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The International Monetary System

The rules and procedures for exchanging national currencies are collectively known as

the international monetary system. This system doesn't have a physical presence, like

the Federal Reserve System, nor is it as codified as the Social Security system. Instead,

it consists of interlocking rules and procedures and is su!ect to the foreign exchangemarket, and therefore to the !udgments of currency traders aout a currency.

"et there are rules and procedures#exchange rate policies#which pulic finance

officials of various nations have developed and from time to time modify. There are also

physical institutions that oversee the international monetary system, the most important

of these eing the International $onetary Fund.

International monetary systems 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 acceptablebetween buyers and sellers of dierent nationality, including deferred

payment. To operate successfully, they need to inspire condence, to provide

sucient liquidity for uctuating levels of trade and to provide means by

which global imbalances can be corrected. The systems can grow organically

as the collective result of numerous individual agreements between

international economic factors spread over several decades. Alternatively,

they can arise from a single architectural vision as happened at retton

!oods in "#$$.

Throughout history, precious metals such as gold and silver  have been used for trade,termed bullion , and since early history the coins of various issuers – generally kingdoms andempires – have been traded. The earliest known records of pre - coinage use of bullion formonetary exchange are from Mesopotamia and Egypt, dating from the third millennium !."#$ Early money took many forms, apart from bullion% for instance bron&e 'pade moneywhich became common in (hou dynasty !hina in the late )th century !. *t this time, forms of moneywere also developed in +ydia, *sia minor, from where its use spread to nearby reek cities andlater to the rest of the world."#$

'ometimes formal monetary systems have been imposed by regional rulers. or example

scholars have tentatively suggested that the ruler 'ervius Tulliuscreated a primitive monetarysystem in the archaic period of what was to become the oman epublic. Tullius reigned in thesixth century ! - several centuries before ome is believed to have developed a formal coinagesystem."/$

*s with bullion, early use of coinage is believed to have been generally the preserve of the elite.ut by about the 0th century ! they were widely used in reek cities. !oins were generallysupported by the city state authorities, who endeavoured to ensure they retained their values

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regardless of fluctuations in the availability of whatever base precious metals they were madefrom."#$ rom reece the use of coins spread slowly westwards throughout Europe, andeastwards to 1ndia. !oins were in use in 1ndia from about 022!, initially they played a greaterrole in religion than trade, but by the /nd century had become central to commercial transactions.Monetary systems that were developed in 1ndia were so successful they spread through parts of

*sia well into the Middle *ges."#$

*s multiple coins became common within a region, they were exchanged by moneychangers, the predecessors of today3s foreign exchange market, as famously discussed in the iblical storyof 4esus and the money changers. 1n 5enice and the 1talian city states of the early Middle *ges,money changers would often have to struggle to perform calculations involving six or morecurrencies. This partly led to ibonacci writing his +iber *baci where he popularised the useof 1ndo-*rabic numerals, which displaced the more difficult oman numerals then in use bywestern merchants."6$

7istoric international currencies. rom top left8 crystalline gold, a 9th-century !E :ersiandaric, an ;th-century English mancus, and an #;th-century 'panish real.

<hen a given nation or empire has achieved regional hegemony, its currency has been a basisfor international trade, and hence for a de facto monetary system. 1n the <est – Europe and theMiddle East – an early such coin was the :ersian daric. This was succeeded by omancurrency of the oman empire, such as the denarius, then the old =inar  of the >ttoman Empire,and later – from the #?th to /2th centuries, during the *ge of 1mperialism – by the currency ofEuropean colonial powers8 the 'panish dollar, the =utch ilder, the rench ranc and the ritish:ound 'terling% at times one currency has been pre-eminent, at times no one dominated. <ith thegrowth of *merican power, the @' =ollar became the basis for the international monetarysystem, formali&ed in the retton <oods agreement that established the post–<orld <ar 11monetary order, with fixed exchange rates of currencies to the dollar, and convertibility of thedollar into gold. 'ince the breakdown of the retton <oods system, culminating in the Aixonshock  of #B)#, ending convertibility, the @' dollar has remained the de facto basis of the worldmonetary system, though no longer de Cure, with various European currencies and the 4apaneseDen being used. 'ince the formation of the Euro, the Euro has gained use as a reservecurrency and a unit of transactions, though the dollar has remained the primary currency.

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* dominant currency may be used directly or indirectly by other nations – for example, Englishkings minted gold mancus, presumably to function as dinars to exchange with 1slamic 'pain%colonial powers sometimes minted coins that resembled the ones already used in a distantterritory% and more recently, a number of nations have used the @' dollar as their local currency,a custom called dollari&ation.

@ntil the #Bth century, the global monetary system was loosely linked at best, with Europe, the*mericas, 1ndia and !hina among othersF having largely separate economies, and hencemonetary systems were regional. European coloni&ation of the *mericas, starting with the'panish empire, led to the integration of *merican and European economies and monetarysystems, and European coloni&ation of *sia led to the dominance of European currencies,notably the ritish pound sterling in the #Bth century, succeeded by the @' dollar in the /2thcentury. 'ome, such as Michael 7udson, foresee the decline of a single basis for the globalmonetary system, and instead the emergence of regional trade blocs, citing the emergence of theEuro as an example of this phenomenon. 'ee also lobal financial systems, world-systemsapproach and polarity in international relations. 1t was in the later half of the #Bth century that a

monetary system with close to universal global participation emerged, based on the goldstandard.

The International Monetary Fund IMFF is an international organi&ation headGuartered

in <ashington, =!, of #;; countries working to foster global monetary cooperation, secure

financial stability, facilitate international trade, promote high employment and sustainable

economic growth around the world."/$ ormed in #B00 at the retton <oods !onference, it came

into formal existence in #B09 with /B member countries and the goal of reconstructing

theinternational payment system. !ountries contribute funds to a pool through a Guota system

from which countries with payment imbalances can borrow. *s of /2#2, the fund had H= 0)?.;

 billion, about @'I)99.) billion at then-current exchange rates.

"6$

Through this fund, and other activities such as statistics keeping and analysis, surveillance of its

members3 economies and the demand for self-correcting policies, the 1M works to improve the

economies of its member countries."0$ The organi&ation3s obCectives stated in the *rticles of

*greement are8"9$ to promote international economic cooperation, international trade, 

employment, and exchange-rate stability, including by making financial resources available to

member countries to meet balance-of-payments needs."?$

%unctions&edit'

*ccording to the 1M itself, it works to foster global growth and economic stability by providing

 policy, advice and financing to members, by working withdeveloping nations to help them

achieve macroeconomic stability, and by reducing poverty.")$ The rationale for this is that private

international capital markets function imperfectly and many countries have limited access to

financial markets. 'uch market imperfections, together with balance-of-payments financing,

 provide the Custification for official financing, without which many countries could only correct

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large external payment imbalances through measures with adverse economic conseGuences.";$ The 1M provides alternate sources of financing.

@pon initial 1M formation, its two primary functions were8 to oversee the fixed exchange

rate arrangements between countries,"B$ thus helping national governments manage

their exchange rates and allowing these governments to prioritise economic growth, "#2$ and to

 provide short-term capital to aid balance of payments."B$ This assistance was meant to prevent the

spread of international economic crises. The 1M was also intended to help mend the pieces of

the international economy post the reat =epression and <orld <ar 11."##$

The 1M3s role was fundamentally altered after the floating exchange rates post #B)#. 1t shifted

to examining the economic policies of countries with 1M loan agreements to determine if a

shortage of capital was due to economic fluctuations or economic policy. The 1M also

researched what types of government policy would ensure economic recovery."#/$ The new

challenge is to promote and implement policy that reduces the freGuency of crises among the

emerging market countries, especially the middle-income countries that are vulnerable to

massive capital outflows."#6$ ather than maintaining a position of oversight of only exchange

rates, their function became one of surveillance of the overall macroeconomic performance of

member countries. Their role became a lot more active because the 1M now manages economic

 policy rather than Cust exchange rates.

1n addition, the 1M negotiates conditions on lending and loans under their policy

of conditionality,"B$ which was established in the #B92s."##$ +ow-income countries can borrow

on concessional terms, which means there is a period of time with no interest rates, through the

Extended !redit acility E!F, the 'tandby !redit acility '!F and the apid !redit acility!F. Aonconcessional loans, which include interest rates, are provided mainly through'tand-

y *rrangements '*F, the lexible !redit +ine !+F, the :recautionary and +iGuidity +ine

:++F, and the Extended und acility. The 1M provides emergency assistance via the apid

inancing 1nstrument 1F to members facing urgent balance-of-payments needs."#0$

What the IMF Does

The work of the IMF is of three main types. Surveillance involves the

monitoring of economic and financial developments, and the provision of

policy advice, aimed especially at crisisprevention. The IMF also lends tocountries with !alance of payments difficulties, to provide temporary

financing and to support policies aimed at correcting the underlying

pro!lems" loans to lowincome countries are also aimed especially at

poverty reduction. Third, the IMF provides countries with technical

assistance and training in its areas of e#pertise. Supporting all three of

these activities is IMF work in economic research and statistics.

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In recent years, as part of its efforts to strengthen the international financial

system, and to enhance its effectiveness at preventing and resolving crises,

the IMF has applied !oth its surveillance and technical assistance work to

the development of standards and codes of good practice in its areas of

responsi!ility, and to the strengthening of financial sectors.

The IMF also plays an important role in the fight against moneylaundering

and terrorism

The International Monetary Fund

The International $onetary Fund %www.imf.org& is like a central ank for the world's

central anks. It is headuartered in (ashington, ).*., has +- memer nations, and

cooperates closely with the (orld ank, which we discuss inThe /loal $arket and

)eveloping 0ations. The I$F has a oard of governors consisting of one representativefrom each memer nation. The oard of governors elects a 123memer executive oard

to conduct regular operations.

The goals of the I$F are to promote world trade, stale exchange rates, and orderly

correction of alance of payments prolems. 4ne important part of this is preventing

situations in which a nation devalues its currency purely to promote its exports. That

kind of devaluation is often considered unfairly competitive if underlying issues, such as

poor fiscal and monetary policies, are not addressed y the nation.

$emer nations maintain funds in the form of currency reserve units called Special

)rawing Rights %S)Rs& on deposit with the I$F. %This is a it like the federal funds that

5.S. commercial anks keep on deposit with the Federal Reserve.& From +67- to +62,

the value of S)Rs was ased on the currencies of +8 leading trading nations. Since

+62, it has een ased on the currencies of the five largest exporting nations. From

+662 to 1222, these were the 5nited States, 9apan, /reat ritain, /ermany, and

France. The value of S)Rs is reassigned every five years.

S)Rs are held in the accounts of I$F nations in proportion to their contriution to the

fund. %The 5nited States is the largest contriutor, accounting for aout 1: percent of

the fund.& ;articipating nations agree to accept S)Rs in exchange for reserve

currencies#that is, foreign exchange currencies#in settling international accounts. <llI$F accounting is done in S)Rs, and commercial anks accept S)R3denominated

deposits. y using S)Rs as the unit of value, the I$F simplifies its own and its memer

nations' payment and accounting procedures.

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In addition to maintaining the system of S)Rs and promoting international liuidity, the

I$F monitors worldwide economic developments, and provides policy advice, loans,

and technical assistance in situations like the following=

•  <fter the collapse of the Soviet 5nion, the I$F helped Russia, the altic states,

and other former Soviet countries set up treasury systems to assist them inmoving from planned to market3ased economies.

• )uring the <sian financial crisis of +667 and +66, the I$F helped >orea toolster its reserves. The I$F pledged ?1+ illion to help >orea reform itseconomy, restructure its financial and corporate sectors, and recover fromrecession.

• In 1222, the I$F @xecutive oard urged the 9apanese government to stimulategrowth y keeping interest rates low, encouraging ank restructuring, andpromoting deregulation.

• In 4ctoer 1222, the I$F approved a ?:1 million loan for >enya to help it dealwith severe drought. This was part of a three3year ?+6A million loan under anI$F lending program for low3income nations.

$ost economists !udge the current international monetary system a success. It permits

market forces and national economic performance to determine the value of foreign

currencies, yet enales nations to maintain orderly foreign exchange markets y

cooperating through the I$F.

The World Bank: Its Role, Governance and Organiational !ulture <pril +66-

The :2th anniversary of the founding of the retton (oods institutions in +66-prompted a flood of initiatives aimed at assessing the role played y the (orld ankand the International $onetary Fund and deating their future. $ost of suchreassessments egin y stressing how much the world has changed in the :2 yearssince oth organiBations were estalished. From the collapse of communism to thecommunications and transportation revolution, and from the radical transformation offinancial markets to the population explosion, the inventory of the new conditions underwhich the retton (oods institutions have to operate is certainly long. The implication,

of course, is that the institutions should adapt their goals and policies to the newrealities and then reorganiBe accordingly.It will not e that easy. <mong other reasons, adapting goals and strategies effectivelyto new conditions reuires a shared view of the fundamental purpose of the institutions.@ven though the purposes of the Fund and the ank are often stated in officialdocuments, the expectations and the ehavior of the different groups with influenceover their policies freuently tend to reflect very different assumptions aout thesefundamental purposes.

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There are significant differences among the governments that CownC the ank and theFund. Top managers and the staff of the institutions have different views aout the corepurpose of their organiBations and, needless to say, pulic opinion is also divided. $anyof these differences have little to do with the changes in the environment in which theFund and the ank have to operate.

In the case of the (orld ank, the lack of consensus aout its asic mission, limitationsin its governance system, and other conditions have led to a proliferation of goals3whichin turn has had important organiBational repercussions. Furthermore, the siBe,complexity and relative independence of the ank create a sustantial margin forinconsistencies among its environment, its strategy, and its organiBation. 5sually,competitive pressures do not leave decision3makers much choice ut to adapt goalsand strategies to environmental changes and to make the necessary internalad!ustments to support the new strategy. ut, without intense competition, or otherexternal challenges, organiBations like the ank3large, complex, relatively autonomous,and with a significant capacity to influence its environment3can postpone, or even avoid,the difficult decisions reuired to minimiBe incongruities etween strategy and internal

organiBation. They can often afford the added costs and inefficiencies that result fromthe ineffectiveness of an internal structure whose o!ectives and policies do not respondadeuately to the new external threats and opportunities. Furthermore, in largeorganiBations, the structure, operating procedures and systems, internal culture, inertialehavior, and other such factor end up shaping the strategy, not vice3versa. Therefore,while the (orld ank will certainly have to ad!ust its policies and operations to newchallenges, its internal structure will significantly constrain the range of strategies it canconsider seriously or implement effectively.These are the themes of this paper. Its central message is that while the anniversary ofthe retton (oods institutions will generate many welcome reappraisals, evaluationsand proposals aout new roles, o!ectives and policies, a ma!or reconsideration of theway in which they are governed and the internal factors that influence the ank'sperformance is also in order. The ank urgently needs a more focused mission and asmaller numer of operational priorities. )esigning the process through which prioritiesare defined may well e more important3and difficult3than coming up with a new missionor new goals for the ank. The new circumstances faced y the ank also call forchanges in its organiBational culture. The CprivatiBation' of the ank's culture meansmore competition and more emphasis on external results than on internal priorities/reater attention and proximity to the clients is also recommended.

(orld ank performs the following functions=

(i) /ranting reconstruction loans to war devastated countries.

(ii) /ranting developmental loans to underdeveloped countries.

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%iii& ;roviding loans to governments for agriculture, irrigation, power, transport, water

supply, educations, health, etc

(iv) ;roviding loans to private concerns for specified pro!ects.

(v) ;romoting foreign investment y guaranteeing loans provided y other

organisations.

(vi);roviding technical, economic and monetary advice to memer countries for specific

pro!ects

%vii& @ncouraging industrial development of underdeveloped countries y promoting eco3

nomic reforms.

The Bretton Woods system of monetary management established the rules for commercial and

financial relations among the world3s maCor  industrial states in the mid-/2th century. The retton

<oods system was the first example of a fully negotiated monetary order intended to govern

monetary relations among independent nation-states. The chief features of the retton <oods

system were an obligation for each country to adopt a  monetary policy that maintained

the exchange rate by tying its currency to gold and the ability of the 1M to bridge

temporary imbalances of payments. *lso, there was a need to address the lack of cooperation

among other countries and to prevent competitive devaluation of the currencies as well.

:reparing to rebuild the international economic system while <orld <ar 11 was still raging, )62

delegates from all 00 *llied nations gathered at the Mount <ashington 7otel in retton <oods,

 Aew 7ampshire, @nited 'tates, for the @nited Aations Monetary and inancial !onference, also

known as theretton <oods !onference. The delegates deliberated during #–// 4uly #B00, and

signed the retton <oods agreement on its final day. 'etting up a system of rules, institutions,

and procedures to regulate the international monetary system, these accords established

the 1nternational Monetary und1MF and the 1nternational ank for econstruction and

=evelopment 1=F, which today is part of the <orld ank roup. The @nited 'tates, which

controlled two thirds of the world3s gold, insisted that the retton <oods system rest on both

gold and the @' dollar. 'oviet representatives attended the conference but later declined to ratifythe final agreements, charging that the institutions they had created were Jbranches of <all

'treet.J"#$ These organi&ations became operational in #B09 after a sufficient number of countries

had ratified the agreement.

>n #9 *ugust #B)#, the @nited 'tates unilaterally terminated convertibility of the @'

dollar  to gold, effectively bringing the retton <oods system to an end and rendering the dollar

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a fiat currency."/$ This action, referred to as the Aixon shock , created the situation in which the

@nited 'tates dollar became areserve currency used by many states. *t the same time,

many fixed currencies such as the pound sterling, for exampleF, also became free-floating.