- International Monetary System
In the context of international trade, the problems that crop up relate to : (i) liquidity, (ii)
adjustment, and (iii) stability.
Liquidity is necessary to finance the transactions that are done on cash basis. Adjustment
is needed to bridge the gap that emanates because of imbalance between demand and
supply at existing exchange rates. Similarly, stability is necessary with intent to limit the
degree of uncertainty in international business decisions.
- Evolution Of International Monetary System
The international monetary system, passed through a period of transition from the system
of fixed exchange rates to the system of floating rates.
Gold Exchange Standard system. Put into effect in 1850. In this system, each currency
was linked to a weight of gold. Since gold was convertible into currencies of the major
developed countries, central banks of different countries either held gold or the currency
of these developed countries.
On the Bretton Woods conference held, following decisions had been taken:
- Fixed rates in terms of gold, but only the US dollar was convertible into gold.
- A procedure for mutual international credits.
- Creation of International Monetary Fund (IMF) to supervise and ensure
smooth functioning of the system. Countries were expected to pursue the
economic and monetary policies in a manner so that fluctuations of currency
remained within a permitted margin of + 1 per cent. That is, the central bank
of every country had to intervene to buy or sell foreign exchange, depending
on the need. - Devaluations or reevaluations of more than 5 per cent had to be done with the
permission of the IMF, to avoid chain devaluations.
The main functions of the IMF are:
o to help member countries in stabilizing their currency ;
o to supervise the evolution of exchange rates and provide guidance to
countries on their exchange rate policies;
o to accord temporary financing to tide over balance of payments
difficulties.The capital of the IMF is constituted by the totality of the subscriptions of member states,
known as quotas. These quotas are determined as per the economic importance of each
country reflected/measured in terms of national income, exports, etc. In 1994, the capital
of the IMF was SDR 144.6 billion.