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CHAPTER TWO I N T E R N A T I O N A L M O N E T A R Y S Y S T E M I N T E R N AT I O N A L F I N A N C E * These slides can be utilized to aid you in your studies, but are in no way comprehensive.
INTRODUCTION International Monetary System: The institutional framework within which international payments are made, movements of capital are accommodated, and exchange rates among currencies are determined. - The international monetary system has evolved over time and will continue to do so in the future as the fundamental business and political conditions underlying the world economy continue to shift.
EVOLUTION OF THE INTERNATIONAL MONETARY SYSTEM The International Monetary System went through several distinct stages of evolution: 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
BIMETALLISM: BEFORE 1875 Bimetallism: A double standard maintaining free coinage for both gold and silver. - Before the 1870s, both gold and silver were used as international means of payment and exchange rates among currencies were determined by either their gold or silver contents. - Around 1870, the exchange rate between the British pound, which was fully on a gold standard, and the French franc, which was officially on a bimetallic standard, was determined by the gold content of the two currencies.
BIMETALLISM: BEFORE 1875 Gresham’s law: Under the bimetallic standard, the abundant metal was used as money while the scarce metal was driven out of circulation, based on the fact that the ratio of the two metals was officially fixed. - According to Gresham’s law; “bad” money drives out “good” money. - When one metal becomes abundant, its value depress, causing overvaluation.
CLASSICAL GOLD STANDARD: 1875 - 1914 Gold Standard: A monetary system in which currencies are defined in terms of their gold content. The exchange rate between a pair of currencies is determined by their relative gold contents. - The classical gold standard as an international monetary system lasted about 40 years. - An international gold standard can be said to exist when, in most major countries: (i) Gold alone is assured of unrestricted coinage, (ii) There is two-way convertibility between gold and national currencies at a stable ratio, (iii) Gold may be freely exported or imported.
CLASSICAL GOLD STANDARD: 1875 - 1914

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