INTERNATIONAL MONETARY SYSTEM

INTRODUCTION:

IMS defines the overall financial environment in which multinational corporations and
international investors operate. It is a rules and procedures by which different national
currencies are exchanged for each other in world trade. Such a system is necessary to define a
common standard of value for the world’s currencies. Ims is set of internationally agreed rules,
conventions and supporting institutions that facilitate international trade. Ims has grown over a
period of time and has successfully tackled periods of stress and strains. It has passed a period
of transition from the system of fixed exchange rates to the system of floating rates.

“IMS can be defined as the institutional frame work which international payments are
made, movements of capital are accommodated and exchange rates among currencies are
determined”.

EVALUTION OF IMS:

The IMS went through several distinct stages of evolution. These stages are summarized as
follows.

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 regime: Since 1973.

1. Bimetallism(SPECIE COMMODITY STANDARD):

In early days, prior to the evaluation of an Ims, trade payments were settled through
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barter, but their were many inconveniences and so to overcome those difficulties, traders
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began using metal, especially gold or silver for settling payments. Subsequently metal took
the form of coins. The coins were full bodied coins meaning that their value was equal to
the value of metal contained therein. Later, the process of coin debasement the value of
metal came to lower than the face value of the coin. Debased coins were largely used as
medium of exchange.

 The process of coin debasement in England during 1542-1551. By 1560 the full bodied
coins almost completely out of circulation.

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  The coinage act of 1792 in the USA accepted the dollar as the monetary unit of the
country and fixed its value of gold and silver.
 France adopted the bimetallic standard in 1803 but the mint ratio between the gold and
silver was 1:15 in the USA compared to 1:15.5 in France.
2. Classical gold standard:
The gold standard possessed broader features than the specie commodity
standard. it originated in England in the seventeenth century when the pound was
minted of gold but it was officially announced in 1816.by the 1870’s the gold standard
was widely adopted. Germany adopted it in 1871 and USA in 1879.

Broad rules:

The essential features of the gold standard were:

 The government adopting it fixed the value of currency in terms of specific weight and
fineness of gold and guaranteed two way convertibility.
 Export and import of gold were allowed so that it could flow freely among the gold
standard countries.
 Central bank acting as the apex monetary institution, held gold reserves in direct
relationship with the currency it had issued.
 Each currency has a specified gold content – par value.
 Currency can be converted into and out of gold at their par value
 No government interference.
3. Interwar period:
World War 1 ended the classical gold standard in August 1914, as major
countries such as great Britain, France, Germany, and Russia suspended redemption on
banknotes in gold and imposed embargoes on gold export. After the war, many
countries especially Germany, Australia, Hungary, Poland, and Russia, suffered
hyperinflation. The Germany experience provides a classical example of hyperinflation.
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By the end of 1923, the WPI in Germany was more than 1 trillion times as high as the
prewar level.

4. Bretton Woods’s system:

In July 1944, representatives of 44 nations gathered at Bretton woods, new
Hampshire, to discuss and design the post war international monetary system. After
lengthy discussions and bargains, representatives succeeded in drafting and signing the
article of agreement of the international monetary fund (IMF).

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 The agreement was ratified majority of countries to launch the IMF in 1945.
Delegates also created a sister institution, the international bank for reconstruction and
development (IBRD), better known as WORLD BANK.

Under Bretton woods system, each country established a par value in relation to
the U.S. dollar which was pegged to gold at $35 per ounce.

British Pound German Mark French franc

Par value Par value Par value

U.S. DOLLAR

Pegged at $35/oz

GOLD

5. Flexible exchange rate regime:

In the view of collapse of Bretton woods system of exchange rate, the board of
governors of IMF appointed committee of 20 suggests guidelines for evolving an
exchange rate system that could be acceptable to the member countries. The report
suggested various options that were discussed at Rambouillet in November 1975. The
broad options under the new exchange rate regime were.
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 Floating –independent and managed

 Pegging of currency
To a single currency
To a basket of currencies
To SDR’s
Crawling peg
Currency board arrangement
 Target zone arrangement

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Regime of Fixed Exchange Rates:

 In this system, a currency is pegged to a foreign currency with fixed parity.

 The rates are maintained constant or they may fluctuate within a narrow range.

 When a currency tends crossing over the limits, governments intervene to keep it
within the band.

 A country pegs its currency to the currency of the country in which the major foreign
transactions are carried out.

 Some countries peg their currencies to SDR.

The currencies to which many other currencies are pegged are:

USD (24 currencies)

French Franc (14 currencies)

SDR (4 currencies)
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