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Chapter 11 - The international monetary system. The main goals of this chapter are to: Present a historical overview of the main forms of the international monetary system, explain how the international monetary (IMF) system functions and some major current issues related to the IMF, understand the case for a fixed rate regime and for a floating exchange rate regime,. | Chapter 11 The international monetary system 11– Lecture plan Brief history of the international monetary system – gold standard; the Bretton Woods system; the floating exchange rate system Fixed exchange rates vs floating exchange rates European Monetary System Issues related to the IMF 11– The international monetary system The gold standard The Bretton Woods system (1944); fixed exchange rate system The floating exchange rate system 11– The gold standard system Under the gold standard, countries pegged their currency to gold . At one time, for example, the US government would agree to exchange one dollar for 23.22 grains of gold (1 ounce = 480 grains). The exchange rate between currencies was determined based on how much gold a unit of each currency would buy. The gold standard worked fairly well until the inter-war years and the Great Depression. Following competitive devaluations (e.g. for export support), people lost confidence in the system and started to demand gold for their currency. 11– The Bretton Woods system (1944) Provided for two multinational institutions the IMF and World Bank. The US dollar was to be pegged and convertible to gold, and other currencies would set their exchange rates relative to the dollar. A country could not devalue the currency by more than 10% without IMF approval. Fixed exchange rates were to force countries to have greater monetary discipline. Some flexibility through the use of short-term funds from the IMF to help support currencies during temporary pressures for revaluation. 11– The collapse of the fixed exchange rate system The fixed exchange rate system established in Bretton Woods collapsed mainly due to economic management of USA (Vietnam war fiscal crisis). Speculation that the dollar would have to be devalued relative to most other currencies forced other countries to increase the value of their currency relative to the dollar. The Bretton Woods system relied on an economically well managed US. . | Chapter 11 The international monetary system 11– Lecture plan Brief history of the international monetary system – gold standard; the Bretton Woods system; the floating exchange rate system Fixed exchange rates vs floating exchange rates European Monetary System Issues related to the IMF 11– The international monetary system The gold standard The Bretton Woods system (1944); fixed exchange rate system The floating exchange rate system 11– The gold standard system Under the gold standard, countries pegged their currency to gold . At one time, for example, the US government would agree to exchange one dollar for 23.22 grains of gold (1 ounce = 480 grains). The exchange rate between currencies was determined based on how much gold a unit of each currency would buy. The gold standard worked fairly well until the inter-war years and the Great Depression. Following competitive devaluations (e.g. for export support), people lost confidence in the system and started to demand .
