A brief history of the IMS

1. A brief history of the IMS Up to WW II

2. Outline Mercantilism The Gold Standard The Inter-War Period

3. 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

4. The IMS A true IMS appears when international trade becomes: • significant • permanent • subject to international laws

5. Why is international trade so important? It generates foreign exchange

6. 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

7. 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.

8. History of the International Monetary System • Mercantilism: XVI and XVII centuries • Bi-metallism and free trade: up to 1875 • Classical Gold Standard: 1875 - 1914 • Interwar Period: 1915-1944 • Bretton Woods : 1944 • The Gold Exchange Standard (1945-1971) • The current IMS

10. 1500-1540: 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

11. 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

12. Oliver Cromwell

13. Mercantilism: XVI and XVII centuries • Tough restrictions on imports (see the Navy Act) • Aggressive promotion of exports • Hoarding of precious metals (see Hernan Cortez)

14. The Industrial Revolution England becomes the most productive country in the world

15. England gains supremacy of the sea... …and free trade

16. 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

17. Classical Gold Standard: 1875 - 1914 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

18. 1914 - 1918 The Great War The demise of the great European empires The first communist country: USSR

19. Germany: The 1920s

20. Weimar Republic’s money:The 20 billion mark banknote

21. Interwar Period: 1915-1944 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