Faculty of Business Administration

Master of International Business (MIB)

Chapter 10
The Global Monetary System
Lecturer: HE. RETH CHANTHOUN

Subject: Global Business Strategy

Date: April 03, 2022

 The
Global
Monetary
System
Learning Objectives

1. Define the meaning of international monetary system.

2. Explain the role played by the World Bank and the IMF in the international monetary system.

3. Compare and contrast the differences between a fixed and a floating exchange rate system.

4. Identify exchange rate regimes used in the world today and why countries adopt different exchange rate

regions.

5. Understand the debate surrounding the role of the IMF in the management of financial crises.

6. Explain the implications of the global monetary system for currency management and business strategy.

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 Team Members

Long Solida Hem Monisreylin Tang Hokkheang

The International Monetary The Role of World Bank Pegged Exchange Rates
System
The Collapse of Bretton Wood Currency Boards
The Bretton Woods System
The Floating Exchange Rate Crisis Management by the IMF
The roles of IMF
Fixed Vs Floating Exchange Financial Crises in the Post-Bretton Woods
Summary Rate Era
The Criticism for IMF
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Introduction
What is International monetary system?
The International Monetary System refers to the institutional
arrangements that countries adopt to govern exchange rates.

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 The Gold Standard

Gold Standard is a monetary system where a country’s

currency or paper money has a value directly linked to gold.

• The United Kingdom: 1821-1931

• The United States: 1834-1933

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The Gold Standard (Con.)

The Period
Mechanics of the Strength of the
Between the
Gold Standard Gold Standard
Wars: 1918-1939
The key strength of the The gold standard worked
The gold stand refers to gold standard was its fairly well from the 1870s
until the start of World War
the practice of pegging powerful mechanism for I.
currencies to gold and simultaneously allowing
guaranteeing After the war countries
all countries to achieve started regularly devaluing
convertibility. balance-of-trade their currencies to try to
equilibrium encourage exports.

The exchange rate Confidence in the system fell,

When the income a
between currencies was and people began to demand
country’s residents earn gold for their currency putting
based on the gold par
from its exports is equal pressure on countries’ gold
value – the amount of a reserves, and forcing them to
to the money its
currency needed to suspend gold convertibility.
residents pay for
purchase one ounce of The gold standard ended in
imports. 1939.
gold.
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The Bretton Woods System

The Bretton Woods System required a

currency peg to the U.S. dollar which was in

turn pegged to the price of gold. V

S

The Bretton Woods system was originally

designed to prevent another Great
Depression and advance he economic
interests of the United States.
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The Bretton Woods System (Cont.)
The new international monetary system was designed in 1944
in Bretton Woods, New Hamphire.

The Bretton Woods Agreement established two

multinational institutions

1. The International Monetary Fund (IMF) to maintain

order in the international monetary system.

2. The World Bank to promote general economic

development

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The role of the IMF
IMF was established to monitor the fixed exchange rate system.

Discipline Flexibility
• The need to maintain a fixed exchange rate A rigid policy of fixed exchange rates would be too

puts a brake on competitive devaluations inflexible.

and brings stability to the world trade • The IMF was ready to lend foreign currencies to

environment. members to tide them over during short periods of

• A fixed exchange rate regime imposes balance-of-payments deficits.

monetary discipline on countries, thereby • A country could devalue its currency by more than

curtailing price inflation. 10 percent with IMF approval.

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The Role of World Bank
World Bank (IBRD-International The International Development
Bank for Reconstruction and Agency (IDA), an arm of the
Development) role bank created in 1960

 Refinance post-WWII  Raises funds from member

reconstruction and development states
 Provide low-interest long term  Loans only to poorest countries
loans to developing economies  50 year repayment at 1% per
year interest

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The Collapse of Bretton Wood
Devaluation pressures on US dollar after 20 years
 The system of fixed exchange rates established
at Bretton Woods worked well until the late 1960's
 The US dollar was only currency that could be
converted into gold
 The US dollar served as the reference point for
all other currencies
 Any pressure to devalue the dollar would cause
problems through out the world

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The Collapse of Bretton Wood (Con.)
The factors led to the collapse of fixed exchange system
 President Johnson financed both the Great Society
and Vietnam by Printing money
 High inflation and high spending on imports
 On 8 August 1971, President Nixon announces dollar
no longer convertible into gold
 Countries agreed to revalue their currencies against
the dollar
 On 19 March 1972, Japan and most of Europe
floated their currencies
 In 1973, Bretton Woods fails because the key
currency (dollar) is under speculative attack
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The Floating Exchange Rates
 Following the collapse of the Bretton Woods
agreement (Fixed Exchange Rates), a floating
exchange rate regime was formalized in 1976 in
Jamaica.
 Floating rates declared acceptable
 Gold abandoned as reserve asset;
 IMF returned its gold reserves to its members at
current prices
 Proceeds were placed in a trust fund to help poor
nations
 IMF quotas – member country contributions –
increased; membership now 182 countries
 Less-develop, non-oil exporting countries given
more access to IMF
 IMF continued its role of helping countries cope with
macroeconomic
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Fixed Vs Float Exchange Rates
• The Case for Floating Rates
 Monetary Policy Autonomy
• The removal of the obligation to maintain exchange rate
parity restores monetary control to a government
• With a fixed system, a country’s ability to expand or contract
its money supply is limited by the need to maintain exchange
rate parity
 Trade Balance Adjustments
• The balance of payments adjustment mechanism works more
smoothly under a floating exchange rate regime
• Under the Bretton Woods system (Fixed System), IMF
approval was needed to correct a permanent deficit in a
country’s balance of trade that could not be corrected by
domestic policy alone
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Fixed Vs Float Exchange Rates (Con.)
• The Case for Fixed Rates
 Monetary Discipline
• A fixed exchange rate system requires maintaining exchange
rate parity, it also ensures that governments do not expand their
money supplies at inflationary rates
 Speculation
• A fixed exchange rate regime prevents destabilizing speculation
 Uncertainty
• The uncertainty associated with floating exchange rates makes
business transactions more risky
 Trade Balance Adjustments
• Floating rates help adjust trade imbalances

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Who is Right?
Favor a fixed exchange rate

Favor a floating exchange rate

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Pegged Exchange Rates
• Fixed exchange rate
• A country will peg the value
of its currency to that of a
major currency
• popular among many of
the world’s smaller
nations
• A pegged exchange rate
regime does moderate
inflationary pressures in a
country.

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 Currency Boards
• A country that introduces a currency board
commits itself to converting its domestic
currency on demand into another
currency at a fixed exchange rate.
• The currency board holds reserves of
foreign currency equal at the fixed
exchange rate to at least 100 percent of the
domestic currency issued.

• The currency board can issue additional domestic notes and coins only when there
are foreign exchange reserves to back it.
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Crisis Management by the IMF
• The collapse of the Bretton Woods system (1973)
• IMF’s original function was to provide a pool of money
from which members could borrow, in the short term, to adjust
their balance-of-payments position and maintain their
exchange rate.
• No major industrial country has borrowed funds from the IMF
since the mid-1970s.
• Membership in the IMF has grown to 186 countries in 2010,
54 of which has some type of IMF program in place

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Financial Crises in the Post-Bretton
Woods Era
3 types of financial crises that have required IMF involvement

1. Currency crisis

2. Banking crises

3. Foreign debt crisis

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The Criticism for IMF

1. Inappropriate polices

2. Moral Hazard

3. Lack of accountability

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 Summary
 The International Monetary System refers to the institutional arrangements that countries adopt to govern exchange
rates.
 Gold Standard is a monetary system where a country’s currency or paper money has a value directly linked to gold.
 The Bretton Woods system was originally designed to prevent another Great Depression and advance he economic
interests of the United States.
 The Bretton Woods Agreement established two multinational institutions: IMF & World Bank in 1944.
 IMF was established to monitor the fixed exchange rate system.
 The World Bank is to promote general economic development.
 Floating exchange rate is a regime where the currency price of a nation is set by the forex market based on supply and
demand relative to other countries.
 Fixed exchange rate system is a regime imposed by a government or central bank which ties the official exchange rate
of the country’s currency with the currency of another country or gold price.
 The three types of financial crises that have required IMF involvement:
• Currency crisis
• Bank crisis
• Foreign debt crisis
 The Criticism for IMF
• Inappropriate polices
• Moral Hazard
• Lack of accountability
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 Questions

1) What is international monetary system?

2) What is gold standard?

3) What are the multinational institutions of Bretton Woods agreement?

4) Why were IMF and World Bank designed?

5) What is peg?

6) Why should one country peg another?

7) What is currency board ?

8) What causes the collapse of Bretton Wood system?

9) What is floating exchange rate?

10) What is the different between fixed and floating exchange rate?
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Thank You!