Monetary system

From CEOpedia | Management online

International Monetary System is the set of rules and institutions, defined by international treaties or conventions between participating countries, which regulate international payments, the exchange rates between currencies and the methods of creation and use of international reserves. A well-functioning international monetary system fosters growth and economic stability by supporting international trade, promoting exchange rate stability and the adjustment of balance-of-payments imbalances between states and ensuring an adequate supply of international means of payment, in particular normal conditions as well 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, also relying on new knowledge and technological progress. The use of precious objects or metals as a means of exchange replaced barter. This latter custom inextricably linked the management of coins to the political power, the exclusive holder, in almost all places and historical periods, of the privilege of deciding the content of noble metal (gold or silver). After a long period of crisis in the use of silver, for various reasons, the decision of the English government, at the end of the Napoleonic wars, to adopt gold as the reference value of the pound created the premises for an international monetary system based on the '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) (Francesc0, 2019, p.118)

THE INTERNATIONAL MONETARY SYSTEM IN THE CONTEMPORARY AGE

After the First World War, the decision of Great Britain and other countries to re-peg coins to gold briefly revived the international monetary system in the hope of recreating the conditions of stable growth of the decades preceding the conflict. But the attempt failed, and indeed the system helped to determine the imbalances and rigidities in the international economy that would lead, after the 1929 crisis, to the great depression. After the Second World War, the victorious powers of the conflict decided, in the Woods conference in 1944, to give life to a gold exchange system, in which the main reserve currency, the US dollar, remained linked to gold, while the other countries had the option of converting their dollar reserves into gold with the United States at a fixed parity. 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 FUNCTIONS OF MONEY

From an economic point of view, money performs three functions: unit of account, store of value and means of payment.

  1. unit of account. Money is used to homogeneously compare the value of very different products and services, thus facilitating economic decisions and contractual agreements.
  2. store of value. Money allows the portion of income that is not used immediately to consume goods and services to be shifted over time. In other words, it allows you to keep (save) a portion of your current income to spend it in the future.
  3. means of payment. Money can be instantly exchanged for goods and services: the buyer delivers money to the seller and in this way is freed from any obligation towards the latter who, by accepting it, recognizes its value.

(Isabelle, 2009, p.20)

References

Author: Chiara Di Miscio

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