Question

Outline the brief history of how we got to the present global monetary system (hint: you must discuss the Bimetallism, Gold Standard, Bretton Woods, etc).

Answer 1

Barter trade system had a problem of double coincidence and also many a times the goods used were perishable and non divisible - Eg. Cow for tomatoes.

It should be noted that Gold and silver are in use as an unit of exchange since 3000 BC. Evidences are in Mesopotamian, Egyptian and Indus valley civilizations in India.

Bimetallism is nation’s monetary unit by law in terms of fixed quantities of gold and silver. This system had made all other money in circulation redeemable in either gold or silver. There is a history in order to establish the bimetallic system on an international scale countries like France, Belgium, Italy, and Switzerland had formed the Latin Monetary Union in 1865. They established a mint ratio between silver/gold and allowed to print notes/mint coins abiding this ratio. However, this system came to an immediate end as many countries manipulated this ratio and printed more money than required.

In an international monetary conference held in Paris in 1867 most of the delegates voted for the gold standard. In this system, gold coins are not used directly but the authorities like central bank agree to sell gold bullion on demand at a fixed price in exchange for the circulating currency. Eg. $1 = 0.5 grams of gold.

During world war 1 when many countries had suffered could not live up to a promise of giving gold for determined value of gold and hence there was huge demand of Gold. Gold standard also was not able to control inflation as central banks could not have effective monetary policy in gold standard. Hence many countries like England suspended it.

Bretton woods is a place in USA in which IMF and world bank offices are located. These new establishments avoided gold standard and value of a currency is now determined by demand-supply for it. Central banks can change the money supply and interest rates now more effectively. However, gold is still maintaining its precious position.

Now, virtual currency like bitcoins are used by some of the traders. However, it is not accepted by all the countries as Central banks will lose monetary control over it.