Introduction to Finance

6.1
International Monetary System
GLOBAL
In the fi rst fi ve chapters of Part 1, we focused on covering the role of the U.S. fi nancial 
system, monetary system, and monetary policy. When viewed in a global context, respons-
ibilities become more complex. The global or 
international monetary system
 
is a system of 
institutions and mechanisms to foster world trade, manage the fl ow of fi nancial capital, and 
determine currency exchange rates. We begin with a brief discussion of the historical devel-
opment of international trade and fi nance. Then we turn our attention to how the international 
monetary system has changed or evolved over the past couple of centuries. 
Development of International Finance
International fi nance probably began about 5,000 years ago when Babylonian cities rose to 
importance as centers of trade between the Mediterranean Sea and civilizations in the East. 
Gold was used for transactions and as a store of value, probably beginning around 3000 
B
.
C
., 
when the pharaohs ruled Egypt. Centers of international fi nance shifted to the Greek city of 
Athens around 500 
B
.
C
. and to the Roman Empire and Rome around 100 
B
.
C
.
2 
It appears that 
whenever international trade developed, fi nancial institutions came into existence and inter-
national bankers followed.
international monetary system 
system of institutions and 
mechanisms to foster international 
trade, manage the fl ow of fi nancial 
capital, and determine currency 
exchange rates
1
Maria Mitchell, 
Life, Letters, and Journals
, 1896.
2
For a more detailed look at the early development of international fi nance, see Robert D. Fraser, International Bank-
ing and Finance, 6th ed., (Washington, DC: R&H Publishers, 1984), ch. 2.

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C H A PT E R 6 International Finance and Trade
Instruments and documents similar to those in use today were designed to control move-
ment of cargo, insure against losses, satisfy government requirements, and transfer funds. 
Financial centers shifted to the northern European cities during the 1500s, and in more recent 
years to London, New York, and Tokyo. Today, international trade takes place and interna-
tional claims are settled around the clock. It is no longer necessary to have a physical center, 
such as a city, in which to carry out international fi nancial operations.
How the International Monetary System Evolved