Brief History of Financial System

1925 Words Mar 22nd, 2011 8 Pages
Introduction

The international financial system provides the framework enabling residents of one country to make payments to residents of other countries. Over the past centuries world trade was characterised by great changes in the international financial system, beginning with the use for gold and silver in the bimetallism era, through the gold standard the gold exchange standard , the Bretton Woods system and the current floating exchange rates. Arguably gold id the oldest metal used both as store of value and as a medium of exchange as realised in the early Egyptian Pharaohs’’ (3000 B.C), who stored wealth in gold and traded with other likewise, according to Prayer (1982).

Definitions

According to Arthers and Sheffrins
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Governments agreed to buy and sell gold at its own fixed parity on demand.

The standard ensured minimal inflation, and also ensured countries maintained adequate reserves of gold to back its currency’s value. However the stability caused by the Gold Standard did not allow exchange rates to respond to changes in trade circumstances between countries, such as higher imports. At national level, gold could be acquired by official authorities. Mayer et al (1990) outlined that there was no reason to believe that growth in the world’s gold stock and money supply would be slow and stable. There were expected gold discoveries and/or technological advancement which triggered wave of inflation.

Gold Exchange Standard

Exchange rates fluctuated as countries widely used “predatory” depreciations of their currencies as a means of gaining advantage in the world export market. Attempts were made to restore the gold standard, but participants lacked the political will to “follow the rules of the game”. The result for international trade and investment was profoundly detrimental.

Under this period came about two standard;

i. Gold specie standard in which currency in circulation consisted of gold wins with a fixed gold standard; and

ii. Gold bullion standard in which the basis of money remain a fixes weight of gold but the costs with the authorities

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