International Monetary System

By: Aditya Banerjee

Bimetallism
Existed Prior to the 1870s. Double standard in free coinage in both gold and silver. Both gold and silver were used as international means of payment. Exchange rates among currencies were determined by either their gold or silver content

Bimetallism 2
In 1870 exchange rate between British Pound and French Franc was determined by gold content of their countries (Britain was fully gold standard, France was officially on bimetal). The ex. Rate between Franc and Mark was determined by the silver content of France and Germany (Germany was officially on silver standard). The exchange rate between Pound and Mark was determined by their exchange rate against Franc.

Bimetallism to Gold Standard

Britain adopted gold standard in 1816. France formally adopted the gold standard by 1847. German Empire, which was to receive sizeable war indemnity from France converted to gold standard in 1875. United States converted to gold standard in 1879. Russia and Japan converted to gold standard by 1897.

The Gold Standard

Existed as a historic reality between 1875-1914 (roughly about 40 years). During this period London became the centre of international financial system. Gold standard can exist in a country when: a) Gold is assured of unrestricted free coinage. b) Gold national currency has a 2-way convertibility. c) Gold can be freely imported and exported.

The Gold Standard 2

Each country shall define its national currency in terms of gold. Example: Lets say US Dollar is convertible to gold at $20/ounce of Gold. British pound is at 4/ounce of gold. The dollar-pound exchange rate will be:

Each country must back its currency value by maintaining adequate reserves of gold.

The Gold Standard 3

The exchange rates of a currency could not move beyond a certain prescribed limit. Example: Lets assume that cost of transporting gold between USA and Britain is 40 cent current $/ rate is $5/ then the value of pound sterling could move within $5.10 and $4.90. If Pound exceeded $5.10 then US importer would simply buy 1 ounce gold with $ in US and export it to England and exchange the gold for pounds. Thus the US importer will pay no more than $5.10 for a pound. This upper price is called gold export point. The lower price will be called gold import point.