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International Economic
Relations
Econ 548 Summer 2007
William J. Polley
Department of Economics
College of Business and Technology
Western Illinois University
A brief history of the international
financial system & the role of the U.S.
 Bimetalism and Gresham’s Law
 Isaac Newton 1717
 Coinage Act of 1792
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1834: U.S. sets price of gold at $20.67
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1 ounce of gold=15 ounces of silver
“De facto” gold standard
Civil War years: Greenback era and Legal
Tender Acts
1873: “Crime of ’73”
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U.S. demonetizes silver
A brief history of the international
financial system & the role of the U.S.
 1880: Beginning of the modern international
gold standard
 1896: William McKinley defeats William
Jennings Bryan in U.S. presidential election
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Major issue of the race was the “silver
question”. Bryan (along with midwestern and
western populists) favored bimetalism.
 1900: U.S. formally joins international gold
standard
A brief history of the international
financial system & the role of the U.S.
 World War I causes countries to leave the gold
standard
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U.S. returns in 1919
U.K. returns in 1925, but wartime inflation made a
return to the pre-war gold price problematic.
U.K. leaves gold standard again in 1931
U.S. raises gold price to $35/ounce in 1933 to stem the
outflow
 Aside: German hyperinflation in 1923 added to the
post-war instability
A brief history of the international
financial system & the role of the U.S.
 1944: Bretton Woods Conference leads to
creation of the International Monetary Fund
and World Bank.
 Bretton Woods creates an international
system of fixed exchange rates.
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All currencies are fixed to the U.S. dollar
Dollar is defined to be equal to 1/35 ounce of
gold. (That is, 1 ounce of gold=$35…same as
1933.)
A brief history of the international
financial system & the role of the U.S.
 Bretton Woods works well until the late
1960s.
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U.S. begins running balance of payments
deficits while Japan and Europe run surpluses.
Foreign governments begin piling up dollar
assets and want to exchange them for gold.
By 1971, foreign claims exceeded the U.S.
stock of gold. Nixon suspends convertibility—
”closing the gold window”.
A brief history of the international
financial system & the role of the U.S.
 Thereafter the U.S. devalues the dollar, first
to $38/ounce, then to $42.22/ounce, where it
remained until the system was finally and
permanently abandoned.
A brief history of the international
financial system & the role of the U.S.
 Post-Bretton Woods there are a variety of
exchange rate arrangements. In addition to
the completely fixed and flexible regimes,
there are:
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Crawling peg
Currency boards
Managed float
And others…
A brief history of the international
financial system & the role of the U.S.
 European Union
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Treaty of Rome (1957)
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Created a customs union among France,
Germany, Italy, Belgium, the Netherlands, and
Luxembourg.
Closer monetary union begins to take shape in
the 1970s
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The “snake”
European Monetary System
Maastricht Treaty (1992)
A brief history of the international
financial system & the role of the U.S.
 Maastricht Treaty established “convergence
criteria” for joining the monetary union.
 Common currency goes into effect January 1,
1999.
 Euro banknotes and coins go into circulation
January 1, 2002.
 Additional information on European Central
Bank website: www.ecb.int