US dollars into gold.
 The Bretton Woods System’s Collapse

• Concerned that the United States' gold supply was insufficient to meet the number of dollars
in circulation, President Richard M. Nixon depreciated the dollar against gold in 1971.
• He declared a temporary suspension of the dollar's convertibility into gold after a run on the
gold reserves.
• The Bretton Woods System had crumbled by 1973. Countries may adopt any exchange
arrangement for their currency at the time, except pegging its value to the price of gold.
• They could, for example, tie its value to the currency of another country or a basket of
currencies, or simply let it float and let market forces determine its value about other
currencies.
 4) Present International Monetary system

• The Bretton Woods system collapsed in 1971. The United States had to stop the
convertibility to gold due to high inflation and trade deficit in the economy.
• Inflation led to an increase in the price of gold. Hence, the US could not
maintain a fixed value of 35 dollars to 1 ounce of gold.
• In 1973, the world moved to a flexible exchange rate system.
• In 1976, the countries met in Jamaica to formalize the new system.
• The floating exchange rate system means that the exchange rate of a currency is
determined by the market forces of demand and supply.