This document provides a summary of the history of international monetary systems from ancient times to the present. It discusses the gold standard period, the collapse of the gold standard after World War I, the Bretton Woods system established in 1944, and the eventual collapse of the Bretton Woods system in the early 1970s. The document analyzes the shortcomings of each system and the economic and political factors that led to changes in the international monetary system over time.

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Assignment on--
History of International Monetary System
Prepared For-
Md. Shariat Ullah
Lecturer, Dept. Management Studies
Faculty of Business Studies
University of Dhaka
Prepared By-
Md. Azim Ferdous
Roll No: 121, Section: B, Batch: 11th
Dept. of Management Studies
University of Dhaka
Date of Submission-
May 7, 2008

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The international monetary system establishes the rules by which countries value and
exchange their currencies. It also provides a mechanism for correcting imbalances
between a country’s international payments and its receipts. Further, the cost of
converting foreign money into firm’s home currency-a variable critical to the
profitability of international operations depends on the smooth functioning of the
international monetary system.
The history of monetary system started when in ancient time (seventh century B.C.1)
tribes & city-states of India, Babylon & Phoenicia used gold & silver as media of exchange
in trade. The total history of international monetary system is discussed below in a
chronological order.
1. The Gold Standard
Meaning: Buying and selling of paper currency in exchange for gold on the request of
any individual of firm2. The theory of the gold standard rests on the idea that inflation is
caused by an increase in the supply of money, an idea advocated by David Hume, and
that uncertainty over the future purchasing power of currency depresses business
confidence and leads to reduced trade and capital3.
First to Adopt: In United Kingdom at 1821.
Upshot: It created a fixed exchange rate system because each country tied the value of
its currency.
Advantage: The gold standard created a fixed exchange rate system.
For example, the United Kingdom pledged to buy or sell an ounce of
gold for 4.247 pounds sterling, thereby establishing the pound per
value or official price in terms of gold. The United States agreed
to buy or sell an ounce of gold to a par value of $20.67. The two
currencies could be freely exchanged for the stated amount of
gold making £4.247 = 1 ounce of gold = $20.67. This implied a fixed
exchanging rate between the pound and the dollar of £1= $4.867,
or $20.67/ £4.247.
Representative money and the Gold Standard protect citizens from hyperinflation and
other abuses of monetary policy, as were seen in some countries during the Great
Depression. However, they were not without their problems and critics, and so were
partially abandoned via the international adoption of the Bretton Woods System. That
system eventually collapsed in 1971, at which time all nations had switched to full fiat
money4.
1 Del Mar, A History of Money in Ancient Countries (New York: Burt Franklin, 1968), p.71.
2 I. Drummond, The Gold Standard and the International Monetary System 1900-1939 (London:
McMillan Education Group, 1987), pp.10-11.
3 http://en.wikipedia.org/wiki/Gold_standard
4 In which paper notes are backed only by the traders' "full faith and credit" in the government, in
particular by its acceptability for payments of debts to the government (usually taxes).

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The Gold Standard variously specified how the gold backing would be implemented,
including the amount of specie per currency unit. The currency itself is just paper and so
has no innate value, but is accepted by traders because it can be redeemed any time for
the equivalent specie. A US silver certificate, for example, could be redeemed for an
actual piece of silver5.
Difficulty: Transacting in gold was expensive. For example, suppose Jardine
Matheson, a Hong Kong trading company, sold £100,000 worth of tea to Twining &
Company, a London distributor of fine teas. If it wanted to be paid in gold by Twining &
Company upon delivery of the tea, Jardine Matheson had to bear the costs of
loading the gold into the cargo hold of a ship, guarding it against theft,
transporting it, and insuring it against possible disasters. Moreover, because of the
slowness of sailing ships, Jardine Matheson would be unable to earn interest on
the £100,000 payment while the gold was in transit from London to Hong-Kong. On
the other hand, if Jardine Matheson was willing to he paid in British pounds, Twining
could draft a check to Jardine Matheson and give it to the firms London agent. The
London agent could then either immediately deposit the check in Jardine
Matheson's interest-bearing London bank account or transfer the funds telegraph
of the firm's account at its Hong Kong bank.
Starling-Based Gold Standard: From 1821 until the end of 1918, the most important
currency in international commerce was the British pound sterling because of the United
Kingdom’s large territory6 due to dominant economic and military power. So, most of the
people relayed on pound that time. As a result international monetary system during this
period is also called starling-based gold standard7. Because of the international trust
London became a dominant international center in the 19th century, a position it still
holds8.
2. The Collapse of Gold Standard
World War I: During World War 1, the sterling-based gold standard unraveled. With the
outbreak of war, normal commercial transactions between the Allies (France, Russia, and
the United Kingdom) and the Central Powers (Austria-Hungary, Germany, and the
Ottoman Empire) ceased. The economic pressures of war caused country after country
to suspend their pledges to buy or sell gold at their currencies' par values.
Post-War Conferences & Re-adaptation of Gold Standard: After the war, conferences
at Brussels (1920) and Genoa (1922) yielded genera agreements among the major
economic powers to return to the prewar gold standard. Most countries, including the
United States, the United Kingdom, and France, readopted the gold standard in the 1920s
5 http://en.wikipedia.org/wiki/Gold_standard
6 United Kingdom’s territory that time was consisted of Canada, Australia, New Zealand, Hong
Kong, Singapore, India, Pakistan, Bangladesh, Kenya, Zimbabwe, South Africa, Gibraltar,
Bermuda, and Belize.
7 At the turn of the century, the French franc & the German mark were used in addition to
sterling for setting private international transactions.
8 B. Cohen, The Future of Sterling as an international Currency (London: McMillan, 1971), pp.60-
61.

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despite the high levels of inflation, unemployment, and political instability that were
wracking Europe.9
Implementation of Floating Rate System By Bank of England: The standard of gold
standard was doomed by economic stresses triggered by the worldwide Great
Depression. The Bank of England, the United Kingdom's central bank, was unable to
maintain its new pledges under the gold standard. On September 21, 1931, it allowed the
pound to float, meaning that the pound's value would be determined by the forces of
supply and demand and the Bank of England would no longer guarantee to redeem
British paper currency for gold at par value10.
Competitive Devaluation of Currencies & Increased Tariff Rate: After the United
Kingdom abandoned the gold standard, a "sterling area” emerged as some countries,
primarily members of the British Commonwealth, pegged their currencies to the
pound and relied on sterling balances held in London as their international
reserves.11 Other countries tied the value of their currencies to the U.S. dollar or the
French franc. Some countries (United States, France, United Kingdom, Belgium, Latvia,
the Netherlands, Switzerland & Italy) were deliberately & artificially devaluating their
official value of currencies to make their goods cheaper in the international
markets, which is stimulating its exports and reducing its imports. But, none were
getting the benefit due to competitive devaluation at almost same percentage that is
each currency's value relative to the other remains the same. Most countries also raised
the tariffs they imposed on imported goods in the hope of protecting domestic jobs in
import-competing industries. Nations adversely affected by trade barriers of any kind
are quite likely to impose retaliatory or reciprocal tariffs12.
Effect of beggar-thy-neighbor policies (World War II): As more and more countries
adopted beggar-thy-neighbor policies like devaluation of currencies and increasing the
tariff rate on imported goods, international trade contracted that hurt employment in
each country's export industries. More ominously, this international economic conflict
was soon replaced by international military conflict that was the outbreak of World War
II in 1939.
3. The Bretton Woods Era
Post-War Situation: World War II created inflation, unemployment and an instable
political situation. Every country was struggling to rebuild their war-torn economy.
Bretton Woods Conference: Not to repeat the mistakes that had caused World War II,
to promote worldwide peace & prosperity and to construct the postwar international
monetary system representatives of 44 countries met at a resort in Bretton Woods, New
Hampshire in 1944.
9 I. Drummond, The Gold Standard and the International Monetary System 1900-1939 (London:
McMillan Education Group, 1987), p.31
10 Ibid., pp.40.
11 B. Cohen, The Future of Sterling as an international Currency (London: McMillan, 1971), p.68.
12 http://www.csusm.edu/politicalscience/golich/money-module/

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Decisions & Outcome of the Bretton Woods Conference: The Bretton Woods
Conference has presented the world two historic agreements. These are as follows:
A. Agreement of conferees to renew the gold standard on a modified basis.
B. Agreement to create two new international organizations to assist the rebuilding
of the world economy and the international monetary system. These are-
a. International Bank for Reconstruction and Development (IBRD)
b. International Monetary Fund (IMF)
a. The International Bank for Reconstruction and Development (IBRD)
The International Bank for Reconstruction and Development (IBRD) is the official name
of the World Bank. Established in 1945, the World Bank's initial goal was to help finance
reconstruction of the war-torn European economics. With the assistance of the
Marshall Plan, the World Bank accomplished this task by the mid-1950s. The Bank
then adopted a new mission—to build the economies of the world's developing
countries.
As its mission has expanded over time, the World Bank created three affiliated
organizations:
a. International Development Association (IDA)
b. International Finance Corporation (IFC)
c. Multilateral Investment Guarantee Agency (MIGA)
Together with the World Bank, these constitute the World Bank Group. The World Bank
is currently owned by the 185 member countries. The World Bank’s activities are
focused on the reduction of global poverty, focusing on the achievement of the
Millennium Development Goals (MDGs), goals calling for the elimination of poverty and
the implementation of sustainable development. United States is the bank’s largest
shareholder.
International Bank for
Reconstruction and
Development (IBRD)
International
Development
Association (IDA)
Offers soft loans
International Finance
Corporation (IFC)
Promotes private
sector development
Multilateral
Investment Guarantee
Agency (MIGA)
Provides political risk
insurance

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b. International Monetary Fund (IMF)
International Monetary Fund (IMF) was created to monitor and
control the functioning of the international monetary system. It is an
international organization that oversees the global financial system
by observing exchange rates and balance of payments, as well as
offering financial and technical assistance. Its objectives are as
follows:
i. To promote international monetary cooperation.
ii. To facilitate the expansion and balanced growth of international trade.
iii. To promote exchange stability, to maintain orderly exchange arrangements
among members, and to avoid competitive exchange depreciation.
iv. To assist in the establishment of a multilateral system of payments.
v. To give confidence to members by making the general resources of the Fund
temporarily available to them and to correct maladjustments in their balances
of payments.
vi. To shorten the duration and lessen the degree of disequilibrium in the
interactional balances of payments of members.
At first 29 countries signed its Articles of Agreement of IMF. But now it has 186
Members. Its Headquarters are at Washington, D.C., USA. Current Managing Director is
Dominique Strauss-Kahn. Its Central Bank of Base borrowing rate 5.50%.
A Dollar-Based Gold Standard: The IMF and the World Bank provided the institutional
framework for the postwar international monetary system. All countries agreed to peg
the value of their currencies to gold. However, only the United States pledged to redeem
its currency for gold at the request of a foreign central bank. Thus the U.S. dollar
became the key-stone of the Bretton Woods system.
In the early postwar years, only the U.S. and Canadian dollars were convertible
currencies, that is, ones that could be freely exchanged for other currencies without
legal restrictions. Countries had faith in the U.S. economy and so were willing to accept
U.S. dollars to settle their transactions. As the British pound sterling had been in the
nineteenth century, the U.S. dollar became the preferred vehicle for settling most
international transactions. The effect of the Bretton Woods conference was thus to
establish a U.S. dollar-based gold standard.
Under the Bretton Woods Agreement each country pledged to maintain the value of its
currency within ±1% of its par value. If the market value of its currency fell outside that
range, a country was obligated to intervene in the foreign-exchange market to bring the
value back within ±1% of par value. This stability in exchange rates benefited
international businesses, since the Bretton Woods system generally provided an
assurance that the value of each currency would remain stable.
Bretton Woods System as Adjustable Peg : The Bretton Woods system is often
described as using an adjustable peg because currencies were pegged to gold but the
pegs themselves could be altered under certain conditions. The arrangement of Bretton
Woods System worked well as long as pessimism about a country’s economy was

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temporary. But, if a country suffered from structural macroeconomic problems, major
difficulties could arise.
4. The End of the Bretton Woods System
Shortcoming of Dollar-Based Gold Standard Under Bretton Woods System & Triffin
Paradox: The British and French central banks were a precursor to a run on the most
important bank in the Bretton Woods system—the U.S. Federal Reserve Bank. Ironically,
the reliance of the Bretton Woods system on the dollar ultimately led to the system's
undoing. Because the supply of gold did not expand in the short run, the only source of
the liquidity needed to expand international trade was the U.S. dollar. Under the Bretton
Woods system, the expansion of international liquidity depended on foreigners'
willingness to continually increase their holdings of dollars. Foreigners were perfectly
happy to hold dollars as long as they trusted the integrity of the U.S. currency, and during
the 1950s and 1960s the number of dollars held by foreigners rose steadily.
As foreign dollar holdings increased, however, people began to question the ability of the
United States to live up to its Bretton Woods obligation. This led to the Triffin paradox,
named after Robert Triffin13, who first identified the problem. The paradox arose because
foreigners needed to increase their holdings of dollars to finance expansion of
international trade. But the more dollars they owned, the less faith they had in the ability
of the United States to redeem those dollars for gold. The less faith foreigners had in the
United States, the more they wanted to rid themselves of dollars and get gold in return.
But if they did this, international trade and the international monetary system might
collapse because the United States didn't have enough gold to redeem all the dollars held
by foreigners. The shortcomings are listed below in brief-
Limited gold.
Liquidity problem.
Foreigners’ behavior of continuous increasing in dollar holding.
Foreigners’ less faith on United States.
Agreement to Create Special Drawing Rights (SDRs): To inject more liquidity into the
international monetary system while reducing the demands placed on the dollar as a
reserve currency, IMF members created the special drawing rights in 1967. SDR is a
credit granted by the IMF that can be used to settle official transactions among central
banks. Thus SDRs are sometimes called "paper gold".
As of 1993, approximately 21.4 billion SDRs, representing about 2% of the world's
total reserves, had been distributed to IMF members in proportion to their IMF
quotas. The value of an SDR is a function of the current value of five different currencies
from which it is comprised. They include the U.S. dollar, the Japanese yen, the United
Kingdom pound sterling, and the respective euro values of Germany and France. An
SDR's value is currently calculated daily as a weighted average of the market value of
five major currencies (U.S. dollar, German mark, French franc, Japanese yen, and
13 A Belgian-born Yale University economist

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pound sterling) with the weights revised every five years14. As of May 1995, the SDR
was worth $1.54 in U.S. dollars.
Outcome of Creating SDRs: SDRs solved the liquidity problem for the international
monetary system, but if failed to solve the problem related to the glut of dollars held
by foreigners & faith. By mid 1971, the Bretton Woods system was tottering, the
victim of fears about the dollar's instability. In the first seven months of 1971, the
United States sold one third of its gold reserves15. It became clear to the marketplace that
the United States did not have sufficient gold on hand to meet the demands of those who
still wanted to exchange their dollars for gold.
Official Ending of Bretton Woods System: The Bretton Woods system officially ended
when in a dramatic address on August 15, 1971, President Richard M. Nixon announced
that the United States would no longer redeem gold at $35 per ounce.
5. Post Bretton Woods System & the Floating Rate Era
After President Nixon's speech, most foreign currencies began to float, their values being
determined by supply and demand in the foreign-exchange market. The value of the U.S.
dollar fell relative to most of the world's major currencies. But the nations of the world
were not yet ready to abandon the fixed exchange-rate system.
At the Smithsonian Conference, held in Washington, D.C. in December 1971, central
bank representatives from the Group of Ten16 agreed to restore the fixed exchange-rate
system but with restructured rates of exchange between the major trading currencies.
The U.S. dollar was devalued to $38 per ounce but remained inconvertible into gold, and
the par values of strong currencies such as the yen were revalued upward. Currencies
were allowed to fluctuate around their new par values by =2.25%, which replaced the
narrower ± 1.00% range authorized by the Bretton Woods Agreement.
Recent changes in international monetary policy17:
 US$ 100 Trillion estimated total world assets, including real estate.
 US$ 30 Trillion worldwide liquidity held by pension funds which traditionally
invest in long term assets: formerly gold, today government bonds.
 US$ 15-18 Trillion cash, mainly in Japan.
 US$ 3-4 Trillion "hot money" in offshore trusts.
14 International Monetary Fund, 1990 Annual Report, p.133.
15 The European Financial Common Market (Luxembourg: Office for Official Publications of the
European Communities, 1989), pp. 43ff.; The European Community in the nineties
(Washington, D.C.: EC Delegation to the United States, 1992), pp.12ff.; Directorate-General for
Economic and Financial Affairs, European Economy, No. 44 (October 1990), p. 42.
16 Group of Ten means the group consists of following countries who have world’s top most GDP
shares: United States, Japan, Germany, France, Italy, United Kingdom, Canada, Netherlands,
Belgium & Sweden.
17 http://www.gold-eagle.com