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International Monetary System
International Monetary System
INTRODUCTION
International Monetary SystemComplex system of international arrangements,
BIMETALLISM(pre-1875)
Commodity money system using both silver and gold
(precious metals) for international payments (and for domestic currency).
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Under a bimetallic standard the silver/gold ratio was
fixed at a legal rate. When the market rate for silver/gold differed substantially from the legal rate, one metal would be overvalued and one would be undervalued. Eg. from 1837-1860 the legal silver/gold ratio was 16/1 and the spot market ratio was 15.5/1. Gold was overvalued at the legal rate, silver was undervalued.
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Under a gold standard, ex-rates would be kept in line
by cross-country gold flows. Example: suppose that the UK Pound is pegged to gold at: 6 Pound/oz., and the franc is pegged at 12 FF/oz, then the official ex-rate should be 2FF/Pound.
1. Possible deflationary pressure for countries. With a fixed supply of gold (fixed money supply), output growth would lead to deflation. 2. An international gold standard has no commitment mechanism, or enforcement mechanism, to keep countries on the gold standard if they decide to abandon gold.
British pound
German mark
French franc
Par Value
U.S. dollar
Pegged at $36/oz.
Gold
In short..
a. Flexible ex-rates allowed, central banks could intervene in currency markets. b. Gold was abandoned as a reserve asset. c. Developing countries were to get more assistance from IMF.
Disadvantages:
a. More Volatility. b. Potential abuse by central bank, reckless monetary expansion.
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