International Monetary System. Over the 1879-1934 period — with the exception of the

World War I years — an international monetary system known as the gold standard prevailed.

From the end of World War II in the mid-1940s until 1971 the so-called Bretton Woods system

prevailed. These two systems both stressed fixed exchange rates, although the latter allowed for

periodic rate adjustments. Since 1971, a system of essentially freely flexible or floating rates has

been in operation. This system has been dubbed managed floating exchange rates, however, because

governments often intervene in exchange markets to alter the international value of their

currency.

Let us examine these three systems in the order stated.

The system of the gold-value, “gold standard.”

The national exchange rates were tied hard to gold within this system. There were minimum

deviations from the fixed rate (±1 %).

Conditions. A nation is on the gold standard when it fulfills three conditions:

1. It must define its monetary unit in terms of a certain quantity of gold.

2. It must maintain a fixed relationship between its stock of gold and its domestic money supply.

3. It must allow gold to be freely exported and imported.

If each nation defines its monetary unit in terms of gold, the various national currencies will

have a fixed relationship to one another.

Gold standard. A country is said to be on the gold standard when its central bank is obliged to

give gold in exchange for any of its currency presented to it. When the U К was on the gold standard

before 1914, anybody could go to the Bank of England and demand gold in exchange for banknotes.

The gold standard was central to the classical economists’ view of the equilibrating processes

in international trade. The fact that each currency was freely convertible into gold fixed the

exchange rates between currencies (specie points), and all international debts were settled in gold.

A balance of payments surplus caused an inflow of gold into the central bank’s reserves. This enabled

the central bank to expand the money supply without fear of having insufficient gold to meet

its liabilities. The increase in the quantity of money raised prices, resulting in a fall in the demand

for exports and therefore a reduction in the balance-of-payments surplus. The reverse happened in

the event of a deficit. The UK came off the gold standard in 1914, partly returned to it in 1925, but

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ing to the BWS, the American dollar along with gold served a role of the world money. This mechanism

of regulating exchange rates was imposed on the nations of Western Europe which were in a

deep economic dependence on the US. The US had nearly 70 percent of all world stock of gold. As

я result of introducing the BWS, the dollar became the only exchange convertible into gold: $35 =

Troy ounce of gold.

To achieve its goals, the Bretton Woods Conference stated a number of conditions with which

member nations were required to comply. Each nation agreed to establish a par value for its currency;

that is, the value of a unit of its currency would be fixed in relation to the dollar or to gold. This

would prevent great fluctuations of national currencies in relation to each other.

Member nations also agreed upon the principle of currency convertibility. Thus, if one nation

owned the currency of another, it would be able to sell it back at par value. A.third agreement was

that member governments would contribute to the operating funds of the IMF according to the