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    International Monetary System

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    Amethyst Nocellado
    The document discusses the International Monetary System (IMS), which regulates valuations and exchange of money across countries. It is governed by the IMF and World Bank and facilitates cross-border payments, exchange rates, and capital mobility according to established rules. The IMS has evolved over time from the gold standard to the Bretton Woods system to today's managed float system governed by the G20 countries.

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    International Monetary System

    Uploaded by

    Amethyst Nocellado
    58 views7 pages
    The document discusses the International Monetary System (IMS), which regulates valuations and exchange of money across countries. It is governed by the IMF and World Bank and facilitates cross-border payments, exchange rates, and capital mobility according to established rules. The IMS has evolved over time from the gold standard to the Bretton Woods system to today's managed float system governed by the G20 countries.

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    The document discusses the International Monetary System (IMS), which regulates valuations and exchange of money across countries. It is governed by the IMF and World Bank and facilitates cross-border payments, exchange rates, and capital mobility according to established rules. The IMS has evolved over time from the gold standard to the Bretton Woods system to today's managed float system governed by the G20 countries.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    58 views7 pages

    International Monetary System

    Uploaded by

    Amethyst Nocellado
    The document discusses the International Monetary System (IMS), which regulates valuations and exchange of money across countries. It is governed by the IMF and World Bank and facilitates cross-border payments, exchange rates, and capital mobility according to established rules. The IMS has evolved over time from the gold standard to the Bretton Woods system to today's managed float system governed by the G20 countries.

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    Bicol University College of Business Economics and Management

    Daraga Campus, Daraga Albay

    Module on : International Monetary System: Meaning

    International Monetary System (IMS) is a well-designed system that regulates the valuations
    and exchange of money across countries. It is a well-governed system looking after the cross-
    border payments, exchange rates, and mobility of capital. This system has rules and regulations
    which help in computing the exchange rate and terms of international payments. In other words,
    International Monetary System mobilizes the capital from one nation to another by felicitating
    trade. There are many participants like MNCs (Multinational Corporations), Investors, Financial
    Institutions, etc., in the International Monetary System.

    The main purpose of the International Monetary System today is to enhance high growth in the
    world with stable price levels. Earlier the scope was only up to exchange rates. Now the system
    has a broader scope by taking financial stability into consideration. International Monetary
    System has established International Monetary Fund (IMF) and the World Bank in the year
    1944.

    International Monetary System is also known as “International Monetary and Financial System”
    and also “International Financial Architecture.”

    What are the Characteristics of the International Money Market?

    The international money market is a money market but on a massive scale. This market
    enables investors, usually central banks of different countries, to lend and borrow
    money. Central banks and major commercial banks are the main participants in
    the international money market. This market deals in short-term instruments, mainly
    those that mature within the year. Another name for this market is the foreign exchange
    or forex. In this article, we will take a look at the characteristics of the international
    money market.

    Characteristics of International Money Market


    Below are the primary characteristics of the international money market:

    Global Market
    It is likely the biggest financial market globally as it handles trillions of dollars of
    transactions on a daily basis. Also, it is the most liquid market.

    Participants
    Central banks and major commercial banks are the main participants in this market.
    Individuals also participate in this market, but they typically transact small amounts.

    Having an international network of dealers is another characteristic of this market. And


    most of these dealers are commercial banks and investment banks. These dealers are
    usually in different countries with branches around the globe.

    Exchange Rate Pairs


    The international money market usually works with pairs to determine the exchange rate
    between currencies. For instance, GBP/USD tells about the exchange rate between
    British pounds and U.S. dollars. Similarly, EUR/USD measures the rate between euros
    and U.S. dollars. Since the U.S. dollar is the most active or popular currency, most pairs
    measure the value of one currency against the U.S. dollar. Some currencies, however,
    do use currencies other than the USD as well.

    Even though the U.S. dollar is the most active currency, the United Kingdom accounts
    for the highest amount of foreign exchange trading

    Number of Transactions
    It is a very big market that trades almost 24 hours a day. Thus, this market trades every
    second, giving rise to constant small fluctuations. These small movements could be as
    tiny as up to eight decimals. Such movements may appear small, but when you are
    dealing with millions of dollars, it could result in thousands in profit or losses.

    Trading In/Out of the Country


    The short-term instruments, such as bank deposits, are usually issued and traded
    outside of the nation issuing the currency.

    Pricing of Instruments
    The pricing of many instruments in this market depends on the benchmark, such as
    LIBOR.

    Price Transparency
    Price transparency is the highest in the international money market. And, transparency
    continues to improve with advancements in technology. In this market, a trader is able
    to directly trade with the market maker, ensuring higher transparency. Trading directly
    with the market maker also means that traders get a fair price on all trades.
    Rules of Market
    Though it is an international market, each country has its rules for the transactions in
    the market. These rules are for accounting, tax, payment and settlement, and banking
    laws.

    Physical Offices
    The equity and bond markets have physical offices, such as New York Stock Exchange
    (NYSE) or the London Stock Exchange (LSE). However, the international money market
    has no physical offices. Rather, the dealers in this market are connected online and
    share information with each other.

    So, these are the characteristics of the international money market that make it different
    from other financial markets in the world.

    Evolution of International Monetary System


    Over the past 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 has
    remained constant. The evolution of the International Financial Architecture is as follows:-

    Classic Gold Standard


    The first phase of the International Monetary System was the Classic Gold Standard from 1816
    to 1914. Only a few countries adopted this standard in the initial years of the Gold Standard.
    Later almost all countries accepted it. Usually, coins and billions of gold were useful during this
    standard. This gold standard gave birth to a fixed exchange rate system with minimal
    fluctuations. Because of the most fixed exchange rate, International trade saw a boost during
    this time. Gold Standard also made all countries of the world abide by strict monetary policy.
    This standard was helpful in correcting trade imbalances in the country. The other name of
    Classic Gold Standard is International Gold Standard.

    Why Classic Gold Standard Collapsed?

    After the end of World War 1, the Classic Gold Standard collapsed. During World War, many
    countries printed more money in order to finance their military requirements. As a result of this,
    the money in circulation exceeded the gold reserves of the country, and so those countries have
    to give up on Classic Gold Standard. The only United States of America didn’t give up on
    Classic Gold Standards.

    Interwar Period
    The period between World War 1 and World War 2 is known as the Interwar Period. This was
    the next episode of the International Monetary System from 1915 to 1944. During this time,
    Britain was replaced by the United States of America as the dominant financial powerhouse
    across the globe. During this period, all the economies had gone into a depression with a higher
    inflation rate. The fixed exchange rate system collapsed with a higher supply of money. Almost
    all countries started focussing on domestic revamping and not on international trade.

    Bretton Woods System


    The period after World War 2 gave birth to Bretton Woods System. This monetary system was
    in existence from 1945 to 1972. Representatives from 44 countries, in the year 1944, met at
    Bretton Woods of the United States and came up with a new International Monetary System.
    The focus of the Bretton Woods Agreement was to establish a uniform and liberal International
    Financial Architecture with independence on domestic policies. This agreement gave birth to the
    US Dollar-based Monetary System or Gold-Exchange Standard. This system gave birth to the
    pegging of domestic currency in terms of US Dollars. A price of $35 was set for 1 ounce of gold
    —the countries, rather than linking their currency to the gold-linked it to US Dollars.

    All the member countries of Bretton Woods had to maintain their currencies value within 1%
    upward or downward variations in comparison to Fixed Exchange Rate. This agreement also
    allowed the Governments of the country to convert their gold into the US Dollar at any point in
    time. Eventually, countries and businesses have started ignoring the link between US Dollar and
    Gold and have started considering exchange rates directly.

    Also Read: What are the Characteristics of the International Money Market?

    If the situation prevailed, then Bretton Woods Agreement allowed the country to devalue its
    currency by more than 10% straight. Although, it didn’t allow countries to use this mechanism to
    benefit from imports and exports of the country.
    Downfall of the Bretton Woods System

    Post-World War situation, the supply of US Dollars suddenly increased in the world economy.
    As a result of it, many countries started questioning the quantum of gold reserves of the US
    Government with the supply of the US Dollar. By 1973, many countries started losing
    confidence in the US Dollar and started searching for some other reliable sources.

    Current International Monetary System


    After the downfall of the Bretton Woods System, there has not been any formal International
    Monetary System in place. The present-day International Financial Architecture is a managed
    float system. All the currencies of all the countries can freely float against one another in an
    open market under the managed float system. The government intervenes only when the
    currency needs to be stabilized. Managed Float System has been in place since 1976 with the
    Jamaica Agreement. Later in 1980, the International Financial Architecture was regulated by G-
    5 countries. This G-5 group has currently turned into G-20, with a group of 20 countries
    managing the exchange rate on managed float system.

    Advantages of Current International Monetary System


    Following are a few advantages of the International Monetary Market

     IMS enhances financial stability and maintains the price level on a global scale. It also boosts
    global growth.
     International Monetary System mobilizes money across countries and determines the exchange
    rate.
     This system encourages the governments of respective countries to manage their Balance of
    Payment by reducing the trade deficit.
     IMS is a well-regulated system that makes the whole process of international trading smooth.
     This system relocates the capital from one country to another by enhancing cross-border
    investments.
     International Financial Architecture provides liquidity to the countries of the world.
     This system tries and avoids any short or long-run disruptions in the world economy.
    These advantages are non-exhaustive in nature.

    Criticisms of Current International Monetary System


    The biggest criticism of the present International Monetary System is that it is incompetent in
    avoiding global financial crises. There have been four serious financial crises over the past few
    years. Mexico, in the years 1994 and 1995, has suffered from a major economic and financial
    downfall. These crises came to an end in December 1996. Similarly, in the year 1997,
    Southeast Asia had suffered from a major economic breakdown. Russia and Brazil also had to
    go through serious financial crises in the year 1998 and 1999, respectively. In 2007-2009, the
    Global Economic Crisis questioned the current International Financial Architecture. There have
    been many such major financial breakdowns over the past few years, which the International
    Financial Architecture was unable to avoid.
    The second criticism with respect to the current International Financial Architecture is that
    sometimes the exchange rate remains misaligned. Managed Float System sometimes gets
    misaligned due to either internal or external factors.
    Conclusions
    International Monetary System has evolved over the years and has adjusted according to the
    prevailing conditions. There have been many criticisms of the prevailing International Monetary
    System. Sometimes it becomes difficult to manage Exchange Rate Stability, Monetary Policy
    Independence, and Free Capital Mobility altogether. According to experts, these criticisms can
    be overcome by filling the gaps in the national monetary system of each country and the
    International Financial Architecture at large. Rather than completely replacing the current
    system, a little modification in the regulations would make the current International Financial
    Architecture foolproof.

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