Evolution of International Monetary System

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The International Monetary System
Chapter Objective:

This chapter serves to introduce the student to the institutional framework within which:

INTERNATIONAL FINANCIAL MANAGEMENT

Chapter Two

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a. International payments are made. Fourth Edition b. The movement of capital is accommodated. EUN / RESNICK c. Exchange rates are determined.

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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res

Chapter Two Outline
      

Evolution of the International Monetary System Current Exchange Rate Arrangements European Monetary System The Mexican Peso Crisis The Asian Currency Crisis The Argentine Peso Crisis Fixed versus Flexible Exchange Rate Regimes

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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res

Evolution of the International Monetary System
Bimetallism: Before 1875  Classical Gold Standard: 1875-1914  Interwar Period: 1915-1944  Bretton Woods System: 1945-1972  The Flexible Exchange Rate Regime: 1973Present


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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res

Bimetallism: Before 1875
A “double standard” in the sense that both gold and silver were used as money.  Both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents.


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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res

Bimetallism: Before 1875 Gresham’s Law
Phenomenon experienced by the countries that were on the bimettalic standard.  Since exchange rate between two currency was fixed officially, only the abundant metal was used as money, driving more scarce metal out of circulation.
 

Gresham’s Law: “Bad” (abundant) money drives out “Good” (scarce) money

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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights res

Classical Gold Standard: 1875-1914


During this period in most major countries:
 



Gold alone was assured of unrestricted coinage There was two-way convertibility between gold

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