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Chapter Two Outline Evolution of the International Monetary System Current Exchange Rate Arrangements European Monetary System Euro and the European Monetary Union The Mexican Peso Crisis The Asian Currency Crisis The Argentine Peso Crisis Fixed versus Flexible Exchange Rate Regimes Evolution of the International Monetary System Bimetallism: Before 1875 Classical Gold Standard: 1875-1914 Interwar Period: 1915-1944 Bretton Woods System: 1945-1972 The Flexible Exchange Rate Regime: 1973-Present Bimetallism: Before 1875 A “double standard” in the sense that both gold and silver were used as money. Some countries were on the gold standard, some on the silver standard, some on both. Both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Gresham’s Law Gresham’s Law implied that it would be the least valuable metal that would tend to circulate. Suppose that you were a citizen of Germany during the period when there was a 20 German mark coin made of gold and a 5 German mark coin made of silver. If Gold suddenly and unexpectedly became much more valuable than silver, which coins would you spend if you wanted to buy a 20-mark item and which would you keep? Classical Gold Standard: 1875-1914 During this period in most major countries: Gold alone was assured of unrestricted coinage There was two-way convertibility between gold and national currencies at a stable ratio. Gold could be freely exported or imported. The exchange rate between two country’s currencies would be determined by their relative gold contents. Classical Gold Standard: 1875-1914 For example, if the dollar is pegged to gold at U.S. $30 = 1 ounce of gold, and the British pound is pegged to gold at ￡6 = 1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents: Classical Gold Standard: 1875-1914 Highly stable exchange rates under the classical gold stand