international monetary system

The international monetary system went through several distinct stages of evolution. These stages are summerised as follows: 1) Bimetallism 2) Gold standard 3) Bretton woods system 4) Flexible Exchange rate Regime Bimetallism- Bimetallism means the use of a monetary standard consisting of two metals, especially gold and silver, in a fixed ratio of value. Bimetallism, monetary standard is based upon the use of two metals, traditionally gold and silver, rather than one. In a bimetallic system, the ratio is expressed in terms of weight, e.g., 16 oz of silver equal 1 oz of gold, which is described as a ratio of 16 to 1. As the ratio is determined by law, it has no relation to the commercial value of the metals, which fluctuates constantly. The system provided a free and unlimited market for the two metals, imposed no restrictions on the use and coinage of either metal, and made all other money in circulation redeemable in either gold or silver. A major problem in the international use of bimetallism was that, with each nation independently setting its own rate of exchange between the two metals, the resulting rates often differed widely from country to country. The future of the bimetallic standard apparently had been sealed at an international monetary conference held in Paris in 1867, when most of the delegates voted for the gold standard. Gold standard 1) The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. The gold standard was a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price. England adopted a de facto gold standard in 1717. The United States, though formally on a bimetallic (gold and silver) standard, switched to gold de facto in 1834. The United States fixed the price of gold at $20.67 per ounce, where it remained until 1933. Other major countries joined the gold standard in the 1870s. The period from 1880 to 1914 is known as the classical gold standard. During that time, the majority of countries adhered (in varying degrees) to gold. By the beginning of the world war II, the gold standard was dead. The Bretton Woods system- In 1944, when World War II was at its peak, 730 delegates from all 44 countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. With the collapse of the Gold Standard and the Great Depression of the 1930s fresh in their mind, these statesman wanted to have an enduring economic order that would facilitate post war economic growth. The general consensus was as follows. a) Fixed exchange rates were desirable. b) The participants wanted to avoid the competitive devaluation of the 1930s. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944. Setting up a system of rules, institutions, and procedures to regulate the international monetary system,

the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar. The agreement reached at Bretton Woods contained the following a) IMF and the World Bank were created. The IMF embodoid an explicit set of rules about the conduct of international monetary policies and was responsible for enforcing these rules. The IBRD better known as the World Bank, was chiefly responsible for financing individual development projects. b) Each country established a par value in relation to the U. S. dollar, which was pegged to gold at $ 35 per ounce. The US dollar was the only currency that was fullyconvertible to gold. Other currencies were not convertible to gold. Countries held US dollars as well as gold , for use as an international means of payment c) A commitment by member countries not to use devaluation as a weapon of competitive trade policy.. However if a currency became too weak to defend, a devaluation of upto 10%would be allowed without any formal approval by the IMF. Large devaluation requires IMF approval.