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: Interwar Period: Bretton Woods : 1944 The Gold Exchange Standard ( ) The current IMS

: 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: 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

The Great War The demise of the great European empires The first communist country: USSR

Germany: The 1920s

Weimar Republics money: The 20 billion mark banknote

Interwar Period: 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