International Monetary System Coloured

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

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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.

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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.

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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.

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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.

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Advantages:

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stabilizing influence. 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. 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.

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The Gold-Exchange System 

In the decades following World War II, international trade was conducted according to the gold-exchange standard.

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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  1.

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Features: to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value in terms of gold; 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   

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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.

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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  

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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.

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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.