Chapter 7:
The
International
Monetary
System and the
Balance of
Payments
International Business, 4th Edition
Griffin & Pustay
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©2004 Prentice Hall
Chapter Objectives_1
 Discuss the role of the international
monetary system in promoting
international trade and investment
 Explain the evolution and functioning
of the gold standard
 Explain the evolution of the flexible
exchange rate system
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Chapter Objectives_2
 Summarize the role of the World Bank
Group and the International Monetary Fund
in the post-World War II international
monetary system established at Bretton
Woods
 Describe the function and structure of the
balance of payments accounting system
 Differentiate among the various definitions
of a balance of payments surplus and deficit
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The Gold Standard
 Countries agree to buy or sell their
paper currencies in exchange for gold
on the request of any individual or firm
and to allow the free export of gold
bullion and coins
 Adopted by the U.K. in 1821
 Created a fixed exchange rate
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Exchange Rates
 Exchange rate: price of a one currency
in terms of a second currency
 Fixed exchange rate system: price of a
given currency does not change relative
to each other currency
– Under the gold standard, each country
pegged the value of its currency to gold
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The Collapse of the Gold Standard
 Economic pressures of WWI
 Countries suspended pledges to buy or sell
gold at currencies’ par values
 Gold standard readopted in 1920s
 Dropped during Great Depression
 British pound allowed to float in 1931
– Float: value determined by supply and demand
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Map 7.1 The British Empire in 1913
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Figure 7.1 The Contraction of World
Trade, 1929-1933
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The Bretton Woods Era
 44 countries met in Bretton Woods, New
Hampshire in 1944
 Goal: to create a postwar economic
environment to promote worldwide peace
and prosperity
 Renewed gold standard on modified basis
(dollar-based)
 Created International Bank for
Reconstruction and Development and
International Monetary Fund
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International Bank for
Reconstruction and Development
 World Bank
 Goal 1: to help finance reconstruction
of European economies
– Accomplished in mid 1950s
 Goal 2: to build economies of the
world’s developing countries
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