Module 8: International Monetary System and Financial Forces IB-300

What is the international monetary system?

Consists of institutions, agreements, rules, and processes that allow for the payments, currency exchange, and cross-border movements of capital required for international transactions

Three Evolutions of the Monetary System

• Gold Standard: currency directly linked to gold

• Bretton Woods System: fixed exchange rates with the US dollar

• Floating Exchange Rates: currency value based on the market

Gold Standard (time period, aim, exchange rate type, adv, disad)

• Gold Standard (late 1800s - 1930s): currency directly linked to gold (money=gold)

  • Aim: ensure LT stability + trust in money

  • Exchange rate type: currencies directly related to a fixed quantity of gold (1 ounce)

  • Adv: stable prices + predictability 

  • Disad: rigid money supply

Bretton Woods System (time period, aim, exchange rate type, adv, disad)

• Bretton Woods System (1944 - early 1970s): fixed exchange rates with the US dollar

  • Aim: Promote stability, trade, collaboration + recovery

  • Exchange Rate type: fixed, but adjustable currencies are pegged to the USD, which is convertible to gold ($35/ounce)

  • Adv: stability for global trade, the USD became the global reserve currency

  • Disad: dependent on US gold reserves, created large deficits —> undermine confidence in US dollar 

Floating Exchange Rate (time period, aim, exchange rate type, adv, disad)

• Floating Exchange Rates (early 1970s - today): currency value based on market

  • Aim: allow market-driven adjustments to reflect economic realities 

  • Exchange Rate Type: flexible (floating); market forces determine currency values

  • Adv: flexibility in responding to shocks (independent monetary policy)

  • Disad: exchange rate volatility + currency speculation risks 

Fiat Currency

What it is: Government-issued money (USD, Euro, Peso). Has no intrinsic value, backed by trust in the government 

Who controls it: Central banks and governments

How it works: you use cash, cards, or apps linked to banks

Pros; stable, widely accepted, predictable value

cons: can be affected by inflation, political control

Digital Currency/Crypto 

What it is: Digital, decentralized money (Ethereum, Bitcoin). Exists only online and uses blockchain tech

Who controls it: no single authority

How it works: peer-to-peer transactions verified on a blockchain (no middleman)

Pros: fast, borderless, transparent, often lower fees

Cons: highly volatile, less regulated, not universally accepted

Exchange Rate Quotations

Spot Rate: (delivery in 2 days) vs. forward rate (fixed rate for future delivery)

Bid Price: (highest-priced buy order in the market) vs. Ask price (lowest-priced sell order in the market) (the price at which the market is willing to buy from you)

The difference between the bid and ask is called the bid-ask spread