Notes

1. International
Monetary
System

2. Evolution of IMS
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

3. 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

4. Gresham’s law
“Bad” (abundant) money drives out “good”
(scarce) money.

5. Classical 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.

6. Price specie flow
mechanism
 GB export goods France
 GB gold France
 Leads to higher price level in GB and it will
slow exports and increase the imports.
 So BOP disequilibrium will eventually
disappear.

7. 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
currencies as a means of gaining
advantage in the world export market.

8.  Major countries was 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.

9. 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.

10.  Major outcomes of the Bretton Woods
conference included the formation of the
International Monetary Fund and the
International Bank for Reconstruction and
Development

11. 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.

12. SMITHSONIAN AGREEMENT
 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.

13.  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%.

14.  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.

15. 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.

16. The jamaica meeting was to revise the
IMF articles of agreement to reflect the
new reality of floating exchange rate
system.
 Floating rates were declared acceptable
 Gold was abandoned as reserve assets.

17. OPEC(Organization of the Petroleum Exporting
Countries)and the Oil Crisis (1973-774)
1. OPEC raised oil prices four fold;
2. Exchange rate turmoil resulted;
3. Caused OPEC nations to earn
large surplus B-O-P.
4. Surpluses recycled to debtor nations
which set up debt crisis of 1980’s.

18. Dollar Crisis (1977-78)
1. U.S. B-O-P difficulties
2. Result of inconsistent
monetary policy in U.S.
3. Dollar value falls as confidence
shrinks.
The Rising Dollar (1980-85)
1. U.S. inflation subsides as the Fed
raises interest rates
2. Rising rates attracts global capital to
U.S.
3. Result: Dollar value
rises.

19. The Sinking Dollar:(1985-87)
1. Dollar revaluated slowly
downward;
2. Plaza Agreement (1985)
G-5 agree to depress US$
further.
3. Louvre Agreement (1987)
G-7 agree to support the
falling US$.

20. Louvre Agreement
 Marked the inception of the managed
float system, in which G7 countries would
jointly intervene in the exchange market
to correct over or undervaluation of
currencies.
 Name given to the five industrialized
nations that meet periodically to achieve
a cooperative effort on international
economic and monetary issues.
G5 - France, Japan, Germany , UK and USA
G7- France, Japan, Germany , UK and USA
Canada and Italy