2010 OEM Chapter 4_1

2010 OEM Chapter 4_1 - Chapter 4: International Monetary...

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Chapter 4: International Monetary Systems 4.1 Introduction The international monetary system (IMS) is the framework of institutions and rules within which international financial transactions are conducted and balance of payments imbalances are settled. The principal institutions of today’s IMS are the major commercial banks in financial centers around the world, central banks who act as the monetary authorities of individual countries, and the International Monetary Fund (IMF). Most of these institutions are relatively young, as is the notion of the IMS. Indeed, most historians identify 1880 as the year when most (but not all) countries entered into the first identifiable IMS known as the gold standard. One of the defining characteristics of an IMS is the prevailing behavior of exchange rates of the member countries. During the gold standard, for instance, exchange rates were fixed between participating countries. Since then, the IMS has taken on various forms, alternating between periods of fixed and flexible exchange rates. In this chapter, I provide historical detail on the evolution of the IMS and describe how, and how well the IMS has functioned in its various formats. 4.2 The Gold Standard 1 The first international monetary system was known as the gold standard, which prevailed from about 1880-1914 and then again (but much less successfully) in the late 1920s. The gold standard became a worldwide system over the nineteenth century as more and more countries chose to peg the value of their currencies to the price of gold. The first to do so was Great Britain, which officially adopted a gold standard in 1820. Other countries including the United States and France 2 An excellent collection of articles on the gold standard can be found in Barry Eichengreen, ed., The Gold 1 Standard in Theory and History , Methuen Publishers, 1985. Prior to that it had been on a de facto gold standard for more than 100 years. This had come about because Sir 2 Isaac Newton, in his role as Master of the Mint, made a mistake and set the price of silver too high in terms of gold
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were officially on bimetallic standards, with both silver and gold circulating simultaneously. Over time as new discoveries of silver and then gold occurred throughout the world these countries had trouble stabilizing the price of one metal in terms of another (a necessary condition for both metals to circulate in coinage). Gradually countries chose to adopt a single metallic standard, typically in favor of gold. Germany adopted gold in 1871. Other European countries soon followed, including Holland, Denmark, Norway, Sweden, France, Belgium, Switzerland, Italy, and Greece. In 1879, the United States, Russia, and Japan also adopted gold. By 1880, virtually all of the richer countries of the world were on gold. And, because they were all fixed to gold, their currencies were all fixed to each other. It is important to note that the international gold standard was not a formal agreement
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This note was uploaded on 04/17/2011 for the course ECON 1510 taught by Professor Stevenhusted during the Spring '11 term at Pittsburgh.

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2010 OEM Chapter 4_1 - Chapter 4: International Monetary...

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