International Monetary System – Evolution & Exchange Arrangements

The "International Monetary System" helps countries trade by providing a mechanism to exchange currencies. It has evolved from gold coins to digital numbers.

1. Evolution of IMS (The Timeline)

2. Key Systems Explained

A. The Gold Standard (Fixed)

• Rule: Each country set a fixed price for gold.
• Mechanism: If UK had a trade deficit, it had to ship physical gold to the US.
• Drawback: Money supply was limited by gold reserves (could not print money during crisis).

B. The Bretton Woods System (1944)

• 44 nations met at Bretton Woods, USA.
• The Agreement:
  1. US Dollar became the world reserve currency.
  2. US promised to convert Dollar to Gold at $35/ounce.
  3. IMF and World Bank were born.
• Collapse: In 1971, Nixon stopped converting Dollars to Gold. The system broke.

C. The Current System (Managed Float)

• Floating: US Dollar, Euro, Yen float freely.
• Managed: Central Banks (like RBI) intervene (buy/sell) to prevent extreme volatility.
• Pegged: Some countries (e.g., UAE Dirham) still peg their currency to USD.

3. Classifications of Exchange Arrangements

4. Exam Notes: Writing the Answer

Question: "Write a detailed note on the evolution of the International Monetary System." (10 Marks)

Answering Strategy:

1. Timeline: Draw a timeline from 1876 to Present.
2. Gold Standard: Mention "Mint Parity Theory".
3. Bretton Woods: Mention "IMF" and "$35/oz Gold".
4. Smithsonian Agreement: (Optional bonus point) The short-lived attempt to save Bretton Woods in 1971.
5. Current Status: Explain "Managed Float".

Quiz Time! 🎯