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History of the International Monetary System

Supervised by:

Pr. Lamiaa Dandoun

Presented by:

Amine MASROUBI

Hakim KADIRY

Salma GUESSAI

Soumaya GNAOU

Definition:

The monetary system is the set policies and instruments employed by a country to regulate its money supply.

Its external dimension insures the smooth functioning of international trade through exchange rates, convertibility, and international reserves.

History of the monetary system

History

The standards, regulations and policies used for the international monetary system have evolved over time due to the limitations of the previous systems.

Evolution of the monetary system

Through this presentation we will present the following systems:

  • The Bimetallic standard
  • The Gold Standard
  • The Bretton Woods system
  • The flexible exchange rate regime

The Bimetallic Standard

The Bimetallic Standard

A monetary system in which coins composed of gold and silver are recognised by a government as legal tender.

This standard kept in reserve an adequate amount of gold and/ or silver to back a unit of currency to a fixed ratio.

The Mint Ratio

The Mint Ratio

The mint ratio is the fixed rate of exchange for the two metals.

For example:

  • if the mint ratio is equal to 5 it means that one ounce of gold is eaqual to five ounces of silver

=> Meaning that it would take 5 times more silver than gold to back the same value of currency.

History and end of the Bimetallic Standard

The Bimetallic standard was first used in the US in 1792.

However, this system has ended in 1875 due to a statement of the Resumption Act saying that paper money could be reverted to gold in an effort to reduce inflation following the Civil War.

The Gold Standard

The Gold Standard

The Gold standard is monetary system where a currency has its value directly linked to a fixed amount of gold.

The exchange rate between two currencies was determined by their relative gold content.

History

The international Gold Standard was first adopted by Germany in 1871.

The last country to join this monetary system was the US in 1879 due to a strong silver lobby.

The Fall of the Gold Standard

In the wake of WWI, the change of political alliances and a deteriorating economy: a lack of confidence in the Gold standard was created.

Also, considering the scarcity of the newly minted Gold using this monetary standard would have restricted the growth of world trade due to the lack of sufficient monetary reserves.

Bretton Woods Agreement

The Bretton Woods Agreement was developed in 1944 at the United Nations Monetary and Financial Conference.

This conference gathered 44 countries that aimed to ensure a foreign exchange rate system while preventing competitive devaluations and promoting growth.

Outcome of the agreement

The creation of the International Monetary Fund to monitor exchange rates and lend reserve currencies to nations.

The creation of the World Bank to provide financial assistance during the reconstruction following the war

Currency regulations

The Us dollar was considered as a reserve currency linked to the price of gold at $35 per ounce.

The rest of the currencies were pegged to the US dollar

The obligation of each country to maintain its external exchange rate within 1% of the adopted par value by either selling or buying foreign reserves.

Fall of the agreement

Fall of the agreement

The Bretton Woods agreement ended 1971 following the termination of convertibility of the US dollar to gold by making it a fiat currency.

This is known as the Nixon Shock, and it has caused many countries to use the US dollar as the reserve currencies while some major currencies bgan to float.

Floating Exchange Rate Regime

Floating Exchange Rate Regime

The floating exchange rate regime is a system in which the currency exchange rate is set by the Forex Market based on supply and demand in comparison to other currencies.

This regime was allowed to major currencies following the fall of the Bretton woods Agreement.

Fluctuation of the exchange rate

The floating exchange rate regime unlike the fixed exchange rate where the government predetermined the rate: is subject to speculations based on rumors or disasters that can impact a country's currency.

Central Bank Intervention

The Central Bank can react to these extreme short term moves by either selling or buying the local currency to adjust the exchange rate.

Another indirect mean of intervention used by the Central Bank is setting the interest rates to affect the amount of money circulating

Central Bank Intervention

Currency Band

The currency band is system in which the exchange rate can float within a certain range.

Basically, this system sets limits to the fluctuation of the exchange rate relative to a reference currency or currencies.

Currency Band

Conclusion

This presentation shows the evolution of the monetary system through time: starting from a system that uses commodities to back the value of species to one for which the value of a currency fluctuates depending on supply and demand.

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