Question

Briefly describe the current International Monetary System. How does the Current systems differ from the system that was in place prior to August 1971?

Prior to 1971, the world operated on a fixed exchange rate system. The value of the U. S. Dollar link to gold at the fixed price of $35 per ounce and the values of other currencies then tied to the dollar. For example, in 1964, the British pound was fixed at $2.80 for 1 pound, with a 1 percent permissible fluctuation around this rate. Thus, the British government had regularly intervened in the foreign exchange market to keep the pound in the range of $2.77 to $2.83. When the pound fell, the Bank of England had to buy pounds, offering either foreign currencies or gold in Exchange. Conversely, if the pound reached the top of the range, the Bank of England would sell pounds. The official exchange rates were occasionally “reset” to reflect changing economic conditions.

The current international monetary system for most industrialized nations is a floating rate system. In this system, currency exchange rates allowed to fluctuate in response to market conditions with a minimum of governmental intervention. Changes in currency demand can be due to trade deficits (i.e., one nation imports more from another nation than it does exports, causing there to be higher relative demand for the currency of the bigger exporter). It can also be due to capital movements. For example, if interest rates are relatively high in one country, then investors might seek to purchase that country’s securities, which increases the demand for that country’s currency?

Answer 1

Current monetary system :-

The current system for most of the industrialized Nations is a floating rate system where exchange rate fluctuate due to changes in demand. The current system involves minimum government intervention . The changes in demand occur due to trade deficit or surplus capital movements highest interest rates.

Monetary system before 1971 :-

As World War II drew to a close, powers met at Bretton Woods, new hemisphere to create a post-war International Monetary system. The bretton woods agreement established the US dollar based International Monetary system and created to new institutions that are the International Monetary Fund and the World bank. The IMF was a key institution it was created to render temporary assistance to member countries and their currencies against cyclical, seasonal, random occurrences and assist countries for having a structure of balance of payment and exchange rate point.

Under bretton Woods agreement all countries fix the value of currencies in terms of gold but were not required to exchange their currencies for gold. Only the dollar remained convertible into gold and each currency established its exchange rate with the dollar. The participating countries agreed to maintain the value of their currencies within one percent of pad by buying or selling foreign exchange of or Gold as needed. If the currency became too weak to defend ,a devaluation upto 10% was around without formal approval by IMF this was also known as a gold exchange Standard System

Difference between both the system :-

prior to 1971 effects exchange rate system was an effect. The US dollar was tied to Gold. Other currencies were tied to the Dollar at fixed exchange rates. Central banks interwined by purchasing and selling currency to even out demand so that the fixed exchange rates for maintaining. Occasionally the official rate for a country would be changed.

While the current monetary system is a floating exchange rate system based on change in demand where the changes in demand is due to trade deficit of surplus or capital moments to capture higher interest rates.

History of Change :-

​​​​​​Widely diverging monetary and fiscal policies, differential rate of inflation and various currency shocks resulted in the system's demise of bretton wood. The US has consistent deficits in BOP and this generated outflow of US dollars to other countries .Eventually the large amount of dollars held by foreigners lead to lack of confidence in the ability of US to meet its commitment to convert Dollars to Gold. This resulted in subsequent devaluation of the dollar and by 1973 the fixed rate exchange system was no longer feasible given the speculator flow of currencies which led to the signing of Jamaica agreement.

In the Jamaica agreement of 1976 flexible exchange rates were declared acceptable to the IMF members. Central banks were allowed to intervene in the exchange rate markets to iron out unwarranted voltalities .Gold was abandoned as an international reserve asset and non oil exporting countries and less developed countries were given greater access to IMF funds. The largest number of countries about 36 allowed market forces to determine their countries value and about 50 countries combined government intervention with market forces to set exchange rate .About 40 currencies did not adopt the printing their own and instead used the US dollar for example Ecuador, Panama.