Monetary system

International monetary system is a set of rules and institutions defined by international treaties or conventions between participating countries that regulate international payments, exchange rates between currencies, and methods of forming and using international reserves. A well-functioning international monetary system ensures an adequate supply of international means of payment by supporting international trade, promoting exchange rate stability, and balancing balance-of-payments imbalances among countries, especially under normal circumstances, such as in times of recession or crisis.

Origins and evolution of the international monetary system

The international monetary system has evolved over time under the influence of different economic needs and political conditions, as well as incorporating new knowledge and technological advances. The use of valuables or metals as a medium of exchange replaced barter. This latter custom inextricably links coin management with political power, which in almost all places and historical periods has had the prerogative of determining the content of the precious metal "(gold or silver)". Due to various reasons, after the long-term use crisis of silver, the British government decided to adopt gold as the reference value of the pound at the end of the Napoleonic Wars, laying the foundation for an international monetary system based on gold.The gold standard, in force between 1870 and 1914 and restored briefly between the two world wars, considered by many to be the only historical example of a well-functioning international monetary system, was based on a few basic rules accepted informally by the participating countries : the mutual convertibility and acceptability of the respective currencies by all components; the setting of a gold parity for each national currency; the regulation by each state of the money supply according to the availability of gold reserves (John, 2018, p. 352) (Francesco, 2019, p. 118).

The international monetary system in the contemporary age

After the first world war, Britain and other countries decided to re-pegg their coins to gold, briefly reviving the international monetary system in hopes of restoring the stable growth conditions of the decades before the conflict. But the attempt failed, and in fact the system helped identify the imbalances and rigidities in the international economy that would lead to the Great Depression after the 1929 crisis. After World War II, at the Woods Conference in 1944, the victorious powers of the conflict decided to create a gold swap system in which the U.S. dollar, the main reserve currency, would remain pegged to gold and other countries would be able to trade at fixed rates Exchange dollar reserves for gold in the United States.This mechanism, although threatened by the growing external imbalances of the american economy, lasted until august 15, 1971, when the Nixon administration suspended the gold convertibility of the dollar. Since then the exchange rates between the main currencies have fluctuated freely, apart from some regional exchange agreements, such as the european monetary system. The dollar continued to be almost the only reserve currency. The asymmetrical nature of the international monetary system due to the fact that a single country created means of payment and therefore was not subject to any external constraints, has even become more accentuated, since the albeit tenuous discipline of gold parity has disappeared. In 1971, with the aim of facilitating the transition towards a more balanced system, the international monetary fund created a new international payment instrument, the special drawing right, which however always maintained a marginal role in the system. From the late 1990s, new developments in the structure of the international monetary system began to emerge. The euro, after its introduction in 1999, acquired an important role as an international reserve currency, second only to the dollar. The widening imbalances in the balance of payments between large emerging countries, eager to please their exports with a weak exchange rate, and the United States, interested in keeping domestic demand high even to the detriment of the external balance, accentuated the weakness of the dollar and the diversification of international reserves (Leena, 2021, p. 158).

The function of money

From an "economic" point of view, money has three functions:

1. Unit of account. Money is used to facilitate economic decision-making and contractual agreements by making homogeneous comparisons of the value of very different products and services.
2. Store of value. Money can transfer over time that portion of income that is not immediately spent on goods and services. In other words, it allows you to keep (save) a portion of your current income for future consumption.
3. Means of payment. Money can be exchanged instantly for goods and services: the buyer delivers the money to the seller, thereby releasing him from any obligation to the latter, who acknowledges its value by accepting it.

References

• Francesco P., (2019), International monetary system New economy and history, 5-122
• John T., (2018), International monetary system International monetary system, 347-359
• Leena A., Azhar A., (2021), Monetary system revolution changes Monetary system revolution changes, 156-160

Author: Chiara Di Miscio