Monetary system

From CEOpedia | Management online

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 U.S. dollar is still pretty much the only reserve currency. Since a single country creates the means of payment and thus is not subject to external constraints, the asymmetry of the international monetary system becomes more pronounced as the gold parity discipline, albeit weak, disappears. In 1971, to facilitate the transition to a more balanced system, the International Monetary Fund created a new international payment instrument, the Special Drawing Right, although it remained a marginal player in the system. Beginning in the late 1990s, new developments in the architecture of the international monetary system became apparent. Since its launch in 1999, the euro has played an important role as an international reserve currency following the US 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

Author: Chiara Di Miscio