European Monetary Union and the International Monetary System

Abstract

The past century has witnessed sweeping changes in the international monetary system. Starting from the sterling-oriented gold standard of a century ago, the inflation of World War I led to an undervaluation of gold and the attempt to economize on it with a post-war system based on the gold exchange standard. When this system broke down in the 1930s, a period of managed exchange rates, anchored by a gold-convertible dollar, emerged. The inflations of World War II and its aftermath again led to the undervaluation of gold and another attempt to economize on it, first, by using the dollar and second, by creating the SDR. When this system broke down in August 1971, an attempt was made at the Smithsonian Institution in December 1971, to reconstruct a fixed exchange rate system around the inconvertible dollar. When this system broke down in the spring of 1973, the international monetary system was scrapped and countries moved to flexible exchange rates or currency areas. But Europe, in the late 1970s, created a zone of fixed exchange rates and formed its own monetary system, and has recently made firm plans to proceed to complete European Monetary Union by the end of the century.