International financial management eun download

Some ancillaries, including electronic and print components, may not be available to customers outside the United States. To Elizabeth C. Eun, Bruce G. ISBN alk. International finance. International business enterprises-Finance. Foreign exchange. Financial institutions, International.

Resnick, Bruce G. What are my shipping options? The estimated amount of time this product will be on the market is based on a number of factors, including faculty input to instructional design and the prior revision cycle and updates to academic research-which typically results in a revision cycle ranging from every two to four years for this product.

Pricing subject to change at any time. Cheol S. Eun is the Thomas R. He serves as a consultant to national and international organizations, including the World Bank and the Korean Development Institute, advising on capital market liberalization, global capital and exchange risk management. Bruce Resnick, Wake Forest University. Bruce G. Resnick is the Joseph M. His research interests include efficiency of options and futures markets and empirical tests of asset pricing.

A major focus is the optimal design of internationally diversified portfolios controlled for parameter uncertainty and exchange rate risk. In recent years, Professor Resnick has investigated international portfolio investment strategies applying information in the yield curve. His research has been published in major academic journals in finance.

Her research areas include international finance, corporate finance, and behavioral finance. She holds a Ph. Chuluun has taught a variety of undergraduate and graduate courses, including international finance, corporate finance, investments, microeconomics, and macroeconomics at Loyola University Maryland, Georgia Institute of Technology, and West Virginia University—Parkersburg, often incorporating innovative teaching practices.

Chuluun was a Visiting Scholar at the Brookings Institution and has international consulting experience. Reduce course material costs for your students while still providing full access to everything they need to be successful. It isn't too good to be true - it's Inclusive Access.

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For instructors, SmartBook 2. Creating accessible products is a priority for McGraw-Hill. Considering the sheer size of the euro zone in terms of pop- ulation, economic output, and world trade share, the euro has a potential for becoming another global currency rivaling the U. Since its inception in , the euro has already brought about revolutionary changes in European finance.

For instance, by redenominating corporate and govern- ment bonds and stocks from many different currencies into the common currency, the euro has precipitated the emergence of continentwide capital markets in Europe that are comparable to U.

Companies all over the world can benefit from this development as they can raise capital more easily on favorable terms in Europe. Since the end of World War I, the U. Similarly, international trade in primary commodities, such as petroleum, coffee, wheat, and gold, is conducted using the U. Reflecting the dominant position of the dollar in the world economy, central banks of the world hold a major portion of their external reserves in dollars. The ascendance of the dollar reflects several key factors such as the dominant size of the U.

It is noted that the dominant global currency status of the dollar confers upon the United States. However, once economic agents start to use the euro in earnest as an invoice and reserve currency, the dollar may have to share the aforementioned privileges with the euro.

The crisis started in December when the new Greek government revealed that its budget deficit for the year would be The previous government had falsified the national account data. This news surprised finan- cial markets and prompted investors, who became worried about sovereign default, to sell off Greek government bonds. The Greek predicament is attributable to excessive borrowing and spending, with wages and prices rising faster than productivity.

With the adoption of the euro, Greece no longer can use the traditional means of restoring competitiveness, i. The panic spread to other weak European economies, especially Ireland, Portugal, and Spain. As can be seen from the exhibit, Greece paid a minimal or practically nonexistent premium above the German interest rate until December However, the Greek interest rate began to rise sharply there- after, reaching Source: Bloomberg.

The sovereign debt crisis in Greece, which accounts for only about 2. While euro-zone countries share the com- mon monetary policy, fiscal policies governing taxation, spending, and borrowing firmly remain under the control of national governments.

Hence, a lack of fiscal discipline in a euro-zone country can always become a Europe-wide crisis, threatening the value and credibility of the common currency. The long-term viability of the euro and its potential as a global currency thus critically depend on how this disparity between monetary and fiscal integration will be addressed. Trade Liberalization International trade, which has been the traditional link between national economies, and Economic has continued to expand.

This implies that, over the same time period, international trade increased nearly three times as fast as world GDP. For some countries, international trade grew much faster; for Germany, the ratio rose from 6.

In , for example, the export-to-GDP ratio was 2. This reflects the inward-looking, protectionist economic policies these countries pursued in the past. Even these once- protectionist countries are now increasingly pursuing free-market and open-economy. World 5. In , the export-to-GDP ratio was The principal argument for international trade is based on the theory of compara- tive advantage, which was advanced by David Ricardo in his seminal book, Principles of Political Economy According to Ricardo, it is mutually beneficial for coun- tries if they specialize in the production of those goods they can produce most effi- ciently and trade those goods among them.

Suppose England produces textiles most efficiently, whereas France produces wine most efficiently. It then makes sense if Eng- land specializes in the production of textiles and France in the production of wine, and the two countries then trade their products. By doing so, the two countries can increase their combined production of textiles and wine, which, in turn, allows both countries to consume more of both goods.

This argument remains valid even if one country can produce both goods more efficiently than the other country. Although the theory of comparative advantage is not completely immune to valid criticism, it nevertheless provides a powerful intellectual rationale for promoting free trade among nations.

Currently, international trade is becoming further liberalized at both the global and regional levels. At the global level, the General Agreement on Tariffs and Trade GATT , which is a multilateral agreement among member coun- tries, has played a key role in dismantling barriers to international trade. Since it was founded in , GATT has been successful in gradually eliminating and reducing tariffs, subsidies, quotas, and other barriers to trade. Under the auspices of GATT, the Uruguay Round launched in aims to i reduce import tariffs worldwide by an average of 38 percent, ii increase the proportion of duty-free products from 20 percent to 44 percent for industrialized countries, and iii extend the rules of world trade to cover agriculture, services such as banking and insurance, and intellectual property www.

The WTO has more power to enforce the rules of international trade. China website covers news and joined the WTO in The latest round of talks, the Doha Round commenced at Doha, Qatar, in development.

Its objective is to lower trade barriers around the world, pro- moting free trade between developed and developing countries. However, negotiations have stalled over a divide between the developed countries led by the United States, European Union, and Japan and the developing countries led by Brazil, China, and India. Since then, the Chinese economy has grown rapidly, often at an astounding rate of 10 percent per annum, and in the process has lifted tens of millions of local citi- zens from poverty.

India has also joined China in recent years in opening its economy and attracting foreign investment. As is well known, India has emerged as the most important center for outsourcing. Readers are referred to Appendix 1A for a detailed discussion of the theory of comparative advantage. The huge supplies of labor, highly skilled and disciplined, in China and India are bound to alter the structure of the world economy in a major way.

China already is the second largest economy in the world, second only to the United States. India, on the other hand, is the third largest economy ahead of Japan in terms of purchasing power. The importance of China and India is likely to grow further, profoundly altering the pattern of international production, trade, and investment. On the regional level, formal arrangements among countries have been instituted to promote economic integration. The European Union EU is a prime example.

The www. Today the EU includes 28 member states Berkeley library provides a web that have eliminated barriers to the free flow of goods, capital, and people. The mem- guide to resources related to ber states of the EU hope this move will strengthen its economic position relative to the European Union. In January , 11 member countries of the EU successfully adopted a single common currency, the euro, which may potentially rival the U. Greece joined the euro club in January The launch of the euro has spurred a rush by European companies into seeking pan-European and global alliances.

Whereas the economic and monetary union planned by the EU is one of the most advanced forms of economic integration, a free trade area is the most basic. In a free trade area, most impediments to trade, such as tariffs and import quotas, are eliminated among members. Many observers believe that NAFTA will foster increased trade among its members, resulting in an increase in the number of jobs and the standard of living in all member countries. It is interesting to note from Exhibit 1.

Brexit is likely to weaken both the United Kingdom and the European Union, economically and politically. In fact, one cannot completely discount the possibility that Brexit may trigger slow disintegration of the EU under the worst-case scenario. It is ironic that Britain, the country that championed free trade and liberal capitalism, became the first country to voluntarily leave the EU, the most ambitious globalization project.

How did it happen? The answer for the question also seems a bit ironic: Brexit happened, to a certain extent, because globalization succeeded. As European integra- tion deepened, London emerged as the capital of European finance, benefiting London tremendously. But the rest of England did not share the fruits of this success.

It is highly instructive that although 60 percent of Londoners voted for remaining in the EU, only 45 percent of voters throughout the rest of England voted the same way.

Basically, the majority of voters outside of London felt alienated from the globalized economy and were concerned about competition for jobs from the immigrants. Brexit also revealed some of the difficulties associated with free trade and global economic integration that espouse free movements of goods, capital, and people. Although international trade contributes a great deal to economic growth, lifting tens of millions of people from poverty around the world, it also produces clear winners and losers.

As a result, unless losers are compensated by transfer payment and retrain- ing, free trade is likely to encounter political opposition. If protectionism wins over free trade, as happened in the s, everybody may end up becoming losers.

Privatization The economic integration and globalization that began in the s picked up speed in the s via privatization. Through privatization, a country divests itself of the ownership and operation of a business venture by turning it over to the free market system. Privatization did not begin with the fall of the Berlin Wall; nevertheless, its pace has quickly accelerated since the collapse of communism in the Eastern Bloc countries.

It is ironic that the very political and economic system that only a short while ago extolled the virtues of state ownership should so dramatically be shifting toward capitalism by shedding state-operated businesses. President Calvin Coolidge once said that the business of America is business. One might now say that business is the business of the world. Privatization can be viewed in many ways. In one sense it is a denationalization process. When a national government divests itself of a state-run business, it gives up part of its national identity.

Moreover, if the new owners are foreign, the country may simultaneously be importing a cultural influence that did not previously exist. Privatization is frequently viewed as a means to an end. One benefit of privatization for many less-developed countries is that the sale of state-owned businesses brings to the national treasury hard-currency foreign reserves. The sale proceeds are often used to pay down sovereign debt that has weighed heavily on the economy.

Addi- tionally, privatization is often seen as a cure for bureaucratic inefficiency and waste; some economists estimate that privatization improves efficiency and reduces operating costs by as much as 20 percent. There is no one single way to privatize state-owned operations. The objectives of the country seem to be the prevailing guide. For the Czech Republic, speed was the overriding factor.

To accomplish privatization en masse, the Czech government essen- tially gave away its businesses to the Czech people. For a nominal fee, vouchers were sold that allowed Czech citizens to bid on businesses as they went on the auction block.

From to , more than 1, companies were turned over to private hands. Moreover, three-quarters of the Czech citizens became stockholders in these newly privatized firms. Additionally, via a Czech-style voucher system, 40 million Russians now own stock in more than 15, medium- to large-size corporations that became privatized through mass auctions of state-owned enterprises. In China, privatization has proceeded by way of listing state-owned enterprises SOEs on the organized exchanges, thereby making SOEs eligible for private ownership.

In the early s, China launched two stock exchanges—the Shanghai Stock Exchange and the Shenzhen Stock Exchange—as a part of concerted efforts toward market-oriented reform. Since their inception, the Chinese stock markets have grown at a phenomenal pace, becoming some of the largest stock markets in Asia in terms of capitalization.

Foreigners may also participate in the own- ership of Chinese firms mainly by investing in the so-called B-shares listed on the Shanghai or Shenzen stock exchanges or in those shares that are directly listed on the Hong Kong Stock Exchange H-shares , New York Stock Exchange, or other inter- national exchanges. It is noted that A-shares of Chinese firms are mostly reserved for domestic investors. While individual and institutional investors are now actively investing in Chinese shares, the Chinese government still retains the majority stakes in most public firms.

For some countries, privatization has meant globalization. For example, to achieve fiscal stability, New Zealand had to open its once-socialist economy to foreign capi- tal.

Australian investors now control its commercial banks, and U. Fiscal stability has also been realized. As can be seen from the experiences of New Zealand, privatization has spurred a tremendous increase in cross-border investment. Global Financial The subprime mortgage crisis in the United States that began in the summer of led Crisis of — to a severe credit crunch, making borrowing and refinancing difficult for households, firms, and banks.

The credit crunch, in turn, escalated to a full-blown global financial crisis in — The defining moment of the crisis came on September 14, , when Lehman Brothers, a major U.

The abrupt failure of an iconic U. Stock prices fell precipi- tously. Output fell and unemployment rose sharply. As shown in Exhibit 1. At the same time, international trade has been shrinking rapidly. The crisis engulfed not only the advanced economies, such as the United States, Japan, and the European Union, but also many emerging.

Subprime mortgages are a financial instrument designed to facilitate home ownership for low and modest income households. Most subprime mortgages are adjustable-rate mortgages and are refinanced relatively frequently. Mortgage banks raise funds for making subprime loans mainly by securitization. Once sub- prime mortgage loans are originated, they are pooled and packaged into a variety of mortgage-backed securities and sold to various institutional investors in the United States and abroad.

Subprime mortgages worked as designed while house prices were rising during — But as U. Subsequently, subprime borrow- ers started to default, spreading risk among investors and eroding the bank capital base in the United States and abroad. What caused the global financial crisis? While it may be early to provide a defini- tive answer for this important question, it is possible to identify several factors that are likely to have contributed to the crisis.

First, households and financial institutions borrowed too much and took too much risk. Second, the crisis was amplified manyfold and transmitted globally by securitization. Securitization allows loan originators to avoid bearing the default risk, which leads to a compromised lend- ing standard and increased moral hazard.

Also, financial engineers designed opaque and complex mortgage-based securities that could be used for excessive risk-taking. These securities were traded infrequently and were often difficult to value. This laissez- faire regulatory stance reflects the broad deregulation of the U. The repeal of the Glass-Steagall Act in is the prima facie example of the deregulatory trend in the United States.

The Act, which was adopted in the wake of the Great Depression, built a firewall between commercial and investment banking activities. Its repeal may have encouraged banks to take risks excessively.

Fourth, international financial markets are highly interconnected and integrated nowadays. The U. So AIG was found to be not only too big, but also too interconnected to fail. In the contemporary world economy, a local financial shock originating in a market can quickly be transmitted to other markets through contagion and other channels. No market or institution is an island in an integrated world. Facing the severe credit crunch and economic downturn, the U.

Many governments around the world, notably the U. In addition, to prevent future financial crises and costly bailouts, the U. Among other things, the new rules pro- hibit banks from making risky investments with their own money, which may endan- ger the core capital of banks. In addition, a new independent Consumer Financial Protection Bureau was set up to protect consumers from predatory lending.

Also, a new Financial Stability Oversight Council of regulators chaired by the Treasury sec- retary would be responsible for carefully monitoring the systemic risk affecting the entire financial market. Lastly, it is noteworthy that during the course of the global financial crisis of — , the G, composed of both leading developed countries, such as Germany, Japan, and the United States, and major developing countries, such as Brazil, China, India, Korea, and South Africa, has emerged as the premier forum for discussing inter- national economic issues and coordinating financial regulations and macroeconomic policies.

We will revisit and discuss these and other related issues in greater detail in Chapter Multinational Corporations In addition to international trade, foreign direct investment by MNCs is a major force driving globalization of the world economy.

According to a UN report, there are about 60, MNCs in the world with over , foreign affiliates. In comparison, international trade grew at the rate of 3. A multinational corporation MNC is a business firm incorporated in one coun- try that has production and sales operations in many other countries.

The term sug- gests a firm obtaining raw materials from one national market and financial capital from another, producing goods with labor and capital equipment in a third country, and selling the finished product in yet other national markets. Indeed, some MNCs have operations in dozens of different countries.

MNCs obtain financing from major money centers around the world in many different currencies to finance their opera- tions. Exhibit 1. The list was compiled by the United Nations Conference on Trade and www.

By country of origin, U. MNCs, with 17 out of the total of , constitute the largest group. Italy Motor vehicles It is interesting to note that some Swiss firms are extremely multinational.

Obviously, MNCs make a significant contribution to the creation of job opportunities around the world. MNCs may gain from their global presence in a variety of ways. MNCs can indeed leverage their global presence to boost their profit margins and cre- ate shareholder value. In recent years, companies are increasingly using offshore outsourcing as a way of saving costs and boosting productivity. For example, when Microsoft entered the video game market, it decided to outsource production of the Xbox gaming console to Flextronics, a Singapore-based contract manufacturer.

Flextronics, in turn, decided to manufacture all Xbox consoles in China. This outsourcing decision allows Micro- soft, a company mainly known for its strength in software, to benefit from the manu- facturing and logistics capabilities of Flextronics and low labor costs in China.

Like Microsoft, many companies around the world are using outsourcing to enhance their competitive positions in the marketplace. Owing to the a con- tinuous liberalization of international trade and investment, and b rapid advances in telecommunications and transportation technologies, the world economy will become even more integrated.

Three major dimensions distinguish international finance from domestic finance. They are a foreign exchange and political risks, b market imperfections, and c an expanded opportunity set. Financial managers of MNCs should learn how to manage foreign exchange and political risks using proper tools and instruments, deal with and take advantage of market imperfections, and benefit from the expanded investment and financ- ing opportunities.

By doing so, financial managers can contribute to share- www. The theory of comparative advantage states that economic well-being is enhanced if countries produce those goods for which they have comparative advantages and then trade those goods. The theory of comparative advantage provides a powerful rationale for free trade. Currently, international trade is becoming liberalized at both the global and the regional levels.

At the global level, WTO plays a key role in promoting free trade. The subprime mortgage crisis in the United States that began in the summer www. The credit crunch, in turn, escalated to a major global financial crisis in — The global financial crisis may be attributable to several factors, including i excessive borrowing and risk taking by both households and banks, ii failure of government regulators to detect the rising risk in the financial system and take timely preventive actions, and iii the interconnected and integrated nature of financial markets.

The panic spread among weak European economies. The interest rates in these countries rose sharply and, at the same time, the euro depreciated sharply in currency markets, hurting its credibil- ity as a major global currency. A major economic trend of the recent decades is the rapid pace with which for- mer state-owned businesses are being privatized.

With the fall of communism, many Eastern Bloc countries began stripping themselves of inefficient business operations formerly run by the state. Privatization has placed a new demand on international capital markets to finance the purchase of the former state enter- prises, and it has also brought about a demand for new managers with interna- tional business skills.

In modern times, it is not a country per se but rather a controller of capital and know-how that gives the country in which it is domiciled a comparative advantage over another country. These controllers of capital and technology are multinational corporations MNCs. Today, it is not uncommon for an MNC to produce merchandise in one country, on capital equipment financed by funds raised in a number of different currencies, through issuing securities to investors in many countries and then selling the finished product to customers all over the world.

Why is it important to study international financial management? How is international financial management different from domestic financial management? Discuss the major trends that have prevailed in international business during the last two decades. What considerations might limit the extent to which the theory of comparative advantage is realistic? What are multinational corporations MNCs and what economic roles do they play?

Perot feared the loss of American jobs to Mexico, where it is much cheaper to hire workers. Rather, its goal should be to serve the company, whose interests should be clearly distin- guished from those of its shareholders, employees, creditors, suppliers, and clients but still equated with their general common interest, which is to safeguard the prosperity and continuity of the company. Emphasizing the importance of voluntary compliance, as opposed to enforce- ment, in the aftermath of such corporate scandals as those involving Enron and WorldCom, U.

President George W. Suppose you are interested in investing in shares of Samsung Electronics of Korea, which is a world leader in mobile phones, TVs, and home appliances. But before you make an investment decision, you would like to learn about the company. Visit the website of Yahoo finance. Discuss what you learn about the company. Also discuss how the instanta- neous access to information via Internet would affect the nature and workings of financial markets.

You may use such Internet search engines as Google and Yahoo. WWW www. The company, initially called Blue Ribbon Sports, changed its name to. Nike became highly successful in designing and marketing mass-appealing products such as the Air Jordan, the best-selling athletic shoe of all time. Nike has no production facilities in the United States. Rather, the company manu- factures athletic shoes and garments in such Asian countries as China, Indonesia, and Vietnam using subcontractors, and sells the products in the U.

In each of those Asian countries where Nike has production facilities, the rates of unem- ployment and under-employment are relatively high. The wage rate is very low in those countries by U. In addition, workers in those countries often operate in poor and unhealthy environments and their rights are not particularly well protected. Initially, Nike denied the sweatshop charges and lashed out at critics.

But later, the company began monitoring the labor practices at its overseas factories and grading the factories in order to improve labor standards. Nike also agreed to random factory inspec- tions by disinterested parties. Discussion Points 1. Do you think the criticism of Nike is fair, considering that the host countries are in dire needs of creating jobs?

Do firms need to consider the so-called corporate social responsibilities in making investment decisions? Investments, 9th ed. Ross, Stephen A. Westerfield, and Jeffrey F. Corporate Finance, 9th ed. International Accounting, 5th ed. Pearson Education, Meuller, Gerhard G. Accounting: An International Perspective, 5th ed. Burr Ridge, Ill.

Irwin, An Introduction to International Economics. San Diego: Harcourt Brace Jovanovich, Husted, Steven, and Michael Melvin. International Economics, 9th ed. Pearson, Krugman, Paul R. International Economics: Theory and Policy, 8th ed. Reading, Mass. Rivera-Batiz, Francisco L. International Finance and Open Economy Mac- roeconomics, 2nd ed. Upper Saddle River, N. Underlying the theory are the assump- tions of free trade between nations and that the factors of production land, labor, technology, and capital are relatively immobile.

Consider the example described in Exhibit A. Exhibit A. Country A and B each have 60,, units of input. Each country presently allocates 40,, units to the production of food and 20,, units to the production of textiles. Examination of the exhibit shows that Country A can produce five pounds of food with one unit of production or three yards of textiles.

Country B has an absolute advantage over Country A in the production of both food and textiles. Country B can produce 15 pounds of food or four yards of textiles with one unit of production. When all units of production are employed, Country A can produce ,, pounds of food and 60,, yards of textiles.

Country B can produce ,, pounds of food and 80,, yards of textiles. Total output is ,, pounds of food and ,, yards of tex- tiles. Without trade, each nation's citizens can consume only what they produce. While it is clear from the examination of Exhibit A. When viewed in terms of opportunity costs it is clear that Country A. Units of input , Food 40 40 Textiles 20 20 II. Output per unit of input lbs. Total output lbs. Consumption lbs. Units of input , Food 20 50 Textiles 40 10 II.

A relative efficiency that shows up via a lower opportunity cost is referred to as a comparative advantage. Total output is now ,, pounds of food and ,, yards of textiles. Suppose that Country A and Country B agree on a price of 2.

With free trade, Exhibit A. Compute the opportunity cost of producing food instead of textiles. Similarly, compute the opportunity cost of producing textiles instead of food. Assuming that free trade is allowed, develop a scenario that will benefit the citizens of both countries. Units of input , Food 70 60 Textiles 40 30 II. As mentioned in Chapter 1, the exchange rates among major currencies, such as the U.

Consequently, —Present corporations nowadays are operating in an environment in The Current Exchange Rate Arrangements which exchange rate changes may adversely affect their com- European Monetary System petitive positions in the marketplace.

This situation, in turn, The Euro and the European Monetary Union makes it necessary for many firms to carefully measure and A Brief History of the Euro manage their exchange risk exposure. Similarly, international investors face the problem of fluctuating exchange rates affect- What Are the Benefits of Monetary Union?

As we will discuss shortly, however, Costs of Monetary Union many European countries have adopted a common currency Prospects of the Euro: Some Critical Questions called the euro, rendering intra-European trade and investment The Mexican Peso Crisis much less susceptible to exchange risk.

The complex interna- The Asian Currency Crisis tional monetary arrangements imply that for adroit financial Origins of the Asian Currency Crisis decision making, it is essential for managers to understand, in detail, the arrangements and workings of the international Lessons from the Asian Currency Crisis monetary system.

The Argentine Peso Crisis The international monetary system can be defined as Fixed versus Flexible Exchange Rate Regimes the institutional framework within which international pay- Summary ments are made, movements of capital are accommodated, Key Words and exchange rates among currencies are determined. It is a Questions complex whole of agreements, rules, institutions, mechanisms, and policies regarding exchange rates, international payments, Internet Exercises and the flow of capital.

In this chapter, we will review the history of the international monetary sys- tem and contemplate its future prospects. In addition, we will compare and contrast the alternative exchange rate systems, that is, fixed versus flexible exchange rates. For astute financial management, it is important to understand the dynamic nature of international monetary environments. Evolution of the International Monetary System The international monetary system went through several distinct stages of evolution.

These stages are summarized as follows: 1. Bimetallism: Before Classical gold standard: — Interwar period: — Bretton Woods system: — Flexible exchange rate regime: Since We now examine each of the five stages in some detail. Bimetallism: Before Prior to the s, many countries had bimetallism, that is, a double standard in that free coinage was maintained for both gold and silver. In Great Britain, for example, bimetallism was maintained until after the conclusion of the Napoleonic Wars when Parliament passed a law maintaining free coinage of gold only, abolishing the free coinage of silver.

In the United States, bimetallism was adopted by the Coinage Act of and remained a legal standard until , when Congress dropped the silver dollar from the list of coins to be minted. France, on the other hand, introduced and maintained its bimetallism from the French Revolution to Some other countries such as China, India, Germany, and Holland were on the silver standard. On the other hand, the exchange rate between the franc and the German mark, which was on a silver standard, was determined by the silver content of the currencies.

The exchange rate between the pound and the mark was determined by their exchange rates against the franc. It is also worth noting that, due to various wars and political upheavals, some major countries such as the United States, Russia, and Austria-Hungary had irredeemable currencies at one time or another during the period — One might say that the international monetary system was less than fully systematic up until the s.

Since the exchange ratio between the two metals was fixed officially, only the abundant metal was used as money, driving more scarce metal out of circulation. As a result, the franc effectively became a gold currency. As previously mentioned, France was effectively on the gold standard begin- ning in the s and formally adopted the standard in The newly emergent German empire, which was to receive a sizable war indemnity from France, converted.

In fact, many countries were on either a gold standard or a silver standard until the s. The United States adopted the gold standard in , Russia and Japan in One can say roughly that the international gold standard existed as a historical reality during the period — The majority of countries got off gold in when World War I broke out.

The classical gold standard as an international monetary system thus lasted for about 40 years. An international gold standard can be said to exist when, in most major countries, i gold alone is assured of unrestricted coinage, ii there is two-way convertibility between gold and national currencies at a stable ratio, and iii gold may be freely exported or imported.