Chapter 13
International Monetary Systems
This chapter describes the evolution of the international monetary system and important related details and
institutions. The choice of an exchange rate system is an important topic of current policy interest.
This chapter is useful when related to current reform proposals and changes in exchange rate
arrangements. A productive topic of classroom debate and group discussion involves the pros and cons of
flexible vs. fixed exchange rates. The Annual Report of the IMF provides summary information on
countries with multiple exchange rates. This is good information to bring into a lecture as it illustrates the
important role exchange rate policy plays in many countries.
◼ Chapter Outline
Introduction
The Gold Standard: 1880–1914
The Interwar Period: 1918–1939
76 Husted/Melvin • International Economics, Ninth Edition
◼ Suggested Answers for the End-of–Chapter Exercises
1. Over the past two centuries, there have been two extended periods of worldwide fixed exchange
rates, the international gold standard and the Bretton Woods system. Compare and contrast these
two systems in terms of the following:
a. the amount and types of exchange rate movement allowable under the two
systems
and the factor or factors that determined the limits to exchange rate movements.
b. the role of speculators in stabilizing or destabilizing the systems.
c. the role of international organizations in the systems.
d. the duties of national central banks in the systems.
a. Both systems allowed exchange rates to move around a central par value. Under the gold
standard, the par value was determined by mint parity and this mint parity was maintained
2. Suppose that we are in the early days of the Bretton Woods system, and France has declared a par
value for the French franc at FF6 per dollar. The allowable fluctuation band is one percent on
either side of par. What is the price ceiling for the dollar in terms of French francs? What is the
price floor? Suppose that France then devalues the franc and sets a new par at FF8. What are the
new price ceiling and floor?
3. Suppose Switzerland is on the gold standard and it maintains a strict ratio of gold in its vaults to
money (Swiss francs) in circulation. Suppose that it runs a balance of payments deficit. What will
happen to its overall money supply? What impact if any will this have on the Swiss economy? Will
this help or hurt the balance of payments situation? Discuss.
4. Why do you suppose that small countries tend to fix their exchange rate, whereas the largest countries
float theirs?
5. List three factors relevant for a country’s choice of an exchange rate system. Using the United States
as an example, explain how these factors may have affected U.S. policy regarding floating exchange
rates.
a. Harmonious or divergent inflation rate: A country cannot maintain a fixed exchange rate if its
rate of inflation differs significantly from those in other countries. In the early 1970s, the United
6. What roles did the International Monetary fund play in the Bretton Woods System? What roles does
it play in today’s international monetary system?
The initial objective of the International Monetary Fund (IMF) was to supervise and facilitate the
operation of the fixed exchange rate system created at Bretton Woods. Countries participating in the