A brief history of the IMS

Up to WW II

Outline

Mercantilism

The Gold Standard

The Inter-War Period

The International Monetary System

All foreign exchange arrangements and mechanisms used by various countries

It requires some degree of economic organization, integration, and international cooperation

The IMS

A true IMS appears when international trade becomes:

• significant• permanent• subject to international laws

Why is international trade so important?

It generates foreign exchange

IMS: Glossary of terms

• convertibility = exchanging paper money for gold

• exchange rate = the price of one currency expressed in terms of another currency

• fixed exchange rate system = a system in which governments maintain a fixed exchange rate for long periods of time

• floating exchange rate system = a system in which exchange rates are determined by the market

• devaluation = decrease in the price of a currency under a fixed exchange rate system

• revaluation = increase in the price of a currency under a fixed exchange rate system

• weakening (depreciation) = decrease in the price of a currency under a floating exchange rate system

• strengthening (appreciation) = increase in the price of a currency under a floating exchange rate system

1156: Earliest known foreign exchange contract

Two brothers borrow 115 Genovese pounds and agree to reimburse the bank's agents in

Constantinople the sum of 460 bezants one month after their arrival in that city.

History of the International Monetary System

• Mercantilism: XVI and XVII centuries• Bi-metallism and free trade: up to 1875• Classical Gold Standard: 1875 - 1914• Interwar Period: 1915-1944• Bretton Woods : 1944• The Gold Exchange Standard (1945-1971)• The current IMS

1500-1540:

On average between 1,000 and 1,500 kg. of gold reach Spain each year during this period, obtained by plunder, especially from the Aztecs and Incas

1615

First balance of trade and balance of payments calculations

The calculations for England by Sir Lionell Cranfield and Mr. Wolstenholme are referred to by Sir Francis Bacon in an essay written in 1616

Oliver Cromwell

Mercantilism: XVI and XVII centuries

• Tough restrictions on imports (see the Navy Act)

• Aggressive promotion of exports

• Hoarding of precious metals (see Hernan Cortez)

The Industrial Revolution

England becomes the most productive country in the world

England gains supremacy of the sea...

…and free trade

Bi-metallism and free trade: up to 1875

Coinage was maintained for both gold and silver until the price of silver came down

• Britain abolishes the coinage of silver in 1814

• US abolishes the coinage of silver in 1873

• France abolishes the coinage of silver in 1878

Classical Gold Standard: 1875 - 1914

Gold gains unchallenged supremacy

National currencies are fully convertible

Gold can be freely imported and exported

Trade imbalances are corrected through the price-specie-flow mechanism

1914 - 1918

The Great War

The demise of the great European empires

The first communist country: USSR

Germany: The 1920s

Weimar Republic’s money:The 20 billion mark banknote

Interwar Period: 1915-1944

Hyperinflation in many European countries

The end of the Gold Standard

Economic nationalism and trade wars

Lack of international cooperation

The Great Depression

The rise of the US as a major economic and political power