history of international monetary system
CHAPTER 2 SUMMARIZED NOTES
A) THE EVOLUTION OF INTERNATIONAL MONETARY SYSTEM
1) THE CLASSICAL GOLD STANDARD ERA (1870-1914)
Characteristics:
All currencies are valued in terms of their gold equivalent and thus all currencies are linked together.
Eg: 1 ounce of gold = $20.67 1 ounce of gold = £4.25 so 1£ = (20.67 /4.25) = $4.87
Money has a value fixed in terms of commodity gold.
Since gold is costly to produce, governments could not easily increase their money supply. Supply of money is restricted by the supply of gold.
Advantages :
Controlling inflation and balance-of-trade equilibrium through money supply.
Eg: Country A Bal.of.Pay. Deficit Money Supply Prices (Inflation)
Country B Bal.of.Pay. Surplus Money Supply Prices (Inflation)
Explanation :
Country A imports more than it exports which in turn leads to net outflow of gold reducing money suppply and prices. Country B, on the other hand, exports more than it imports leading to net inflow of gold increasing its money supply and prices. As a result, Country A’s products become cheaper leading to an increase in exports reducing balance of payments deficit. On the contrary, Country B’s products become more expensive leading to decrease in exports and balance of payments surplus. This process helps achieve balance of payments disequlibrium.
Controlling the exchange rate volatility by establishing fixed exchange rates per gold.
Maintaining balance-of-payments equlibrium and price stable exchange rates help improve the growth of world trade.
2) THE INTERWAR PERIOD (1918-1939):
Characteristics:
It flourished as war related restrictions stopped gold flows and gold standard. Countries started printing money to finance their military expenditures causing hyperinflation.
Eg: By the end of 1923, Price Index in Germany was 1 trillion times higher than pre-war level.
US, UK, and France turned
A) THE EVOLUTION OF INTERNATIONAL MONETARY SYSTEM
1) THE CLASSICAL GOLD STANDARD ERA (1870-1914)
Characteristics:
All currencies are valued in terms of their gold equivalent and thus all currencies are linked together.
Eg: 1 ounce of gold = $20.67 1 ounce of gold = £4.25 so 1£ = (20.67 /4.25) = $4.87
Money has a value fixed in terms of commodity gold.
Since gold is costly to produce, governments could not easily increase their money supply. Supply of money is restricted by the supply of gold.
Advantages :
Controlling inflation and balance-of-trade equilibrium through money supply.
Eg: Country A Bal.of.Pay. Deficit Money Supply Prices (Inflation)
Country B Bal.of.Pay. Surplus Money Supply Prices (Inflation)
Explanation :
Country A imports more than it exports which in turn leads to net outflow of gold reducing money suppply and prices. Country B, on the other hand, exports more than it imports leading to net inflow of gold increasing its money supply and prices. As a result, Country A’s products become cheaper leading to an increase in exports reducing balance of payments deficit. On the contrary, Country B’s products become more expensive leading to decrease in exports and balance of payments surplus. This process helps achieve balance of payments disequlibrium.
Controlling the exchange rate volatility by establishing fixed exchange rates per gold.
Maintaining balance-of-payments equlibrium and price stable exchange rates help improve the growth of world trade.
2) THE INTERWAR PERIOD (1918-1939):
Characteristics:
It flourished as war related restrictions stopped gold flows and gold standard. Countries started printing money to finance their military expenditures causing hyperinflation.
Eg: By the end of 1923, Price Index in Germany was 1 trillion times higher than pre-war level.
US, UK, and France turned