International Business 9eBy Charles W.L. HillMcGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies Inc! "ll rights reser#e$!Chapter 11The International Monetary System 11-3What Is The International Monetary System?International monetary system - the institutional arrangements that govern exchange ratesA floating exchange rate system exists when a country allows the foreign exchange market to determine the relative value of a currencyA egged exchange rate system exists when a country fixes the value of its currency relative to a reference currencyA dirty float exists when a country tries to hold the value of its currency within some range of a reference currency such as the !.". dollarA fixed exchange rate system exists when countries fix their currencies against each other at some mutually agreed on exchange rate11-4What Was The Gold Standard?#he gold standard refers to a system in which countries eg currencies to gold and guarantee their converti$ilityin the %&&'s( most nations followed the gold standard)% * +,.++ grains of -fine. /ure0 goldthe gold ar value refers to the amount of a currency needed to urchase one ounce of gold11-5Why Did The Gold Standard Make Sense? #he great strength of the gold standard was that it contained a owerful mechanism for achieving $alance-of-trade e1uili$rium $y all countries#he gold standard worked well from the %&2's until %3%4 $ut( many governments financed their World War I exenditures $y rinting money and so( created inflation5eole lost confidence in the system By %3,3( the gold standard was dead11-6What Was The Bretton Woods System?In %344( reresentatives from 44 countries met at Bretton Woods( 6ew Hamshire( to design a new international monetary system that would facilitate ostwar economic growth !nder the new agreement a fixed exchange rate system was esta$lishedall currencies were fixed to gold( $ut only the !.". dollar was directly converti$le to golddevaluations could not to $e used for cometitive urosesa country could not devalue its currency $y more than %'7 without I89 aroval11-7What Institutions Were Established t Bretton Woods?#he Bretton Woods agreement also esta$lished two multinational institutions%. #he International 8onetary 9und /I890 to maintain order in the international monetary system through a com$ination of disciline and flexi$ility+. #he World Bank to romote general economic develoment also called the International Bank for :econstruction and ;eveloment /IB:;011-8Why Did The !i"ed E"#han$e %ate System Collapse?Bretton Woods worked well until the late %3