international monetary system

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International monetary system

The global network of government and commercial institutions within which currency exchange rates are determined.

International Monetary System

In foreign exchange, the complete network of governments and institutions that affect currencies. The system has a set of agreed-upon rules that allows for international trade of goods and services. It is important to note that one government's decisions may affect the international monetary system. For example, many countries peg their currencies to the U.S. dollar; when the Federal Reserve makes changes to American monetary policy, it affects those currencies as well. Likewise, import and export laws and decisions on the convertibility of currencies have sometimes significant effects on the international monetary system. See also: Bretton Woods.
International monetary systemclick for a larger image
Fig. 98 International monetary system. Types of international monetary system.

international monetary system

a system for promoting INTERNATIONAL TRADE and SPECIALIZATION while at the same time ensuring long-run individual BALANCE OF PAYMENTS EQUILIBRIUM. To be effective, an international monetary system must be able to:
  1. provide a system of EXCHANGE RATES between national currencies;
  2. provide an ADJUSTMENT MECHANISM capable of removing payments imbalance;
  3. provide a quantum of INTERNATIONAL RESERVES to finance payments deficits. In addition, because of the structural weaknesses of some countries, particularly DEVELOPING COUNTRIES, financial aid facilitates are required to help resolve problems of indebtedness (see INTERNATIONAL DEBT).

The three functions identified above are highly interrelated, and a crucial role is played by the degree of fixity or flexibility built into the exchange rate mechanism, as Fig. 98 indicates. Thus, if exchange rates are rigidly fixed (see FIXED EXCHANGE RATE SYSTEM), balance of disequilibriums can only be removed by internal price and income adjustments (see BALANCE OF PAYMENTS EQUILIBRIUM), and countries will need to hold large stocks of international reserves to cover deficits while the necessary adjustments are given time to work. By contrast, where exchange rates are free to fluctuate in line with market forces (FLOATING EXCHANGE RATE SYSTEM), continuous external price adjustments will work to remove incipient imbalances before they reach serious proportions, thus reducing countries’ reserve requirements. Various international monetary systems have been tried, including the GOLD STANDARD and, currently, the INTERNATIONAL MONETARY FUND system. See EUROPEAN MONETARY SYSTEM.

References in periodicals archive ?
The international gold standard that Strong had labored so hard to create became an engine of worldwide deflation.
What I hope to show is that Keynes's apparently inconsistent views on monetary policy effectiveness may reflect differing assumptions regarding the extent to which policy was, or should be, constrained by a link to the international gold standard.
monetary policy during the early 1930s provide strong support for two of the essential arguments in this paper; that Keynes opposed inflationary fiat regimes and that Keynes's views on monetary policy ineffectiveness were implicitly linked to the constraints imposed by the international gold standard.
For instance, in his discussion of the role that expectations play in the liquidity trap Keynes specifically refers to an international gold standard setting: "But the long-term rate may be more recalcitrant when once it has fallen to a level which, on the basis of past experience and present expectations of future monetary policy, is consider 'unsafe' by representative opinion.
Bernanke argued that under an international gold standard a loss of confidence in the future parity of currencies would lead to the hoarding of gold, a reduction of the money/gold ratio and thus a reduction in the money supply.
Given his advocacy of this type of regime, and given the fact that the international gold standard began to collapse during the early 1930s, why would he have remained so pessimistic as to the prospects of using expansionary monetary policy to promote recovery?
In many respects, the international gold standard did not end in September 1931.
The struggle to restore the international gold standard after World War I differed significantly from past experience.
In theory, the "strict rules" of the international gold standard regulated the international price structure and anchored the international price level over the long run.
Under the international gold standard, no country had absolute control over its domestic price level in the long run; but a large country could influence whether its price level converged toward the world price level or world prices converged toward the domestic price level.
From 1914 to 1925 it was true that the influence of American policy alone on American prices and therefore on the world value of gold was so dominant as to deprive the expression "maintaining the dollar at parity with gold" of the significance properly attributed to it when an international gold standard system is in force.
The prospects of a restoration of the international gold standard seemed distant.

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