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M6-Int'l Monetary System

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31 views

M6-Int'l Monetary System

Uploaded by

Sharon Cadampog Mananguite
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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MODULE 6: INTERNATIONAL MONETARY SYSTEM

INTERNATIONAL MONETARY SYSTEM


 Money is a unit of account that is used as a medium of exchange in transactions.
Without money, individuals and businesses would have a harder time obtaining
(purchasing) or exchanging (selling) what they need, want, or make. Money
provides us with a universally accepted medium of exchange.
 INTERNATIONAL MONETARY SYSTEM refers to the system and rules that
govern the use and exchange of money around the world and between countries.
Each country has its own currency as money and the international monetary
system governs the rules for valuing and exchanging these currencies.
Brief History
History shows that ancient Egypt and Mesopotamia—began to use a system based on the highly
coveted coins of gold and silver, also known as bullion, which is the purest form of the precious
metal. However, bartering remained the most common form of exchange and trade.
Gold and silver coins gradually emerged in the use of trading, although the level of pure gold and
silver content impacted the coins’ value. Only coins that consist of the pure precious metal are
bullions; all other coins are referred to simply as coins. It is interesting to note that gold and silver
lasted many centuries as the basis of economic measure and even into relatively recent history
of the gold standard.
Fast-forward two thousand years and bartering has long been replaced by a currency-based
system. Even so, there have been evolutions in the past century alone on how—globally— the
monetary system has evolved from using gold and silver to represent national wealth and
economic exchange to the current system.
 Pre–World War I
Gradually more countries adopted gold, usually in the form of coins or bullion, and this
international monetary system became known as the gold standard. This system emerged
gradually, without the structural process in more recent systems. The gold standard, in essence,
created a fixed exchange rate system.
Note: An EXCHANGE RATE is the price of one currency in terms of a second currency.
In the gold standard system, each country sets the price of its currency to gold, specifically to one
ounce of gold. A fixed exchange rate stabilizes the value of one currency vis-à-vis another and
makes trade and investment easier.
*The gold standard eventually collapsed from the impact of World War I. During the war, nations
on both sides had to finance their huge military expenses and did so by printing (more) paper
currency. As the currency in circulation exceeded each country’s gold reserves, many countries
were forced to abandon the gold standard.
 Post–World War II
The demise of the gold standard and the rise of the Bretton Woods System pegged to the US
dollar was also a changing reflection of global history and politics.
Bretton Woods
In the early 1940s, the United States and the United Kingdom began discussions to formulate a
new international monetary system. John Maynard Keynes, a highly influential British economic
thinker, and Harry Dexter White, a US Treasury official, paved the way to create a new monetary
system. In July 1944 representatives from forty-four countries met in Bretton Woods, New
Hampshire, to establish a new international monetary system.
The Bretton Woods system established a new monetary system based on the US dollar.
The resulting Bretton Woods Agreement created a new dollar-based monetary system, which
incorporated some of the disciplinary advantages of the gold system while giving countries the
flexibility they needed to manage temporary economic setbacks, which had led to the fall of the
gold standard. The Bretton Woods Agreement lasted until 1971 but it created the International
Monetary Fund (IMF) and the World Bank.
 The IMF’s initial primary purpose was to help manage the fixed rate exchange system; it
eventually evolved to help governments correct temporary trade imbalances (typically
deficits) with loans.
 The World Bank’s purpose was to help with post–World War II European reconstruction.
Note: Both institutions continue to serve these roles but have evolved into broader institutions
that serve essential global purposes, even though the system that created them is long gone.
 Today’s Exchange Rate System
Today’s system remains—in large part—a managed float system, with the US dollar and the
euro jostling to be the premier global currency. For businesses that once quoted primarily in
US dollars, pricing is now just as often noted in the euro as well.

ROLE OF THE INTERNATIONAL MONETARY FUND (IMF) AND THE WORLD BANK
The International Monetary Fund (IMF) and the World Bank, often called the Bretton Woods
Institutions, are twin intergovernmental pillars supporting the structure of the world’s economic
and financial order. Both have taken on expanding roles, and there have been renewed calls for
additional expansion of their responsibilities, particularly in the continuing absence of a single
global monetary agreement.
1. International Monetary Fund (IMF)
Officially, the IMF came into existence in December 1945 with twenty-nine member countries.
Today, 187 countries are members of the IMF.
The purposes of the International Monetary Fund (IMF) are as follows:
a. To promote international monetary cooperation through a permanent institution which
provides the machinery for consultation and collaboration on international monetary
problems.
b. To facilitate the expansion and balanced growth of international trade, and to contribute
thereby to the promotion and maintenance of high levels of employment and real income
and to the development of the productive resources of all members as primary objectives
of economic policy.
c. To promote exchange stability, to maintain orderly exchange arrangements among
members, and to avoid competitive exchange depreciation.
d. To assist in the establishment of a multilateral system of payments in respect of current
transactions between members and in the elimination of foreign exchange restrictions
which hamper the growth of world trade.
e. To give confidence to members by making the general resources of the Fund
temporarily available to them under adequate safeguards, thus providing them with
opportunity to correct maladjustments in their balance of payments without resorting to
measures destructive of national or international prosperity.
f. In accordance with the above, to shorten the duration and lessen the degree of
disequilibrium in the international balances of payments of members.
Note: In addition to financial assistance, the IMF also provides member countries with technical
assistance to create and implement effective policies, particularly economic, monetary, and
banking policy and regulations.
2. The World Bank and the World Bank Group
The World Bank came into existence in 1944 at the Bretton Woods conference. Its formal name
is the International Bank for Reconstruction and Development (IBRD), which clearly states
its primary purpose of financing economic development. The World Bank has one central
purpose: to promote economic and social progress in developing countries by helping raise
productivity so that their people may live a better and fuller life.
In 2009, the World Bank provided $46.9 billion for 303 projects in developing countries worldwide,
with financial and/or technical expertise aimed at helping those countries reduce poverty.
Today, The World Bank consists of two main bodies: the International Bank for Reconstruction
and Development (IBRD) and the International Development Association (IDA).
The World Bank is part of the broader World Bank Group, which consists of five interrelated
institutions:
a. International Bank for Reconstruction and Development (IBRD), which makes
loans to countries with the purpose of building economies and reducing poverty.
b. International Development Association (IDA), which typically provides interest-free
loans to countries with sovereign guarantees.
c. International Finance Corporation (IFC), which provides loans, equity, risk-
management tools, and structured finance with the goal of facilitating sustainable
development by improving investments in the private sector.
d. Multilateral Investment Guarantee Agency (MIGA), which focuses on improving the
foreign direct investment of the developing countries.
e. International Centre for Settlement of Investment Disputes (ICSID), which provides
a means for dispute resolution between governments and private investors, with the end
goal of enhancing the flow of capital.
The current primary focus of the World Bank centers on six strategic themes:
a. The poorest countries. Poverty reduction and sustainable growth in the poorest
countries, especially in Africa.
b. Post-conflict and fragile states. Solutions to the special challenges of post-conflict
countries and fragile states.
c. Middle-income countries. Development solutions with customized services as well as
financing for middle-income countries.
d. Global public goods. Addressing regional and global issues that cross national
borders, such as climate change, infectious diseases, and trade.
e. The Arab world. Greater development and opportunity in the Arab world.
f. Knowledge and learning. Leveraging the best global knowledge to support
development.

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