Stages of development of the world monetary system

Until 1914, the international movement of both long-term and short-term capital could be carried out practically without government control, since exchange relations remained relatively stable, and inflationary processes in the international sphere were restrained. This happened due to the fact that interstate calculations were constantly adjusted by the mechanism of the gold standard. Under the gold standard, there was free international circulation. Owners of foreign currency could freely dispose of it: sell it to a bank or any third party at a freely forming rate, the fluctuations of which were limited to gold points. The transformation of the national currency into a foreign currency or into gold (regardless of the purpose) was not limited by anyone and nothing.

Fluctuations in the foreign exchange market in the conditions of the gold standard were usually insignificant. The gold point mechanism was not an absolutely reliable regulator of exchange rates. For example, only three countries (Great Britain, the Usa and the Netherlands) until 1914 allowed the free import / export of gold.

The First World War disrupted the normal functioning of the foreign exchange market. Most states have imposed trade and currency restrictions. Gold was universally withdrawn from circulation, and the mechanism of the gold standard outgrowed to function. In 1919, the authorities of the leading countries stopped supporting their currencies, a period of uncontrolled fluctuations in their exchange rates began.

The International Conference of 1922 in Genoa attempted to establish some kind of transitional system. To normalize the functioning of the monetary system, it was recommended to restore the partial convertibility of national currencies to gold only in the form of bullion (it disappeared from domestic circulation). The world’s main reserves of Treasury gold were concentrated in the United States, Great Britain, France and Japan.

After the crisis of 1929, a new attempt was made to reach an international agreement. In June 1933, a conference was held in London, in which 66 countries took part. The issues of returning to the gold coin standard and establishing a tripartite truce (customs, currency and, if possible, international debts), raising prices  that can revive business activity were discussed.

The transition to a gold-making system meant a sharp reduction in gold in international circulation and required further improvement of international credit and payment relations. In the period between the world wars, various forms of currency clearing developed. In 1932, the first bilateral clearing agreement was concluded between Hungary and Switzerland, and by 1939 there were already 83 clearing, 53 payment and clearing and 36 payment agreements between 38 states.

The Second World War further strengthened the need for state regulation of economic life, including domestic and international credit relations, but it also inevitably upset them.

In the postwar years, the United States again acted as a creditor of Western Europe, providing $ 17 billion. under the Marshall Plan. In America, the main reserves of the world treasury gold were concentrated, which made it inevitable to modify the gold standard into a gold dollar standard. A monetary system based on gold alone has increased the interdependence of national economies.

Already in the 30s, and especially in the 40s, state monopolistic regulation begins to penetrate more and more actively into the sphere of interstate relations.

After the Second World War, currency zones (groupings of states whose currencies depend on the currency of the country leading the zone) were formed on the basis of pre-war currency blocs. The countries included in the currency area were linked to the lead country by a single monetary and financial regime and basically the same system of currency restrictions.

There were six currency zones: sterling, dollar, French franc, Portuguese escudo, Spanish peseta and Dutch guilder.

The US-led dollar zone arose in 1933 (covering countries that did not apply currency restrictions – Bolivia, Venezuela, Haiti, Guatemala, Honduras, Canada, Colombia, El Salvador, Mexico, Nicaragua, Panama). Their territory was 1/5 of the globe. The main features of the dollar zone are as follows: maintaining an unchanged ratio between the currency of one’s country and the US dollar; absence of currency control in international settlements with foreign countries; storage of most of the foreign exchange reserves in the form of dollar deposits in US banks, through which international settlements of the countries of the zone were carried out. The economic basis of the dollar zone was the dominance of American capital; the vast majority of the foreign trade of the countries of the zone was focused on the US market.

The French franc zone was created by France to maintain its position in colonial, dependent countries (Algeria, Morocco, Tunisia, Madagascar, Monaco, Cameroon). The common currency and customs regime of the countries of the zone, the free convertibility of currencies within the zone, the provision of the French franc and treasury obligations to France allowed the French monopolies to exercise control over the economy and monetary system of these countries and to profit from it. All foreign economic operations were carried out through authorized French banks and the Stabilization Monetary Fund of the French bank. On October 1, 1959, Tunisia left the zone, and from March 1, 1960 , the Republic of Guinea. To maintain its influence, France increasingly used methods to increase public capital investment in the countries of the zone and budget subsidies.

The crisis of currency zones created conditions for strengthening monetary and financial ties of developing countries. This was facilitated by the narrow financial base of most young countries, the huge role of external financing, the uneven distribution of gold and foreign exchange reserves, the instability of balances of payments and exchange rates.

The rapid accumulation of huge foreign exchange reserves by oil-producing countries and the reduction of financial dependence on the leading powers contributed to the establishment of regional ties.

The experience of the war years and the danger of its repetition after the Second World War prompted the United States and Great Britain to take the first steps in 1943 towards the creation of a free, stable and multilateral monetary system. The project of the post-war international order was the subject of discussion at the International Conference of the Countries of the Anti-Hitler Coalition in Bretton Woods (USA, 1944). The ideological inspirer of the creation of an international organization was M. Keynes. The opponent of this system was M. Friedman.

At the heart of the Bretton Woods system was primarily the joint regulation of exchange rates, fixed and interrelated.  To manage the system, the International Monetary Fund was formed, initially consisting of 44 countries. Each member of the organization determined the gold content of its currency and on this basis fixed the rate in the currencies of other participating countries. Fluctuations in the exchange rate were allowed within 10%. the IMF provided short-term loans to settle the balance of payments.

Along with gold, the US dollar became an international reserve asset – the only national currency formally convertible to metal. The official price of gold until 1971 was $35 per troy ounce. The British pound sterling was declared the “second” reserve currency. The rates of operations with cash foreign currency in the market of each of the countries should not differ from parities by more than 1%.

To facilitate international reporting, Special Draw Rights (SDRs) were created. The distribution of SDRs among the participants was based on the financial contribution of each of them. The SDRs were exchanged for all currencies of the IMF members at a rate first equated to the dollar, and then set to $ 1.2.

The monetary system created at Bretton Woods remained effective for about 15 years. The ’50s were relatively quiet in terms of a gradual approach to convertibility. Only the French franc underwent a significant change in parity, being devalued on December 27, 1958 by 14.9%.

In 1961, the German mark and the Dutch guilder were revalued. On November 18, 1967, the pound sterling was devalued from $2.80 to $2.40. In 1968, the French franc was devalued by 11.1%, and in 1969 the German mark was revalued.

At the Currency Conference on December 17-18, 1971, as part of the Us Smithsonian Agreement, it was decided to increase the official value of gold from $ 35 to $ 38 per ounce, which meant the devaluation of the dollar by 7.89%. Revaluations amounted to: 7.7% – for the yen, 4.6% – for the German mark, 2.8% – for the Dutch guilder and the Belgian franc. The agreement provided for the expansion of the permissible limits of currency fluctuations from 1 to 2.25% in both directions of parity and some other measures designed to help restore monetary stability.

In January 1976, the Kingston Agreement on the revision of the IMF Charter (Jamaica Island) enshrined the rejection of the fundamental principles of the Bretton Woods system. The gold standard and the system of firm fixation of exchange rates were abolished, a ban on the use of gold as the basis of currency parities was imposed, and the system of floating exchange rates was legalized. At the same time, many partners maintained a peg to the dollar and decided to turn the SDR into the main reserve asset, a key asset of the world monetary system. However, the SDR quota in world foreign exchange reserves remained at 6%.

One of the most important principles underlying the imf’s amended articles of agreement was the abolition of the official price of gold and its removal from the monetary system, international settlements, and credit relations. Since that time, the inflow of the US currency into the international payment turnover has increased especially sharply.

The free exchange-rate regime has contributed to the development of a tendency towards polycentrism in the monetary sphere, with pronounced signs of the dollar losing its role as a currency benchmark.

Along with the development of monetary and credit relations and their regulation in the global aspect, there was a process of their ordering on a regional scale. Gradually, a contradiction arose between the foreign trade and currency components of the integration process, which became especially acute in 1973 in connection with the transition of the world monetary system from fixed to floating exchange rates. To mitigate contradictions and limit the ability of states to manipulate the exchange rates of their currencies in the interests of their own exporters, the EEC member states introduced the European Monetary System in 1979. It provided for the establishment of a narrow corridor within which fluctuations in the exchange rates of national currencies and the gradual unification of the monetary systems of all participating countries are possible, contributed to reducing inflation, and ensuring the stability of exchange rates. The mechanism of action of the system assumed the use of a single unit of account Ecu.

Ecu is a currency that was supported by a basket of national currencies of the Countries of the Community. The share of each participant depended on its share in the total gross product and mutual trade. On the basis of the currency basket, the central exchange rate of Ecu was also formed. The quotas were as follows (Table 9.1).

Table 9.1 Resource requirements by component

Shares of EU member states in the ECU currency basket (in %)



Deutsche Mark


French Franc


British Pound


Dutch guilder


Italian Lira


Belgian and Luxembourg franc


Spanish peseta


Danish Krone


Irish Pound


Portuguese escudo


Greek Drachma


The exchange rate regime in the system provided for joint changes in currencies, called the “European currency snake”. The limits of mutual fluctuations were set at 2.25% of the total central exchange rate (for Italy and Spain – 6%). Since August 1993, due to the aggravation of the EU’s currency problems, the scope of these fluctuations has been expanded to 15%.

Ecu acted as an international means of payment and reserve along with national currencies, but existed in the form of a record in the accounts of banks and non-cash transfers on them.