The International Monetary System

The international monetary system comprises relevant official policies and practices covering all international regulatory aspects, exchange rate transactions and international balance of payments.

The IMS determines the rules and regulations that
set a country’s most appropriate foreign exchange
rate regime within the institutional framework

International financial institutions, central
banks, commercial banks, different money market
funds, open money markets, and government
bonds are all a part of the IMS.

In 1668, the first central bank as established in Sweden, called Riksbank.

In 1694 the second bank was established in England, called the Bank of England.

Bad money driving good money’ known as Gresham’s Law

A bimetallic standard, or bimetallism,
is a type of monetary system in which a government
accepts coins composed of gold or silver as legal
tender.

Gold Standard (1875-1914)

During the interwar period (between 1915
and 1944), Germany, Hungary, Austria, Russia,
and Poland were badly affected by the war and
hyperinflation. Britain lost its leader position as the
world’s dominant financial power, and the USA
became the new economic power.

The Great Depression, which emerged
as a panic in the US capital market, led
to dramatic industrial production and
employment decline, first in the US and
second in the world in 1929.

The value of a currency expressed in terms of
gold was called its par value.

The value of a currency expressed in terms of
gold was called its par value.

The ‘International Trade Organization (ITO)’ was established for trade negotiations between countries in the 1945.

The value of the SDR, initially, was set to be
the weighted average of 16 currencies of such
countries whose shares in world exports were more
than 1%. In other words, SDR was defined as
35 SDR = 35 dollars = 1 ounce of gold”

A fixed-peg arrangement means that central
banks or national governments set a policy in
which their exchange rate would be fixed for its
currency with another currency. For example,
UAE, Saudi Arabia and Hong Kong pegged their
currencies to the US dollar. Doing so stabilizes
the exchange rate between countries

-With monetary controls, inflation can be restrained
-With fiscal discipline, government spending can be controlled

-Monetary independence is being lost
-Real exchange rate fluctuation
-Burden to keep adequate reserves
-Speculators often attack the system
-The system might collapse suddenly, and a financial crisis might ensue

-Low requirement for international reserves
-Monetary policy independence
-No need for intervention

-Exchange rate risk
-Uncertainty

A central bank is independent when it determines policy
without intervention from politicians, governments
or the private sector. While theoretical studies find
a link between the central bank’s independence
and the effectiveness of monetary policy, empirical
studies demonstrate a positive relationship between
stable inflation and central bank independence.
While many developing countries do not have
independent central banks, developed countries’
central banks are conventionally independent.

There are three policy frameworks of central banks.
1. Regulating the interest rates: Central banks are the
only responsible institutions to set interest rates.
2. Managing foreign currency reserves: Central banks
also regulate foreign reserves.
3. Issuing the national currency: Central banks print
the currency and ensure enough supply of cash
to run the economy

These are as follows;
1. Institutional independence
2. Financial and organizational independence
3. Personal independence
4. Operational and functional independence
5. Legal independence

These are, the US Federal Reserve Bank
(FED), the Bank of England, The European
Central Bank (ECB), the Swiss National
Bank, the Bank of Japan, and the Bank of
Canada. They are the most influential central
banks in the world as of today.