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Tanima Dutta, Lovely Professional University Unit 25 : International Monetary System

Unit 25 : International Monetary System Notes

CONTENTS
Objectives
Introduction
25.1 Meaning of International Monetary System
25.2 The Bretton Woods System
25.3 The Present International Monetary System
25.4 Summary
25.5 Key-Words
25.6 Review Questions
25.7 Further Readings

Objectives

After reading this Unit students will be able to:
• Know the Meaning of International Monetary System.
• Discuss the Bretton Woods System.
• Explain the Present International Monetary System.
Introduction

The period 1870-1914, is considered as the classical gold standard period. The centre of world trade
and finance was London, and the major currencies led by the British sterling were convertible into
gold at given parities. There was no major currency crisis during this period and no major currency
had to be devalued or revalued. International trade and finance proceeded smoothly; goods and
factors moved across national frontiers with great degree of freedom. Trade restrictions, not altogether
unknown, were not generally used for purposes of the balance of payments adjustments. Deficits
and surpluses were to be corrected by internal deflation and inflation.
International liquidity consisted of gold, and British sterling played the role of a reserve currency
during this period. Sterling constituted an important component of international liquidity, and sterling
was widely used in the settlements of balance of payments obligations. The period was characterised
by relatively stable exchange rates. This was the nature of the world monetary system on the eve of
World War I. If the success of the international monetary system is judged by (a) the facility for
unrestricted trade in goods and services, (b) adequate amount of international liquidity, and (c)
relatively fixed exchange rates, the period of 1870-1914 may be considered as the successful period of
the world monetary system, World war I ended all this.
The inter-war period was characterized by international monetary and exchange rate chaos. The
gold standard was abandoned; trade and tariff restrictions came into prominence; exchange rates
were no longer stable, competitive exchange rate changes and beggar-my-neighbour policies became
the order of the day. A need was felt to put an end to all this and build, instead, a system of international
monetary arrangements in which countries could follow policies directed towards full employment
and stable prices without creating problems for others.
The Bretton Woods System rested on two pillars : the maintenance of stable exchange rates and
multilateral credit mechanism institutionalized in the IMF. In order that exchange rate changes are
conducted in an orderly manner, the authors of the Bretton Woods Agreement insisted on the IMF
approval for exchange rate changes beyond 10 per cent. The Fund would permit changes beyond 10
per cent only if it was satisfied that a ‘fundamental disequilibrium’ existed in the member country’s
balance of payments. The second pillar of the system was the arrangement for international liquidity.

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