The document discusses the history and evolution of international monetary systems. It describes the gold standard system before WWI, the gold exchange standard in the 1920s-1930s, and the Bretton Woods system established in 1944 which pegged currencies to the US dollar backed by gold. The Bretton Woods system collapsed in the early 1970s leading to fluctuating exchange rates. More recently, there has been a movement towards more flexible exchange rate regimes and the establishment of the eurozone in Europe.

1. International
Financial System

2. International Financial System
• It refers to financial institutions and financial
markets/facilitators of international trade,
financial instruments (to minimise risk
exposure), rules regulations, principles and
procedures of international trade.

3. International Monetary System
• It is defined as a set of procedures, mechanisms,
processes, institutions to establish that rate at
which exchange rate is determined in respect to
other currency.
• The whole story of monetary and financial system
revolves around 'Exchange Rate' i.e. the rate at
which currency is exchanged among different
countries for settlement of payments arising from
trading of goods and services.

4. Monetary System Before First World War:
(1880-1914 Era of Gold Standard)
• The oldest system of exchange rate was
known as "Gold Species Standard“
• The other version called "Gold Bullion
Standard", where the basis of money
remained fixed gold but the authorities were
ready to convert, at a fixed rate, the paper
currency issued by them into paper currency
of another country which is operating in Gold.

5. • The exchange rate between pair of two
currencies was determined by respective
exchange rates against 'Gold' which was called
'Mint Parity'.
Monetary System Before First World War:
(1880-1914 Era of Gold Standard)

6. Three rules of Mint Parity
• The authorities must fix some once-for-all
conversion rate of paper money issued by them
into gold.
• There must be free flow of Gold between
countries on Gold Standard.
• The money supply should be tied with the
amount of Gold reserves kept by authorities. The
gold standard was very rigid and during 'great
depression' (1929-32) it vanished completely.

7. The Gold Exchange Standard (1925-1931)
• In 1925, US and England could hold gold
reserve and other nations could hold both
gold and dollars/sterling as reserves.
• The countries started devaluing their
currencies in order to increase exports and de-
motivate imports.
• This was termed as "beggar-thy-neighbour "
policy.

8. Bretton Woods System
• Allied nations held a conference in New
Hampshire, the outcome of which gave birth to
two new institutions namely the International
Monetary Fund (IMF) and the World Bank, (WB)
and the system was known as Bretton Woods
System which prevailed during (1946-1971).
• Bretton Woods, the place in New Hampshire,
where more than 40 nations met to hold a
conference.

9. The Bretton Woods Era (1946 to 1971)
• In Bretton Woods modified form of Gold
Exchange Standard was set up with the
following characteristics
– One US dollar conversion rate was fixed by the USA as one
dollar = 35 ounce of Gold
– Other members agreed to fix the parities of their
currencies vis-à-vis dollar with respect to permissible
central parity with one per cent (± 1%) fluctuation on
either side.

10. Post Bretton Woods Period (1971-1991)
• Two major events took place in 1973-74 when
oil prices were quadrupled by the
Organisational of Petroleum Exporting
Countries (OPEC).
• From 1977 to 1985, US dollar observed
fluctuations in the oil prices which imposed on
the countries to adopt a much flexible regime
i.e. a hybrid between fixed and floating
regimes.

11. Current Scenario of Exchange Regimes
• Exchange arrangement with no separate legal tender
• The members of a currency union share a common
currency.
• Currency Board Agreement
• There is a legislative commitment to exchange
domestic currency against a specified currency at
a fixed rate.
• Conventional fixed peg arrangement
• Country pegs its currency to another, or to a
basket of currencies not exceeding +/- 1
• Up to 1999, thirty countries had pegged their
currencies to a single currency

12. Current Scenario of Exchange Regimes
• Pegged Exchange Rates Within Horizontal Bands
• It is a middle way between a fixed peg and floating
peg.
• Crawl ing Peg
• A currency is pegged to another currency or a
basket of currencies but the peg is adjusted
periodically which may be pre-announced or
discretion based or well specified criterion.
• Crawling bands
•The currency is maintained within a certain
margins around a central parity which 'crawls' in
response to certain indicators.

13. Current Scenario of Exchange Regimes
• Managed float
• In this regime, central bank interferes in the
foreign exchange market by buying and selling
foreign currencies against home currencies
without any commitment or pronouncement.
• Independently floating
• Here exchange rate is determined by market
forces and central bank only act as a catalyst to
prevent excessive supply of foreign exchange and
not to drive it to a particular level.

14. The Era of Euro and European
Monetary Union
• As a failure of the Smithsonian agreement in
1973, some countries of Europe met together
to form a union which was basically an
attempt to keep the member countries
exchange rate.
• This was known as 'Snake in the Tunnel' and in
1979 the 'snake' became the European
Monetary System (EMS) with all EEC countries
joining the club except Britain.

15. • The ECU was the sponsor of 'EURO' commonly
shared by eleven member countries.
• This was mainly an attempt to create a single
economic zone in Europe with complete
freedom of resource mobility within the zone.
• In November, 1999, central banks of EEC
finalised the draft statute for a future
European Central Bank.
The Era of Euro and European
Monetary Union

16. • The concept of European economic and
monetary union received shake when in 1992
referendum, Denmark people (Danish) rejected
the "Maastricht Theory" and Italy and Britain
faced political anger against it.
• Debates were going on to resolve the conflicts
and ultimately in Dec. 1996 "Growth & Stability
Pact" was agreed upon in Dublin.
• As a consequence of this agreement, 'EURO'
came into existence on January 1, 1999 and
trading began on January 4, 1999.
The Era of Euro and European
Monetary Union