International Monetary System

International Monetary System
The international Monetary system refers primarily to the set of policies, Institutions, Practices, Regulations and Mechanisms that determines the rate at which one currency is exchanged for another.
History of International Monetary System

The Gold Standard (1876-1913)
This is the oldest system which was in operation till the breakout of first world war Under this standard each country set the rate at which its currency unit (paper or coin) could be converted to a weight of gold.
Example
For exp: $20.67= 1 ounce of Gold decided by US British Pound was pegged at 4.2474 pound = 1 ounce of gold The Dollar/Pound exchange rate is $20.67/pound 4.2474= $4.8665/ 1 pound
Gold Standard
There must be free flow of gold between countries on gold standard Maintaining adequate reserves of Gold to back currency value was very much important for every country This system implicitly was effecting the rate at which money supply of any country can increase Any Growth in the amount of money was limited to the rate at which official authorities could acquire additional gold.
The Gold standard worked adequately until the outbreak of world war I which interrupted trade flow and free movement of gold.
Inter War Years and World War II

During
the world war and in the early 1920s currencies were allowed to fluctuate over fairly wide range in terms of gold and each other. this flexible system did not work.
But
1925-1931
US
and England tried to reinstate Gold Standard. this system US and England could hold only Gold reserves but other nations could hold dollar and pound sterling also.
Under
1931and beyond
In 1931 England departed from gold standard and devalued pound sterling. As a result 25 other nations devalued their currencies to maintain their trade competitiveness. The result was BeggarThy-neighbor. In order to avoid such destructive economic policies in future, the allied nations agreed to new post war monetary system at a conference held in Bretton Woods New Hampshire in 1944.
1946-1971
Under the Bretton Wood System each government pledged to maintain a fixed exchange rate for its currency vis a vis dollar or Gold. One ounce of gold= $35
The exchange rates were allowed to fluctuate only within 1% of its stated par value.
Official intervention were maintained in the form of purchase and sale of dollar against own currencies whenever the supply and demand conditions in the market caused the exchange rates to deviate from the agreed upon par values
1946-1971
Devaluation
was not to be used as a competitive trade policy, but if a currency becomes too weak to defend , a devaluation up to 10% was allowed without formal approval of IMF. Larger devaluations require IMF approval.
1946-1971
The currency arrangement negotiated at Bretton Woods Conference and monitored by the IMF worked fairly well during the post world war II, period of reconstruction and rapid growth. However widely diverging national monetary and fiscal policies, differences in inflation rates and many unexpected external shocks demise the system.
1946-1971
The US dollar was the main reserve currency held by central banks and was the key to the web of exchange rate values. Unfortunately the United States ran into growing deficit of balance of payment. A heavy capital outflow was required to meet growing demand of dollar. Eventually the heavy overhang of dollar held by foreigners resulted in a lack of confidence in the ability of US to meet its commitment of converting dollar into gold
1946-1971
This lack of confidence forced president Richard Nixon to suspend official purchase and sale of Gold by US treasury on August 15, 1971 after US Suffered outflow of 1/3rd of its gold from its reserves in the first seven month of the year. Currencies were allowed to fluctuate in relation to dollar indirectly in relation to gold. By the end of 1971 , most of the major trading currencies had appreciated vis a vis dollar . This change resulted into devaluation of dollar. On Feb 12, 1973 dollar was pegged as $42.22= 1 ounce of gold.
1973- Present
By late 1973 , a fixed exchange rate system no longer appeared feasible. Speculative pressure forces closure or international foreign exchange nearly for 2 weeks, markets open on floating rates for major currencies. In 1976 IMF meeting in Jamaica results in legalization of floating rate already in effect , gold is demonetized as a reserve asset.
1973-Present
Exchange Rate Regimes
The International Monetary Fund classifies all exchange rate regimes into eight specific categories:
Exchange arrangements with no separate legal tender Currency board arrangements Other conventional fixed peg arrangements Pegged exchange rates within horizontal bands Crawling pegs Exchange rates within crawling pegs Managed floating with no pre-announced path Independent floating
currency
regimes.htm

International Monetary System

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International Monetary System

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International Monetary System

History of International Monetary System

Inter War Years and World War II

Exchange Rate Regimes

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