international monetary system
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[ ] July 15, 2010
I. INTERNATIONAL MONETARY SYSTEMSA. INTERNATIONAL MONETARY SYSTEMS DEFINEDB. THE ROLE AND DRIVE FOR NEEDC. Balance of International Payments
1. Principles of Balance International PaymentsD. PROPOSALS FOR INTERNATIONAL MONETARY REFORMSE. THE INTERNATIONAL MONETARY FUND (IMF)
1. IMF KEY ACTIVITIES2. IMF AIMS
F. The Reduced Role of Gold II. INTERNATIONAL MONETARY SYSTEMS on SPECIAL DRAWING RIGHTS
A. SPECIAL DRAWING RIGHTS DEFINEDB. THE REASONS FOR SDR’S CREATIONC. THE OPERATION AND CREATION OF THE SDR’SD. ARTICLE XV – SPECIAL DRAWING RIGHTS
1. Section 1. Authority to allocate special drawing rights2. Section 2. Valuation of the special drawing right
E. VALUATION OF CURRENCIES IN TERMS OF SDRF. FREE USABLE CURRENCY
1. Monetary reserves according to Articles of Agreements.G. CHARACTERISITICS OF SPECIAL DRAWING RIGHTS
1. Assured Use2. UNchangable Use3. Extent of Use4. Currency Provided5. Use by Agreement6. Limited Surrender7. Gold Value Guarantee8. Equal Value of Currencies Provided9. Interest10. Withdrawal11. Liquidation
H. Composition of the International Reserve of the Philippines for International PaymentsI. CLASSIFICATION OF MONETARY SYSTEMS
1. Fixed rate of exchange monetary system2. The Floating Rate of Exchange3. The Flexible Par Value System
J. CLASSIFICATION OF MONETARY SYSTEMSK. DEGREES OF MANAGEMENT
1. Automatic Management2. Presumptive Management3. Discretionary Management
L. CLASSIFICATION OF INTERNATIONAL MONETARY SYSTEMS1. One World Monetary Systems2. Bloc Systems
M. GOLD EXCHANGE STANDARD IN GENERAL1. Gold Exchange
a) Three Ways Government to Secure Gold Fund:b) Advantages of Gold Exchange Standardc) Disadvantage of Gold Exchange Standard
N. CONVERTIBLE MONEYSO. NON COMMODITY MONEYSP. PAPER MONEYSQ. PRINCIPLES GOVERNING MANAGED CURRENCY SYSTEMR. SIGNS OF OVER ISSUANCE OF PAPER MONEY
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SUMMARY
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INTERNATIONAL MONETARY SYSTEMSINTERNATIONAL MONETARY SYSTEMS
INTERNATIONAL MONETARY SYSTEMS DEFINED are sets of internationally agreed rules, conventions and supporting institutions that
facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected.
can grow organically as the collective result of numerous individual agreements between international economic actors spread over several decades. Alternatively, they can arise from a single architectural vision as happened at Bretton Woods in 1944.
THE ROLE AND DRIVE FOR NEED Just as people in different countries speak different languages, they also transact business in
different currencies, requiring conversion from one type of money to another. The International Monetary System comprises the set of rules and practices that govern how
debts are honored and paid between and among nations with different national moneys. When the system is functioning smoothly, all countries gain from international flows of goods,
services, and capital – the system is an int’l public good. But when it breaks down or is poorly organized, nations are unable to sustain high levels of trade and investment.
Balance of International Payments Refers to a country’s summary statement of all imports of goods, services and
capital items, paid for by the nation, as measured against the value of all its exports of goods, services and capital items.
Principles of Balance International Payments:1. When the value of all foreign receipts exceeds the value of all payments to
foreign countries, the balance is said to be favorable.2. When the payments abroad exceed the receipts, the balance of payments is
to be unfavorable to the country.
PROPOSALS FOR INTERNATIONAL MONETARY REFORMS The Graham Commodity-Reserve-Currency Proposal Increasing the official price of gold for international monetary reserves The Keynes Plan for an International Central Bank The International Monetary Fund
THE INTERNATIONAL MONETARY FUND (IMF) an organization of 187 countries, working to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. www.imf.org
set up in 1944 to lower trade barriers between countries and to stabilize currencies by monitoring the foreign exchange systems of member countries, and lending money to developing nations.
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By Marie Sachie Mitsui P. Turiano
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IMF KEY ACTIVITIES 1. The IMF supports its membership by providing:2. policy advice to governments and central banks based on analysis of economic
trends and cross-country experiences;3. research, statistics, forecasts, and analysis based on tracking of global, regional,
and individual economies and markets;4. loans to help countries overcome economic difficulties;5. concessional loans to help fight poverty in developing countries; and6. technical assistance and training to help countries improve the management of
their economies.
IMF AIMS 1. provide a forum for cooperation on international monetary problems2. facilitate the growth of international trade, thus promoting job creation,
economic growth, and poverty reduction;3. promote exchange rate stability and an open system of international payments;
and4. lend countries foreign exchange when needed, on a temporary basis and under
adequate safeguards, to help them address balance of payments problems.
The Reduced Role of Gold ~under the Second Amendment to the Articles of Agreement of the International Monetary Fund
o Gold is removed from the central position it occupies in the Fund’s present Articles by:1. Breaking the link b/w gold & SDR;2. Prohibiting the use of gold as a peg for a currency under any future exchange
arrangements, including par value system;3. By requiring the Fund in any dealings in gold, to avoid actions that would manage
the price in the market or establish a fixed price.
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[ ] July 15, 2010
INTERNATIONAL MONETARY SYSTEMSINTERNATIONAL MONETARY SYSTEMSOn Special Drawing RightsOn Special Drawing Rights
SPECIAL DRAWING RIGHTS DEFINED The replacement of gold as an international reserve Established by IMF as the instrument of international currency of general acceptability
among nations. Principal reserve asset of the international monetary system A currency peg; a unit of account in international transport, for bond issues A definition of obligations in international agreements
THE REASONS FOR SDR’S CREATION The inadequacy of reserves would give rise to:
1. Anxiety to retain or increase reserves which would lead countries to adopt excessively restrictive policies to prevent the emergence of a payment’s deficit or to achieve a surplus;
2. Instability of exchange rates3. Rising unemployment4. Falling international prices
THE OPERATION AND CREATION OF THE SDR’S Transformed into a proposed amendment to the Articles of Agreement of the IMF, which later
took effect on July 28, 1969, after being accepted by 3/5 of the members(having 4/5 of the total power of the voting power of IMF).
Conducted through the Special Drawing Account.
ARTICLE XV – SPECIAL DRAWING RIGHTSSection 1. Authority to allocate special drawing rights• (a) To meet the need, as and when it arises, for a supplement to existing reserve assets,
the Fund is authorized to allocate special drawing rights in accordance with the provisions of Article XVIII (Allocation and Cancellation of Special Drawing Rights) to members that are participants in the Special Drawing Rights Department.
• (b) In addition, the Fund shall allocate special drawing rights to members that are participants in the Special Drawing Rights Department in accordance with the provisions of Schedule M. (Special One-Time Allocation of Special Drawing Rights)
Section 2. Valuation of the special drawing right• The method of valuation of the special drawing right shall be determined by the Fund by
a seventy percent majority of the total voting power, provided, however, that an eighty-five percent majority of the total voting power shall be required for a change in the principle of valuation or a fundamental change in the application of the principle in effect.
VALUATION OF CURRENCIES IN TERMS OF SDR(a) The value of the United States dollar in terms of the SDR shall be equal to the
reciprocal of the sum of the equivalents in United States dollars of the amounts of the currencies specified in Rule O-1, calculated on the basis of exchange rates established in accordance with procedures decided from time to time by the Fund.
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(b) The value of a currency other than the United States dollar in terms of the SDR shall be determined on the basis of the value of the United States dollar in terms of the SDR in accordance with (a) above and an exchange rate for that other currency determined as follows:
(c) Procedures to establish exchange rates under (b) above shall be determined by the Fund in consultation with members.
i. for the currency of a member having an exchange market in which the Fund finds that a representative spot rate for the United States dollar can be readily ascertained, that representative rate;
ii. for the currency of a member having an exchange market in which the Fund finds that a representative spot rate for the United States dollar cannot be readily ascertained but in which a representative spot rate can be readily ascertained for a currency as described in (i), the rate calculated by reference to the representative spot rate for that currency and the rate ascertained pursuant to (i) above for the United States dollar in terms of that currency;
iii. for the currency of any other member, a rate determined by the
Fund.
FREE USABLE CURRENCY(a) The Fund shall determine the currencies that are freely usable in accordance with
Article XXX(f).– A freely usable currency means a member's currency that the Fund determines
(i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets.
(b) The Fund shall consult a member before placing its currency on, or removing it from, the list of freely usable currencies.
Monetary reserves according to Articles of Agreements.– “A member’s monetary reserves mean its official holdings of gold; of
convertible of such non-members as the Fund may specify.”
CHARACTERISITICS OF SPECIAL DRAWING RIGHTS1. Assured Use
o The provision of Art. XXV require the Fund to designate participants to provide currency to other participants using their SDR’s in accordance with Section 2(a) of that article, so that the participants can be assured that all times they will be able to use their SDR’s in a manner consistent with the provisions of the Article.
2. UNchangable Useo If a participant uses its SDR’s because it needs to fill because of its balance of
payments or because of developments in its reserves, the transfer will not be challenged in any circumstance.
o The participant’s use of SDR’s in any operation or transaction permitted by the Articles cannot be questioned on the basis of the policies the participant is pursuing.
3. Extent of Useo A participant may use its SDR’s until none remains. However, use beyond a certain
average proportion overtime may require the participant to restore its holdings to a certain average level for a time.
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4. Currency Providedo When a participant transfers its SDR’sto a designated participant, the transferee
must provide “currency convertible in fact”. The transferor is not entitled to demand and, the transferee is not entitled to provide gold instead of currency convertible in fact.
5. Use by Agreemento The right to enter into a transaction involving the transfer of its’ SDR’s to a
participant if the transferee agrees, and if the currency provided is the currency if the ttransferor.
6. Limited Surrendero The monetary authorities holding SDR’s should be able to retain them, and should
not be obliged to surrender them under compulsion, except under stated exceptional cases.
7. Gold Value Guaranteeo SDR’s are expressed in terms of a unit of value equivalent to 0.888671 of fine gold.
This is equivalent to the gold content of the U.S. dollar in effect on July 1, 1944, that is, before the devaluation of the US dollar. The IMF Articles provide that there will never be a reduction in gold content of the SDR.
8. Equal Value of Currencies Providedo The principle is that in operations or transactions between participants, the
transferor must receive the same value whatever the currency provided, and whichever the participant providing it.
9. Interesto Each holder of SDR receives interest on the amount of its holdings, and each
participant pays charges on its net cumulative allocation.o The rates of interests and charges are the same so that a participant holding more
SDR’s than its net cumulative allocation receives a net payment, and one holding less makes a net payment.
10. Withdrawalo A participant may terminate its participation in the facility by giving notice at any
time, and notice is effective as soon as the Fund receives it.o The Fund is obliged to redeem all SDR’s held by the ex-participant, and the latter
must pay to the Fund an amount equal to its net cumulative allocation.o If the Fund is indebted to the ex-participant, the obligation is discharged with gold,
currency convertible in fact or the currency of the ex-participant.11. Liquidation
o Each participant will pay to the Fund in installments, an amount equal to its net cumulative allocation, and the Fund will be bound to redeem the SDR’s held by each participant.
Composition of the International Reserve of the Philippines for International PaymentsThe internal Reserve of the Central Bank of the Philippines may include the following assets:
1. GOLD2. Assets in foreign currencies in the form of:
• Documents & instruments of types customarily employed for the international transfer of fund;
• Demand & time deposits in Central Ban, treasuries, and commercial banks abroad;• Foreign govt. securities, with maturities not exceeding five years;• Foreign notes and coins
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CLASSIFICATION OF MONETARY SYSTEMSAs classified by Exchange Rate Mechanism1. Fixed rate of exchange monetary system
In this system, each country adopts a certain monetary unit with, more or less, fixed par value, based generally upon its gold content. This par value is made the basis of its exchange rate with other national standard momentary units, and this announced exchange rate remains stable or permanent for some time before it is officially changed.
2. The Floating Rate of Exchange A country using the floating rate of exchange for its monetary allows its money to be
traded in the money market at exchange rates fixed by the daily forces of demand and supply for such money. The monetary unit is allowed to seek its own price level.
3. The Flexible Par Value System The middle system between fully fixed rates of exchange and the free floating rate
of exchange.
CLASSIFICATION OF MONETARY SYSTEMSAccording to Degree of Management1. The Free Market Systems2. The Managed Economic Systems3. The Planned Economic Systems4. The mixed Economic Systems5. The Internationally Managed Systems
DEGREES OF MANAGEMENT1. Automatic Management
Process of management which is closely guided, or even pre-determined by precise and detailed rules laid down in advance, to the effect that when such-and-such a condition, qualitative, or quantitative, is fulfilled, countries, (or the Fund) will do such-and such a course of action.
2. Presumptive Management Process of management which such precise and detailed rules will generally apply, but
there is provision of the IMF to meet, and by an appropriate majority, to decide to override the rules in particular cases.
3. Discretionary Management Process of management which such the fulfillment of the conditions leads simply to a
consultation and assessment in the IMF, to be conducted in the light of the principles involved.
CLASSIFICATION OF INTERNATIONAL MONETARY SYSTEMSAs to quality of internationalism1. One World Monetary Systems
Seeks to establish a world monetary system with international authority in all the main areas of monetary matters.
2. Bloc Systems Allow the information and strengthening of the one-world approach in the
multifarious fields of trade and money. this is also the modern tendency of our times
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GOLD EXCHANGE STANDARD IN GENERALGold Exchange
A system in which a country does not redeem its money directly in gold, but in drafts, or claims to foreign exchange, held in foreign countries under the gold standard.
A gold fund must be maintained by government to maintain the gold exchange standards.
Three Ways Government to Secure Gold Fund:1. Borrow in the gold standard country2. Purchase In its own markets securities of that country, which it can then sell in the gold
standard country, and deposit the proceeds in the gold standard country3. Purchase in its own money markets drafts drawn upon the gold standard fund arising
out of its own exports
Advantages of Gold Exchange Standard1. It is cheaper to operate than the gold standard.2. The gold standard fund deposited in the foreign country earns interest, if it is in the
form of securities payable in gold.3. It involves no security risks, and expenses as would be the case when a stock of gold is
held as reserve.
Disadvantage of Gold Exchange StandardThe chief drawback of the gold exchange standard is that the value of the
country’s own monetary standard depends upon the monetary policies of the gold standard country.
NON COMMODITY MONEYS
All moneys whose stated face value as money, has bear no relation to the commodity market values of the materials of which they are made.
Usually made of paper or some valueless material, and their values as money depend solely on their stated face values and their power to command goods and services in exchange for themselves as monetary units, in the country of issue or in foreign markets.
CONVERTIBLE MONEYS Moneys redeemed upon demand of the holder thereof in gold or silver, or other standard
money of equivalent values Belong to the countries issuing them which are of convertible standard.
PAPER MONEYS1. Utopian paper Standard
– The ideal monetary standard.– Has no intrinsic value and no redemption value.
2. Involuntary paper Standard– Happens when some countries are confronted by emergency expenditures.
3. Managed paper Currency Standard– Involves the use of paper as currency with no direct provision for redeemability.
PRINCIPLES GOVERNING MANAGED CURRENCY SYSTEM1. The gold standard is abandoned.2. The remaining monetary function of gold would be limited to its being used as a store of
value and to settle adverse balance of payments with nations desiring gold.3. Gold reserves would no longer be used to correct fluctuations in the rate of exchange with
other moneys still based on gold.
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4. Fluctuations of prices of G & S from the normal level would be corrected by appropriate credit policy, effected by or through changes in the discount rate of the Central Bank, and through change sin the price of gold in the appropriate cases.
5. A managed currency is generally associated with the paper standard, the paper currency being inconvertible for domestic purposes.
6. Moreover, even the gold standard can be converted into managed gold standard.7. A nation with a monetary system based on gold, which utilizes Central Bank procedures for
managing the money supply to control prices, uses the managed gold standard.
SIGNS OF OVER ISSUANCE OF PAPER MONEY1. Some people sets a premium on gold or silver as against paper money2. There is a rise in the rate of exchange between gold based money and paper money, for
international payments3. There is a flight of metallic money from circulation4. Rise in the general price level, if payment is made in paper money.5. Double set of prices
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EXAMINATION:
1) Among the four submitted proposals for International Monetary Reforms, which proposal was made to mandate until the present system?
ANSWER: The International Monetary Fund
2) This refers to a country’s summary statement of all imports of goods, services and capital items, paid for by the nation, as measured against the value of all its exports of goods, services and capital items.
ANSWER: Balance of International Payments
3) Can the international monetary system grow organically as a collective result of numerous agreements between international economic actors over decades? Yes or No?
ANSWER: Yes
4) It is through this that the operation and creation of the Special Drawing Account was conducted…ANSWER: Special Drawing Account
5) - 8.)Give at least four(4) characteristics of the Special Drawing RightPOSSIBLE ANSWERS:
1. UNchangable Use2. Extent of Use3. Assured Use4. Currency Provided5. Use by Agreement6. Limited Surrender7. Gold Value Guarantee8. Equal Value of Currencies Provided9. Interest10. Withdrawal11. Liquidation
9) – 10) Gove the two classifications of international monetary systems as to quality of internationalism
ANSWER: One-World Monetary System; Bloc System
10) – 15) ESSAY: Based from the discussion, what were the drives to the creation of the International Monetary System? (5 points)
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BIBLIIOGRAPHY:
1. 1. http://www.investorwords.com/2569/International_Monetary_Fund.html
definition of international monetary fund
2. http://www.answers.com/topic/international-monetary-system
definition and concepts of international monetary system
3. http://www.imf.org
4. www.youtube.com for videos and clips
5. http://en.wikipedia.org/wiki/International_monetary_systems
6. Nuque, Simplicio R.,(1977) “Modern Money, Credit and Banking, Webster School and Office Supplies Inc., p 89-108
7. http://www.infoplease.com/ce6/bus/A0825353.html, The Columbia Electronic Encyclopedia, 6th ed.
Copyright © 2007, Columbia University
8. http://www.palgrave.com/products/title.aspx?is=0230524958, Copyright © 2010 Macmillan Publishers Limited Houndmills, Basingstoke, Hampshire, RG21 6XS, England
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