International Monetary System

The international monetary system is the framework within which countries borrow, lend, buy, sell and make payments across political frontiers. The framework determines how balance of payments disequilibrium is resolved. Numerous frameworks are possible and most have been tried in one form or another.  International monetary system exists since 1944. Today’s system is a combination of several different frameworks. The increased volatility of exchange rate is one of the main economic developments of the past 40 years. Under the current system of partly floating and partly fixed undergo real and paper fluctuations as a result of changes in exchange rates. Policies for forecasting and reacting to exchange rate fluctuations are still evolving as we improve our understanding of the international monetary system, accounting and tax rules for foreign exchange gains and losses, and the economic effect of exchange rate changes on future cash flows and market values.

Although volatile exchange rate increase risk, they also create profit opportunities for firms and investors, given a proper understanding of exchange risk management. In order to manage foreign exchange risk, however, management must first understand how the international monetary system functions. The international monetary system is the structure within which foreign exchange rates are determined, international trade and capital flows are accommodated, and balance-of-payments (BOP) adjustments made. All of the instruments, institutions, and agreements that link together the world’s currency, money markets, securities, real estate, and commodity markets are also encompassed within that term. Over the ages, currencies have been defined in terms of gold and other items of value, and the international monetary system has been the subject of a variety of international agreements. A review of these systems provides a useful perspective from which to understand today’s system and to evaluate weakness and proposed changes in the present system.  The International Monetary Fund (IMF) and the World Bank have been maintaining order in the international monetary system and general economic development respectively.