INTERNATIONAL MONETARY SYSTEM
We may define international monetary system as "a set of arrangements, rules,
practices and institutions under which payments are made and received for
international transactions across national boundaries".
In broad terms, the international monetary system involves the management of
three processes (1) the adjustment of balance of payments positions, including
the establishment and alteration of exchange rates; (2) the financing of
payments imbalances among countries by the use of credit or reserves; and (3)
the provision of international money (reserves).
The Gold Standard
The international monetary system that operated prior to the 1914- 18 war was
termed as the gold standard. During the late nineteenth century, the global
economy was characterized by use of a gold standard. The gold standard
operated from about 1880 to the outbreak of World War I in 1914. Then the
countries accepted the major assets gold and sterling in settlement of
international debt. In 1821, the United Kingdom, the predominant global
economy through the reaches of its colonial empire, adopted the gold standard
and committed to fixing the value of the British pound. A unit of a country's
currency was defined as a certain weight of gold (e.g. a pound sterling could be
converted into 113.0015 grains of fine gold and the U.S. dollar into 23.22
grains. Through these gold equivalents, the value of the pound was 113.0015 /
23.22 times, (or 4.885 times that of the dollar. Thus 4.885 dollars was the 'par
value' of the pound). This is called the mint parity.
A country is said to be on the gold standard when its central bank is obliged to
give gold in exchange for its currency when presented to it. The gold standard
was the foundation of the international trading system. The currency of a
country was freely convertible into gold at a fixed exchange rate. lnternational
debt settlement was to be in gold. When a country had a surplus in its balance of
payments, gold flowed into its central bank. Thus the country with a balance of
payments surplus could expand its domestic money supply without having the
fear of insufficient gold to meet its liabilities. When the money supply
increased, prices increased, hence the demand of exports fell, and the balance of
payments surplus was reduced.
On the other hand, when a country had a deficit in its balance of payments, gold
flowed outside the country. Thus the deficit country had to contract the money
supply with the reduction in its gold stocks. 'The prices of commodities
decreased. Its exports become more competitive and the deficit automatically
got corrected, as increase in exports resulted in gold inflows.
We may define international monetary system as "a set of arrangements, rules,
practices and institutions under which payments are made and received for
international transactions across national boundaries".
In broad terms, the international monetary system involves the management of
three processes (1) the adjustment of balance of payments positions, including
the establishment and alteration of exchange rates; (2) the financing of
payments imbalances among countries by the use of credit or reserves; and (3)
the provision of international money (reserves).
The Gold Standard
The international monetary system that operated prior to the 1914- 18 war was
termed as the gold standard. During the late nineteenth century, the global
economy was characterized by use of a gold standard. The gold standard
operated from about 1880 to the outbreak of World War I in 1914. Then the
countries accepted the major assets gold and sterling in settlement of
international debt. In 1821, the United Kingdom, the predominant global
economy through the reaches of its colonial empire, adopted the gold standard
and committed to fixing the value of the British pound. A unit of a country's
currency was defined as a certain weight of gold (e.g. a pound sterling could be
converted into 113.0015 grains of fine gold and the U.S. dollar into 23.22
grains. Through these gold equivalents, the value of the pound was 113.0015 /
23.22 times, (or 4.885 times that of the dollar. Thus 4.885 dollars was the 'par
value' of the pound). This is called the mint parity.
A country is said to be on the gold standard when its central bank is obliged to
give gold in exchange for its currency when presented to it. The gold standard
was the foundation of the international trading system. The currency of a
country was freely convertible into gold at a fixed exchange rate. lnternational
debt settlement was to be in gold. When a country had a surplus in its balance of
payments, gold flowed into its central bank. Thus the country with a balance of
payments surplus could expand its domestic money supply without having the
fear of insufficient gold to meet its liabilities. When the money supply
increased, prices increased, hence the demand of exports fell, and the balance of
payments surplus was reduced.
On the other hand, when a country had a deficit in its balance of payments, gold
flowed outside the country. Thus the deficit country had to contract the money
supply with the reduction in its gold stocks. 'The prices of commodities
decreased. Its exports become more competitive and the deficit automatically
got corrected, as increase in exports resulted in gold inflows.
