6.3.6 Summary: Part B
Part B has dealt with six aspects of the international monetary system. We began with a brief history of the gold standard and noted that the gold standard which began life in 1821 finally expired in 1937. The gold standard was a fixed exchange system. A newer version - the gold exchange standard system - was instituted in 1945 as a consequence of the Bretton Woods Agreement. This fixed exchange system had its demise in 1976 following the Jamaica conference of the IMF. The failure of this system was due largely to the decline in the US balance of payments and the inability of the US with its original large stock of gold to continue to support the dollar. The US dollar, you will recall, was the international currency after World War I.
The Bretton Woods Agreement of 1944 also spawned the IMF and the World Bank. The role of the IMF was originally to extend short-term loans for development while the World Bank undertook longer term development loans. These roles have tended to coalesce and there is the prospect of amalgamation of these two bodies sometime in the future.
We looked at the philosophical bases of fixed exchange rates and floating exchange rates and observed that most countries operate a 'managed' float: that is, governments intervene in the market by buying and selling their own currencies as a means of influencing the value of those currencies.
Gold was, and to some extent still is, the basis for fixed exchange rates.
We noted that the EMS became somewhat dysfunctional because of the collapse of the Exchange Rate Mechanism (ERM). This collapse was due to a number of factors, but especially the world recession. The withdrawal of Britain and Italy from the ERM was a particular blow because the currencies of both countries were included in the value of the Euro.
We looked at the European Monetary Union (EMU) which began life on 1 January 1999 and finally we noted various financial crises which plagued the international monetary system in the last five years of the 20 th century.
In Part C which follows, we will return to a discussion of European currencies when we deal with the global capital market.
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