Evolution of international monetary system

Evolution of international monetary system

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  Evolution of Internationalmonetary system International monetary systems are sets of internationally agreed rules, conventions and supporting institutions, that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable buyers and sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected. The systems can grow organically as the collective result of numerous individual agreements between international economic factors spread over several decades. Alternatively, they can arise from a single architectural vision as happened at Bretton Woods in 1944. Evolution of IMS can be identified in five distinct stages. They are: 1. Bimetallism before 1875 2. Classical gold standard 1875-1914 3. Interwar period 1915-1944 4. Bretton woods system 1945-1972 5. Flexible exchange rate system since 1973 Bimetallism : before 1875 Gold and silver coins were used as international means of payment and that the exchange rate among currencies were determined either by gold or silver content. But this seemed to have many defects as goes the Gresham’s law “Bad” (abundant) money drives out “good” (scarce) money, It brought huge variations in supply of money and was viewed as unstable and biconstructive. Classical gold standard Under the gold standard, exchange rate b/w countries will be determined by their gold content. Suppose 1 ounce of gold= 6 pounds 1 ounce of gold= 12 francs It means 1 pound= 2 francs will be the exchange rate. Interwar Period 1915-1944 World war 1 ended the gold standard in 1914,as major countries imposed embargos on gold export. During this period, countries widely used ‘predatory’ depreciation of their
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  currencies as ameans of gaining advantage in the world export market. Major countries were again on gold std by 1928. But again due to financial crisis, major countries finally suspended gold standard in 1933. Paper standard came at last. Bretton woods system 1945- 1972 Monetary and Financial Conference held in Bretton Woods, New Hampshire, from July 1 to July 22, 1944. 730 delegates from the 44 Allied nations attended the conference. Major outcomes of the Bretton Woods conference included the formation of the International Monetary Fund and the International Bank for Reconstruction and Development. Smithsonian agreement Upon entering the Fund, a country submitted a par value of its currency expressed in terms of gold or in terms of the US dollar using the weight of gold in effect on July 1, 1944 ($35 per troy oz). However, but the most significant source of instability was the weakness of dollar. Since the US dollar was used as the principal reserve asset by our trading partners, the weakness of dollar raised doubts about the viability of the entire system. International monetary negotiations were undertaken within the framework of the Group of Ten. Details were worked out by the Group of Ten in a meeting at the Smithsonian Institution in Washington DC in December 1971. The agreement was then formalized by the IMF. Yen appreciated 17%, Mark 13.5 %, pound 9%, FF 9%. Par value of other minor currencies were also changed. In return for the revaluation of other currencies, the U.S. agreed to raise the price of gold from $35 to $38 an ounce. This was equivalent to a dollar devaluation of 8.57%. Par Value Modification Act, 1973 (amended) (copy) With the second devaluation of the dollar in March 1973 by 11% (the price of gold rose from $35.00 to $42.22 per ounce), the Smithsonian agreement fell apart and other currencies were left to float against the dollar. So finally all lost faith in dollar and this system also failed. Flexible exchange rate system since 1973 The floating exchange rate regime that followed the collapse of the fixed exchange rate system was formalized in January 1976 when IMF members met in Jamaica and agreed to the rules of the international monetary system that are in place today.