International Monetary System: Importance
The International Monetary System (IMS) is a well-designed system that regulates the valuation and exchange of money between countries. It is a well-run system that takes care of cross-border payments, exchange rates, and capital mobility. This system has rules and regulations that help calculate the exchange rate and the terms of international payments. In other words, the International Monetary System mobilizes capital from one nation to another facilitating trade. There are many participants such as MNCs (Multinational Corporations), investors, financial institutions, etc. in the International Monetary System.
The main objective of the International Monetary System today is to promote high growth in the world with stable price levels. Before it was about exchange rates. Now the system has a broader scope by taking financial stability into account. The International Monetary System established the International Monetary Fund (IMF) and the World Bank in 1944.
table of Contents
- International Monetary System: Importance
- Development of the International Monetary System
- classic gold standard
- Why did the classical gold standard collapse?
- interwar period
- Sistema de Bretton-Woods
- Demise of the Bretton Woods system
- Current International Monetary System
- classic gold standard
- Advantages of the current international monetary system
- Criticisms in the current international monetary system
The International Monetary System is also known as the "International Monetary and Financial System" and also as the "International Financial Architecture".
Development of the International Monetary System
In the last 75 years, the International Monetary System has been modified according to the prevailing conditions. The scope has evolved over the years, but the purpose of the system remains the same. The evolution of the international financial architecture is as follows:-
classic gold standard
The first phase of the International Monetary System was the classical gold standard from 1816 to 1914. Few countries adopted this standard in the early years of the gold standard. Subsequently almost all countries accepted it. Coins and billions of gold used to come in handy during this standard. This gold standard produced a fixed exchange rate system with minimal fluctuations. Due to the stability of the exchange rate, international trade boomed during this period. The Gold Standard also required every country in the world to adhere to strict monetary policies. This rule was useful to correct the country's trade imbalances. The other name of Classic Gold Standard is International Gold Standard.
Also read:international money market
Why did the classical gold standard collapse?
After the end of World War I, the classical gold standard collapsed. During World War II, many countries printed more money to finance their military needs. As a result, money in circulation exceeded the country's gold reserves, forcing these countries to abandon the classical gold standard. The only United States of America has not abandoned the classical gold standards.
The period between World War I and World War II is known as the interwar period. This was the next episode of the International Monetary System from 1915 to 1944. During this period, Great Britain was replaced by the United States of America as the dominant financial power in the entire world. During this time, all the economies with a higher inflation rate were in depression. The fixed exchange rate system collapsed with an increased money supply. Almost all countries began to focus on internal renewal instead of international trade.
Sistema de Bretton-Woods
The period after World War II brought with it the Bretton Woods system. This monetary system existed from 1945 to 1972. Representatives of 44 countries met in 1944 in Bretton Woods, United States and developed a new International Monetary System. The focus of the Bretton Woods Agreement was to establish a unified and liberal international financial architecture with autonomy in domestic policy. This agreement gave rise to the monetary system based on the US dollar or gold exchange standard. This system led to the national currency being pegged to the US dollar. An ounce of gold was priced at $35 - countries pegged their currency not to gold but to the US dollar.
All Bretton Woods member countries were required to keep the value of their currency within 1% of fluctuations up or down compared to the fixed exchange rate. This agreement also allowed the country's governments to exchange their gold for US dollars at any time. Eventually, countries and companies have started to ignore the link between the US dollar and gold and have begun to look directly at exchange rates.
Also read:What are the characteristics of the international money market?
If the situation prevailed, the Bretton Woods Agreement would allow the country to devalue its currency by more than 10% directly. However, it did not allow countries to use this mechanism to benefit from the country's imports and exports.
Demise of the Bretton Woods system
Situation after the world war, the supply of US dollars suddenly increased in the world economy. As a result, many countries began to question the level of the US government's gold reserves with the provision of the US dollar. By 1973, many countries began to lose confidence in the US dollar and began looking for other reliable sources.
Current International Monetary System
After the demise of the Bretton Woods system, there was no longer a formal International Monetary System. The current international financial architecture is a managed float system. All currencies of all countries can float freely against each other in an open market under the managed float system. The government only steps in when the currency needs to be stabilized. The managed float system has been in place since 1976 with the Jamaica Convention. Later in 1980, the international financial architecture was regulated by the G-5 countries. This G-5 group has now become the G-20, with a group of 20 countries managing the exchange rate on a managed float system.
Advantages of the current international monetary system
Below are some advantages ofinternational currency market
- IMS improves financial stability and maintains price levels on a global scale. It also drives global growth.
- The International Monetary System moves money between countries and determines the exchange rate.
- This system encourages the governments of the respective countries to manage their balance of payments by reducing the trade deficit.
- IMS is a well-regulated system that facilitates the entire process of international trade.
- This system moves capital from one country to another encouraging cross-border investment.
- The international financial architecture provides liquidity to the countries of the world.
- This system seeks to avoid short- or long-term disruption to the global economy.
These benefits are not exhaustive.
Criticisms in the current international monetary system
The biggest criticism of the current International Monetary System is its inability to prevent global financial crises. There have been four serious financial crises in recent years. Mexico suffered a major economic and financial recession in 1994 and 1995. These crises ended in December 1996. Similarly, in 1997 Southeast Asia had suffered a major economic collapse. Russia and Brazil also went through severe financial crises in 1998 and 1999 respectively. In 2007-2009, the global economic crisis challenged the current international financial architecture. In recent years there have been many major financial collapses that the international financial architecture could not prevent.
The second criticism of the current international financial architecture is that, at times, the exchange rate remains misaligned. The managed float system sometimes goes out of alignment due to internal or external factors.
The International Monetary System has evolved over the years and has adapted to prevailing conditions. There have been many criticisms of the current International Monetary System. Sometimes it is difficult to manage the general stability of the exchange rate, the independence of monetary policy and the free mobility of capital. According to experts, these criticisms can be overcome by closing the loopholes in each country's national monetary system and in the international financial architecture as a whole. Instead of completely replacing the current system, a small change in regulation would make the current international financial architecture foolproof.
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