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INTERNATIONAL MONETARY SYSTEMS
are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected. The systems can grow organically as the collective result of numerous individual agreements between international economic actors spread over several decades. Alternatively, they can arise from a single architectural vision as happened at Bretton Woods in 1944. This system doesn't have a physical presence, like the Federal Reserve System, nor is it as codified as the Social Security system. Instead, it consists of interlocking rules and procedures and is subject to the foreign exchange market, and therefore to the judgments of currency traders about a currency. Yet there are rules and procedures²exchange rate policies²which public finance officials of various nations have developed and from time to time modify. There are also physical institutions that oversee the international monetary system, the most important of these being the International Monetary Fund. international monetary system rules and procedures by which different national currencies are exchanged for each other in world trade. Such a system is necessary to define a common standard of value for the world's currencies.
Throughout history, precious metals such as gold and silver have been used for trade, termed bullion, and since early history the coins of various issuers ± generally kingdoms and empires ± have been traded. The earliest known records of pre - coinage use of bullion for monetary exchange are from Mesopotamia and Egypt, dating from the third millennium BC. Its believed that at this time money played a relatively minor role in the ordering of economic life for these regions, compared to barter and centralised redistribution - a process where the population surrendered their produce to ruling authorities who then redistrubted it as they saw fit. Coinage is believed to have first developed in China in the late 7th century, and independently at around the same time in Lydia, Asia minor, from where its use spread to near by Greek cities and later to the rest of the world. Sometimes formal monetary systems have been imposed by regional rules. For example scholars have tentatively suggested that the rulerServius Tullius created a primitive monetary system in the archaic period of what was to become the Roman Republic. Tullius reigned in the sixth century BC - several centuries before Rome is believed to have developed a formal coinage system. As with bullion, early use of coinage is believed to have been generally the preserve of the elite. But by about the 4th century they were widely used in Greek cities. Coins were generally supported by the city state authorities, who endeavoured to ensure they retained their values regardless of fluctuations in the availability of whatever base precious metals they were made from. From Greece the use of coins spread slowly westwards throughout Europe, and eastwards to India. Coins were in use in India from about 400BC, initially they played a greater role in religion than trade, but by the 2nd century had become central to commercial transactions. Monetary systems developed in India were so successful they continued to spread through parts of Asia well into the Middle Ages. As multiple coins became common within a region, they have been exchanged by moneychangers, which are the predecessors of today'sforeign exchange market. These are famously discussed in the Biblical story of Jesus and the money changers. In Venice and the Italian city states of the early Middle Ages, money changes would often have to struggle to perform calculations involving six or more currencies. This partly let to Fibonacci writing his Liber Abaciwhere he popularised the use of Arabic numerals which displaced the more difficult roman numerals then in use by western merchants. When a given nation or empire has achieved regional hegemony, its currency has been a basis for international trade, and hence for a de facto monetary system. In the West ± Europe and the Middle East ± an early such coin was the Persian daric, of the Persian empire. This was succeeded by Roman currency of the Roman empire, such as the denarius, then the Gold Dinar of the Muslim empire, and later ± from the 16th to 20th centuries, during the Age of Imperialism ± by the currency of European colonial powers: the Spanish dollar, the Dutch Gilder, the French Franc 1
Mariesachiemitsuipadilloyutiano 2010 and the British Pound Sterling; at times one currency has been pre-eminent, at times no one dominated. With the growth of American power, the US Dollar became the basis for the international monetary system, formalized in the Bretton Woods agreement that established the post-World War II monetary order, with fixed exchange rates of currencies to the dollar, and convertibility of the dollar into gold. Since the breakdown of the Bretton Woods system, culminating in the Nixon shock of 1971, ending convertibility, the US dollar has remained the de facto basis of the world monetary system, though no longer de jure, with various European currencies and the Japanese Yen being used. Since the formation of the Euro, the Euro has gained use as a reserve currency and a unit of transactions, though the dollar has remained the primary currency. A dominant currency may be used directly or indirectly by other nations ± for example, English kings minted gold mancus, presumably to function as dinars to exchange with Islamic Spain, and more recently, a number of nations have used the US dollar as their local currency, a custom called dollarization. Until the 19th century, the global monetary system was loosely linked at best, with Europe, the Americas, India and China (among others) having largely separate economies, and hence monetary systems were regional. European colonization of the Americas, starting with the Spanish empire, led to the integration of American and European economies and monetary systems, and European colonization of Asia led to the dominance of European currencies, notably the British pound sterling in the 19th century, succeeded by the US dollar in the 20th century. Some, such as Michael Hudson, foresee the decline of a single basis for the global monetary system, and instead the emergence of regional trade blocs, citing the emergence of the Euro as an example of this phenomenon. See also Global financial systems , world-systems approach and polarity in international relations. It was in the later half of the 19th century that a monetary system with close to universal global participation emerged, based on the gold standard. History of modern global monetary orders The pre WWI financial order: 1870±1914 From the 1870s to the outbreak of World War I in 1914, the world benefited from a well integrated financial order, sometimes known as theFirst age of Globalisation.   Money unions were operating which effectively allowed members to accept each others currency as legal tender including the Latin Monetary Union (Belgium, Italy, Switzerland, France) and Scandinavian monetary union (Denmark, Norway and Sweden). In the absence of shared membership of a union, transactions were facilitated by widespread participation in the gold standard, by both independent nations and their colonies. Great Britain was at the time the world's pre-eminent financial, imperial, and industrial power, ruling more of the world and exporting more capital as a percentage of her national income than any other creditor nation has since. While capital controls comparable to the Bretton Woods System were not in place, damaging capital flows were far less common than they were to be in the post 1971 era. In fact Great Britain's capital exports helped to correct global imbalances as they tended to be counter cyclical, rising when Britain's economy went into recession, thus compensating other states for income lost from export of goods.Accordingly, this era saw mostly steady growth and a relatively low level of financial crises. In contrast to the Breton Woods system, the pre-World War I financial order was not created at a single high level conference; rather it evolved organically in a series of discrete steps. Between the World Wars: 1919±1939 This era saw periods of world wide economic hardship. The image is Dorothea Lange's Migrant Mother depiction of destitute pea-pickers in California, taken in March 1936. The years between the world wars have been described as a period of de-globalisation, as both international trade and capital flows shrank compared to the period before World War I. During World War I countries had abandoned the gold standard and, except for the United States, returned to it only briefly. By the early 30's the prevailing order was essentially a fragmented system of floating exchange rates . In this era, the experience of Great Britain and others was that the gold standard ran counter to the need to retain domestic policy autonomy. To protect their reserves of gold countries would sometimes need to raise interest rates and generally follow a deflationary policy. The greatest need for this could arise in a downturn, just when leaders would have preferred to lower rates to encourage growth. Economist Nicholas Davenport had even argued that the wish to return Britain to the gold standard, "sprang from a sadistic desire by the Bankers to inflict pain on the British working class." By the end of World War I, Great Britain was heavily indebted to the United States, allowing the USA to largely displace her as the worlds number one financial power. The United States however was reluctant to assume Great Britain's leadership role, partly due to isolationist influences and a focus on domestic concerns. In contrast to Great Britain in the previous era, capital exports from the US were not counter cyclical. They expanded rapidly with the United States's economic growth in the twenties up to 1928, but then almost completely halted as the US economy began slowing in that year. As the Great Depression intensified in 1930, financial institutions were hit hard along with 2
Mariesachiemitsuipadilloyutiano 2010 trade; in 1930 alone 1345 US banks collapsed.  During the 1930s the United States raised trade barriers, refused to act as an international lender of last resort, and refused calls to cancel war debts, all of which further aggravated economic hardship for other countries. According to economist John Maynard Keynes another factor contributing to the turbulent economic performance of this era was the insistence of French premier Clemenceau that Germany pay war reparations at too high a level, which Keynes described in his book The Economic Consequences of the Peace. The Bretton Woods Era: 1945±1971 British and American policy makers began to plan the post war international monetary system in the early 1940s. The objective was to create an order that combined the benefits of an integrated and relatively liberal international system with the freedom for governments to pursue domestic policies aimed at promoting full employment and social wellbeing . The principal architects of the new system, John Maynard Keynes and Harry Dexter White, created a plan which was endorsed by the 42 countries attending the 1944 Bretton Woods conference. The plan involved nations agreeing to a system of fixed but adjustable exchange rates where the currencies were pegged against the dollar, with the dollar itself convertible into gold. So in effect this was a gold ± dollar exchange standard. There were a number of improvements on the old gold standard. Two international institutions, the International Monetary Fund (IMF) and the World Bank were created; A key part of their function was to replace private finance as more reliable source of lending for investment projects in developing states. At the time the soon to be defeated powers of Germany and Japan were envisaged as states soon to be in need of such development, and there was a desire from both the US and Britain not to see the defeated powers saddled with punitive sanctions that would inflict lasting pain on future generations. The new exchange rate system allowed countries facing economic hardship to devalue their currencies by up to 10% against the dollar (more if approved by the IMF) ± thus they would not be forced to undergo deflation to stay in the gold standard. A system of capital controls was introduced to protect countries from the damaging effects of capital flight and to allow countries to pursue independent macro economic policies  while still welcoming flows intended for productive investment. Keynes had argued against the dollar having such a central role in the monetary system, and suggested an international currency called Bancorbe used instead, but he was overruled by the Americans. Towards the end of the Breton Woods era, the central role of the dollar became a problem as international demand eventually forced the US to run a persistent trade deficit, which undermined confidence in the dollar. This, together with the emergence of a parallel market for gold where the price soared above the official US mandated price, led to speculators running down the US gold reserves. Even when convertibility was restricted to nations only, some, notably France,continued building up hoards of gold at the expense of the US. Eventually these pressures caused President Nixon to end all convertibility into gold on 15 August 1971. This event marked the effective end of the Bretton Woods systems; attempts were made to find other mechanisms to preserve the fixed exchange rates over the next few years, but they were not successful, resulting in a system of floating exchange rates. The post Bretton Woods system: 1971 ± present An alternative name for the post Bretton Woods system is the Washington Consensus. While the name was coined in 1989, the associated economic system came into effect years earlier: according to economic historian Lord Skiedelsky the Washington Consensus is generally seen as spanning 1980±2009 (the latter half of the 1970s being a transitional period). The transition away from Bretton Woods was marked by a switch from a state led to a market led system. The Bretton Wood system is considered by economic historians to have broken down in the 1970s: crucial events being Nixon suspending the dollar's convertibility into gold in 1971, the United states abandonment of Capital Controls in 1974, and Great Britain's ending of capital controls in 1979 which was swiftly copied by most other major economies. In some parts of the developing world, liberalisation brought significant benefits for large sections of the population ± most prominently withDeng Xiaoping's reforms in China since 1978 and the liberalisation of India after her 1991 crisis. Generally the industrial nations experienced much slower growth and higher unemployment than in the previous era, and according to Professor Gordon Fletcher in retrospect the 1950s and 60s when the Bretton Woods system was operating came to be seen as a golden age. Financial crises have been more intense and have increased in frequency by about 300% ± with the damaging effects prior to 2008 being chiefly felt in the emerging economies. On the positive side, at least until 2008 investors have frequently achieved very high rates of return, with salaries and bonuses in the financial sector reaching record levels. The "Revived Bretton Woods system" identified in 2003 From 2003, economists such as Michael P. Dooley, Peter M. Garber, and David Folkerts-Landau began writing papers describing the emergence of a new international system involving an interdependency between states with 3
Mariesachiemitsuipadilloyutiano 2010 generally high savings in Asia lending and exporting to western states with generally high spending. Similar to the original Bretton Woods, this included Asian currencies being pegged to the dollar, though this time by the unilateral intervention of Asian governments in the currency market to stop their currencies appreciating. The developing world as a whole stopped running current account deficits in 1999 ± widely seen as a response to unsympathetic treatment following the 1997 Asian Financial Crisis. The most striking example of east-west interdependency is the relationship between China and America, which Niall Ferguson calls Chimerica. From 2004, Dooley et al. began using the term Bretton Woods II to describe this de facto state of affairs, and continue to do so as late as 2009. Others have described this supposed "Bretton Woods II", sometimes called "New Bretton Woods", as a "fiction", and called for the elimination of the structural imbalances that underlie it, viz, the chronic US current account deficit. However since at least 2007 those authors have also used the term "Bretton Woods II" to call for a new de jure system: for key international financial institutions like the IMF and World Bank to be revamped to meet the demands of the current age, and between 2008 to mid 2009 the terms Bretton Woods II and New Bretton Woods was increasingly used in the latter sense. By late 2009, with less emphases on structural reform to the international monetary system and more attention being paid to issues such as re-balancing the world economy,Bretton Woods II is again frequently used to refer to the practice some countries have of unilaterally pegging their currencies to the dollar.
Calls for a "New Bretton Woods" Leading financial journalist Martin Wolf has reported that all financial crises since 1971 have been preceded by large capital inflows into affected regions. While ever since the seventies there have been numerous calls from the global justice movement for a revamped international system to tackle the problem of unfettered capital flows, it wasn't until late 2008 that this idea began to receive substantial support from leading politicians. On September 26, 2008, French President Nicolas Sarkozy, then also the President of the European Union, said, "We must rethink the financial system from scratch, as at Bretton Woods." On October 13, 2008, British Prime Minister Gordon Brown  said world leaders must meet to agree to a new economic system: ³ We must have a new Bretton Woods, building a new international financial architecture for the years ahead. ´
However, Brown's approach is quite different to the original Bretton Woods system, emphasising the continuation of globalization and free trade as opposed to a return to fixed exchange rates . There have been tensions between Brown and Sarkozy, who argues that the "Anglo-Saxon" model of unrestrained markets has failed. However European leaders were united in calling for a "Bretton Woods II" summit to redesign the world's financial architecture. President Bush was agreeable to the calls, and the resulting meeting was the 2008 G-20 Washington summit. International agreement was achieved for the common adoption of Keynesian fiscal stimulus  , an area where the US and China were to emerge as the worlds leading actors. Yet there was no substantial progress towards reforming the international financial system, and nor was there at the 2009 meeting of the World Economic Forum at Davos  Despite this lack of results leaders have continued to campaign for Bretton Woods II. Italian Economics Minister Giulio Tremonti has said that Italy will use its 2009 G7 chairmanship to push for a "New Bretton Woods." He has been critical of the U.S.'s response to the global financial crisis of 2008, and has suggested that the dollar may be superseded as the base currency of the Bretton Woods system.   Choike, a portal organisation representing southern hemisphere NGOs, has called for the establishment of "international permanent and binding mechanisms of control over capital flows" and as of March 2009 has achieved over 550 signatories from civil society organisations.  March 2009 saw Gordon Brown continuing to advocate for reform and the granting of extended powers to international financial institutions like the IMF at the April G20 summit in London and is said to have president Obama's support . Also during March 2009, in a speech entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of thePeople's Bank of China came out in favour of Keynes's idea of a centrally managed global reserve currency. Dr Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes's Bancor. Dr Zhou said that national currencies were unsuitable for use as global reserve currencies as a result of theTriffin dilemma - the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries' demand for reserve currency. Dr Zhou proposed a gradual move towards increased used of IMF Special Drawing Rights (SDRs) as a centrally managed global reserve currency   His proposal attracted much international attention; in a November 2009 article published in Foreign Affairs magazine, economist C. Fred Bergsten argued that Dr Zhou's suggestion or a similar change to the international monetary system would be in the United States' best interests as 4
Mariesachiemitsuipadilloyutiano 2010 well as the rest of the world's. Leaders meeting in April at the 2009 G-20 London summit agreed to allow $250 Billion of SDRs to be created by the IMF, to be distributed to all IMF members according to each countries voting rights. In the aftermath of the summit, Gordon Brown declared "the Washington Consensus is over". However in a book published during September 2009, Skidelsky argued it is still too early to say whether a new international monetary system is emerging. On Jan 27, in his opening address to the 2010 World Economic Forum in Davos, President Sarkozy repeated his call for a new Bretton Woods, and was met by wild applause by a sizeable proportion of the audience.
Exchange Rate Policies
In July 1944, representatives from 45 nations met in Bretton Woods, New Hampshire to discuss the recovery of Europe from World War II and to resolve international trade and monetary issues. The resulting Bretton Woods Agreement established the International Bank for Reconstruction and Development (the World Bank) to provide longterm loans to assist Europe's recovery. It also established the International Monetary Fund (IMF) to manage the international monetary system of fixed exchange rates, which was also developed at the conference. The new monetary system established more stable exchange rates than those of the 1930s, a decade characterized by restrictive trade policies. Under the Bretton Woods Agreement, IMF member nations agreed to a system of exchange rates that pegged the value of the dollar to the price of gold and pegged other currencies to the dollar. This system remained in place until 1972. In 1972, the Bretton Woods system of pegged exchange rates broke down forever and was replaced by the system of managed floating exchange rates that we have today. The Bretton Woods system broke down because the dynamics of supply, demand, and prices in a nation affect the true value of its currency, regardless of fixed rate schemes or pegging policies. When those dynamics are not reflected in the foreign exchange value of the currency, the currency becomes overvalued or undervalued in terms of other currencies. Its price²fixed or otherwise²becomes too high or too low, given the economic fundamentals of the nation and the dynamics of supply, demand, and prices. When this occurs, the flows of international trade and payments are distorted. In the 1960s, rising costs in the United States made U.S. exports uncompetitive. At the same time, western Europe and Japan emerged from the wreckage of World War II to become productive economies that could compete with the United States. As a result, the U.S. dollar became overvalued under the fixed exchange rate system. This caused a drain on the U.S. gold supply, because foreigners preferred to hold gold rather than overvalued dollars. By 1970, U.S. gold reserves decreased to about $10 billion, a drop of more than 50 percent from the peak of $24 billion in 1949. In 1971, the U.S. decided to let the dollar float against other currencies so it could find its proper value and imbalances in trade and international funds flows could be corrected. This indeed occurred and evolved into the managed float system of today. A nation manages the value of its currency by buying or selling it on the foreign exchange market. If a nation's central bank buys its currency, the supply of that currency decreases and the supply of other currencies increases relative to it. This increases the value of its currency. On the other hand, if a nation's central bank sells its currency, the supply of that currency on the market increases, and the supply of other currencies decreases relative to it. This decreases the value of its currency. The International Monetary Fund plays a key role in operations that help a nation manage the value of its currency. The International Monetary Fund The International Monetary Fund (www.imf.org) is like a central bank for the world's central banks. It is headquartered in Washington, D.C., has 184 member nations, and cooperates closely with the World Bank, which we discuss in The Global Market and Developing Nations. The IMF has a board of governors consisting of one representative from each member nation. The board of governors elects a 20-member executive board to conduct regular operations. The goals of the IMF are to promote world trade, stable exchange rates, and orderly correction of balance of payments problems. One important part of this is preventing situations in which a nation devalues its currency purely to promote its exports. That kind of devaluation is often considered unfairly competitive if underlying issues, such as poor fiscal and monetary policies, are not addressed by the nation. 5
Mariesachiemitsuipadilloyutiano 2010 Member nations maintain funds in the form of currency reserve units called Special Drawing Rights (SDRs) on deposit with the IMF. (This is a bit like the federal funds that U.S. commercial banks keep on deposit with the Federal Reserve.) From 1974 to 1980, the value of SDRs was based on the currencies of 16 leading trading nations. Since 1980, it has been based on the currencies of the five largest exporting nations. From 1990 to 2000, these were the United States, Japan, Great Britain, Germany, and France. The value of SDRs is reassigned every five years. SDRs are held in the accounts of IMF nations in proportion to their contribution to the fund. (The United States is the largest contributor, accounting for about 25 percent of the fund.) Participating nations agree to accept SDRs in exchange for reserve currencies²that is, foreign exchange currencies²in settling international accounts. All IMF accounting is done in SDRs, and commercial banks accept SDR-denominated deposits. By using SDRs as the unit of value, the IMF simplifies its own and its member nations' payment and accounting procedures. In addition to maintaining the system of SDRs and promoting international liquidity, the IMF monitors worldwide economic developments, and provides policy advice, loans, and technical assistance in situations like the following:
After the collapse of the Soviet Union, the IMF helped Russia, the Baltic states, and other former Soviet countries set up treasury systems to assist them in moving from planned to market-based economies. During the Asian financial crisis of 1997 and 1998, the IMF helped Korea to bolster its reserves. The IMF pledged $21 billion to help Korea reform its economy, restructure its financial and corporate sectors, and recover from recession. In 2000, the IMF Executive Board urged the Japanese government to stimulate growth by keeping interest rates low, encouraging bank restructuring, and promoting deregulation. In October 2000, the IMF approved a $52 million loan for Kenya to help it deal with severe drought. This was part of a three-year $193 million loan under an IMF lending program for low-income nations.
Most economists judge the current international monetary system a success. It permits market forces and national economic performance to determine the value of foreign currencies, yet enables nations to maintain orderly foreign exchange markets by cooperating through the IMF. The EU and the Euro The biggest news on the foreign currency front over the past few years is the adoption of the euro by the European Union (EU). Twelve member states of the EU use the euro instead of their old local currencies: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain. Nations that adopt the euro participate in a single EU monetary policy and are subject to fiscal guidelines requiring them to keep deficits to a certain level and to balance their federal budgets by 2006. Although it will reconsider the matter again, Britain has refused to adopt the euro and has stuck with the pound sterling. This reflects England's traditional sense of ³apartness´ from continental Europe and its reluctance to give up sovereignty over its economic policies.
The Gold and Gold Bullion Standards The first modern international monetary system was the gold standard. Operating during the late 19th and early 20th cents., the gold standard provided for the free circulation between nations of gold coins of standard specification. Under the system, gold was the only standard of value. The advantages of the system lay in its stabilizing influence. A nation that exported more than it imported would receive gold in payment of the balance; such an influx of gold raised prices, and thus lowered the value of the domestic currency. Higher prices resulted in decreasing the demand for exports, an outflow of gold to pay for the now relatively cheap imports, and a return to the original price level (see balance of trade and balance of payments ). A major defect in such a system was its inherent lack of liquidity; the world's supply of money would necessarily be limited by the world's supply of gold. Moreover, any unusual increase in the supply of gold, such as the discovery of a rich lode, would cause prices to rise abruptly. For these reasons and others, the international gold standard broke down in 1914. During the 1920s the gold standard was replaced by the gold bullion standard, under which nations no longer minted 6
Mariesachiemitsuipadilloyutiano 2010 gold coins but backed their currencies with gold bullion and agreed to buy and sell the bullion at a fixed price. This system, too, was abandoned in the 1930s. The Gold-Exchange System In the decades following World War II, international trade was conducted according to the gold-exchange standard. Under such a system, nations fix the value of their currencies not with respect to gold, but to some foreign currency, which is in turn fixed to and redeemable in gold. Most nations fixed their currencies to the U.S. dollar and retained dollar reserves in the United States, which was known as the "key currency" country. At the Bretton Woods international conference in 1944, a system of fixed exchange rates was adopted, and the International Monetary Fund (IMF) was created with the task of maintaining stable exchange rates on a global level. The Two-Tier System During the 1960s, as U.S. commitments abroad drew gold reserves from the nation, confidence in the dollar weakened, leading some dollar-holding countries and speculators to seek exchange of their dollars for gold. A severe drain on U.S. gold reserves developed and, in order to correct the situation, the so-called two-tier system was created in 1968. In the official tier, consisting of central bank gold traders, the value of gold was set at $35 an ounce, and gold payments to noncentral bankers were prohibited. In the free-market tier, consisting of all nongovernmental gold traders, gold was completely demonetized, with its price set by supply and demand. Gold and the U.S. dollar remained the major reserve assets for the world's central banks, althoughSpecial Drawing Rights were created in the late 1960s as a new reserve currency. Despite such measures, the drain on U.S. gold reserves continued into the 1970s, and in 1971 the United States was forced to abandon gold convertibility, leaving the world without a single, unified international monetary system. Floating Exchange Rates and Recent Developments Widespread inflation after the United States abandoned gold convertibility forced the IMF to agree (1976) on a system of floating exchange rates, by which the gold standard became obsolete and the values of various currencies were to be determined by the market. In the late 20th cent., the Japanese yen and the German Deutschmark strengthened and became increasingly important in international financial markets, while the U.S. dollar²although still the most important national currency²weakened with respect to them and diminished in importance. The euro was introduced in financial markets in 1999 as replacement for the currencies (including the Deutschmark) of 11 countries belonging to the European Union (EU); it began circulating in 2002 in 12 EU nations (see European Monetary System ). The euro replaced the European Currency Unit, which had become the second most commonly used currency after the dollar in the primary international bond market. Many large companies use the euro rather than the dollar in bond trading, with the goal of receiving a better exchange rate.
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