4324Ch2 - Chapter 2 International Monetary System We will...

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© Sanjiv Sabherwal, 2015, All rights reserved. 1 1 Chapter 2: International Monetary System We will take a Quick Look at the History of the International Monetary System: - Classical Gold Standard (1875–1914) - Bretton Woods System (1945–1972) - The current situation (1973–) 2 The Classical Gold Standard: 1875–1914 - Major currencies were on gold standard. - Involved commitment by nations to fix the price of domestic currency in terms of a specific amount of gold. Gold and the currency could be interchanged at this price. - Exchange rate between two currencies would be determined based on the price of gold in two currencies. For example, if one ounce of gold was worth $40 in the U.S., and £20 in the U.K., the exchange rate was determined as $40 = £20 or $2/£. - The government of a country on gold standard could issue more money only after acquiring more gold. 3 The Classical Gold Standard: 1875–1914 (… continued) - An advantage of the classical gold standard was that exchange rates were stable, and this stability was conducive to international trade and investment. - A disadvantage was that the world money supply could only increase at the rate of new gold mining. The economic growth in the 1900’s was much greater than the increase in the supply of newly minted gold.
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  • Fall '08
  • Staff
  • International Finance, United States dollar, Bretton Woods, mexican peso crisis, Classical Gold Standard

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