ITERNATIONAL MONETARY SYSTEMS
Abstract
The purpose of this paper was to study three main monetary systems: the Gold Standard, the Bretton Woods, and post-Bretton Woods. International monetary system is a set of methods, tools and intergovernmental bodies, with the help of which the mutual payment and settlement turnover function within the global economy.
There existed and succeeded each other three international monetary system. The first one, the Gold standard, was based on gold which was the main form of money. National currencies were pegged to gold, and the gold content of the currencies was correlated with each other at a fixed exchange rate. The basis of the second, the Bretton Woods monetary system, were also solid exchange rates of the participating countries in relation to the leading currency; the US dollar was leading currency, fixed to gold; central banks of the participating countries had to maintain a stable exchange rate to the US dollar through foreign exchange intervention. Currency fluctuations were allowed in the intervals of +/- 1%; the exchange rate modification was made through devaluation and revaluation; organizational unit of the international monetary system was the IMF. The third monetary system – the post Bretton woods is based on a floating exchange rate and a multicurrency standard. A country can choose either a fixed, floating or mixed exchange rate regime. However, most of countries employ floating exchange rates.
International monetary systems
International monetary system is a set of monetary relations established on the basis of internationalization of economic life, the international division of labor and the world market. International monetary relations arise when the money starts to operate in international traffic. The international monetary relations have changed over time, so what were the main monetary systems and what principle they were based on?
The beginning of the "gold standard" was initiated by the Bank of England in 1821, while the official recognition of this system was during the conference held in 1867 in Paris. Walter (1993) suggests, “The model of industrial and financial success which Britain represented played some role in encouraging other states to move to the adoption of the gold standard.” This factor is related to such countries as France or Germany, for instance. Other countries like Austro-Hungary or Russia adopted this system for prestige.
Its basis was the gold which had the role of the main form of money. According to this system, all national exchange rates were pegged to gold currencies related to each other at a fixed exchange rate. Paris monetary system was based on the following structural principles, according to Walter (1993): its basis was the gold standard; each currency had its own gold content; their gold parities of currencies were established in accordance with their gold content; the currency was freely convertible into gold; gold was used as generally recognized world money.
In fact, the introduction of the gold standard required from each participating country to convert its currency into gold (as well as exercise a reverse procedure) at a fixed rate. The exchange rate determined from the conversion of the gold content, set the gold parity for each currency traded in the foreign exchange markets. In the 19th century under the Paris monetary system, gold was paid to the domestic markets in the form of coins and, in addition, served as a form of reserves of commercial banks, providing demand deposits.
While each of the member countries of the Gold Standard was ready to convert its currency into gold, exchange rates do not deviate significantly from the gold parity. Any pressure on exchange rates deviate from parity values were corrected by the influence of transnational gold flows on the money supply within any country.
On the other hand, the gold standard established under the Paris monetary system had many drawbacks. The gold standard established the dependence of the money supply circulating in the world economy, from the mining and production of gold. The discovery of new gold deposits and an increase in its production resulted in transnational inflation. Conversely, if gold production lagged behind the growth of real output, there was a general decline in prices.
Worse was the fact that it was impossible for a country to conduct an independent monetary policy aimed at solving internal problems of its economy under the rule of the Gold Standard. Any country seeking to finance the expenditures through the issue of money, while maintaining its convertibility into gold, instantly became a witness of how its gold reserves disappeared abroad.
Gradually the Gold Standard had run its course, as it didn’t match the scale of the increased economic relations and conditions regulating market economy. The First World War was marked by the crisis of the world monetary system. The Gold Standard ceased to function both as a monetary and foreign exchange system. Paris monetary system had to be transformed.
In order to finance military spending, along with taxes, borrowing and inflation, gold was used as world money. Currency restrictions were introduced. The exchange rate became mandatory, and therefore unreal. Since the beginning of the war the central banks of the belligerent countries stopped exchanging banknotes for gold and increased their emissions to cover military spending. Thus, the immediate cause of the currency crisis was the war and postwar devastation.
The Bretton Woods
The Bretton Woods monetary system lasted from 1944 to 1971. After its adoption, US dollar became the standard currency and was pegged to gold. “Every other currency had a fixed rate in relation to the dollar, a value that its government was supposed to defend and that could be changed only by agreement in the IMF”, (Calleo, 1987). The Bretton Woods monetary system actually began the final stage of the era of the gold standard and fixed exchange rates. After the transition in 1976 to Jamaica agreement, the era of floating exchange rates began.
The Bretton Woods core principles were as follows, according to Brawley (1998): fixed exchange rates of the participating countries with regard to a key currency exchange rate; key currency exchange rate fixed to gold; central banks maintained a stable exchange rate of national currency against key currencies (within +/- 1%) using foreign exchange interventions; changes in exchange rates were carried out through their revaluation or devaluation; the organizational units of the system were the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD or the World Bank). The IMF provided loans in foreign currency for meeting balance of payments deficits and supporting unstable currencies, monitored member countries following the principles of the monetary systems, provided monetary cooperation among countries.
The main purposes of the Bretton Woods conference in 1944 were the revival and increase of the world’s trade volume, which dropped significantly during the war. That is why such international organizations such as the World Bank and the IMF were formed, according to Calleo (1987). Later they provided monetary cooperation, as well as provided parties with credits to maintain the stability of their currencies.
The Bretton Woods monetary system left gold as monetary funds, though the access to the metal was significantly limited – only central banks could use it at the states level. Brawley (1998) argues, “Bretton Woods regime reflected American interests”. The US Dollar was recognized as key currency – a cost of an ounce of gold was estimated to be $ 35. As a result USA got the currency hegemony, pushing its longtime rival - the UK. Within the framework of the Bretton Woods system, dollar standard of international monetary system was established based on the rule of dollar. At that time the United States owned 49.8% all the world's stock of gold, according to Brawley (1998). The dollar - the currency convertible into gold - became a basis for currency parities, the predominant means of international payments, foreign exchange intervention and reserve assets. The national currency of the United States became the world's money at the same time.
Central banks were required to maintain the stability of the exchange rate of their currencies against USD with a small fraction of error (+/- 1%). Foreign exchange interventions were allowed for errors alignment.
As the country with the leading currency, the United States after World War II had constantly passive balance of payments (except the period of the Korean War in the early 50s.). However, it didn’t adversely affect the economic situation of the United States, but only contributed to the expansion of American capital to other countries. Not including commitments to sell gold, there wasn’t any sanctions mechanism in the event of an inflationary policy of the country's leading currency in the Bretton Woods system. Dollar weakness lead only to the expand of the monetary base and increase of foreign exchange reserves in the country with a hard currency, without causing any opposite effects in the United States. Such circumstances provided the United States with almost unlimited capacity to carry out its monetary policy based on domestic economic purposes.
Such a system could exist only as long as the gold reserves of the United States could provide foreign dollars conversion into gold. However there was a gold stock redistribution in favor of Europe, with more and more cash and noncash dollars participating in international circulation. There were significant problems with international liquidity, as gold production was smaller comparing with the growth of international trade. Confidence in the dollar as a reserve currency further dropped due to the giant US current account deficit.
The post Bretton Woods
The post Bretton Woods is a modern system of mutual settlements and currency relations, based on the free currencies float. Its core principles were as follows: currencies, including the dollar, are no longer pegged to the price of gold or anything else, and can’t be exchanges for the precious metal; hence, the gold standard is officially canceled and gold turned into a commodity that can be bought and sold by central banks; member states decided their currencies to be floating within the framework of the established corridor or pegged to another currency; most developed countries have chosen the so-called floating exchange rate, when the value of the national currency is determined by supply and demand; establishment of a new international means of payment - SDR (Special Drawing Rights) - the unit of account of the International Monetary Fund, used for non-cash payments through interstate entries in special accounts.
The post Bretton Woods system was believed to be more flexible than the Bretton Woods, and it quickly adapted to the instability and increased economic interrelations between countries, according to Frieden (1991). However, despite the assertion of floating exchange rates, the dollar, formally deprived of the status of the main means of payment, actually remained fulfilling this role because of the more powerful economic, scientific, technological and military capabilities of the United States compared with other countries.
The introduction of floating rather than fixed exchange rates in most countries (since March 1973) did not ensure their currencies stability, despite the enormous costs on monetary intervention. This mode was unable to provide rapid alignment of balance of payments and inflation in various countries, and do away with sudden movements of capital and currency speculation. That is why a number of countries continued to peg their national currencies to other currencies: the dollar, pound, etc.
One of the basic principles of the post Bretton Woods system is legally completed gold demonetarization. Gold parities were canceled, dollar exchange for gold – terminated. Internationalization of international liquid assets, the formation of a collective currency unit are designed to provide a stabilizing effect on the world economy, to mitigate imbalances in balance of payments and serve as a barrier in transfer of disturbances caused by such violations on the domestic economy.
However, there is also a negative impact considering such globalization in the world economy since, according to Garrett (2000), “Capital can simply choose to exit the national economy if government pursues policies that business people disapprove of. The rubric of bad economic policies is presumed to cover all market “distortions,” including government spending on goods arid services that could be provided more efficiently by the market and taxes to pay for them that treat different income sources unequally.”
Therefore, there existed and succeeded each other three international monetary system. The first of them – the Gold standard was based on gold, which was the main form of money. The basis of the second, the Bretton Woods monetary system, were solid exchange rates of the participating countries in relation to the course of leading currency - the US dollar, which was, respectively, fixed to gold. The third one, the post Bretton Woods monetary system, is based on a floating exchange rate and a multicurrency standard, so a country can choose either a fixed, floating or mixed exchange rate regime.References
Brawley, M. R. (1998). The Creation of the Bretton Woods Monetary Regime, in Turning Points: Decisions Shaping the Evolution of the International Political Economy. Orchard Park, NY: Broadview Press, 1998, pp. 265-27
Calleo, D. (1987). The Atlantic Alliance and the World Economy, in International Political Economy: Perspectives on Global Power and Wealth, 2nd edition, edited by Jeffry Frieden and David Lake. New York: St. Martin's, 1991, pp. 255-276.
Frieden, J. (1991). Invested interests: the politics of national economic policies in a world of global finance. International Organization, 45(04), 425. doi:10.1017/s0020818300033178
Garrett, G.( 2000). Partisan Politics in the Global Economy, in The Globalization Reader, edited by Frank J. Lechner and John Boli Malden, Massachusetts: Blackwell Publishers, 2000, pp. 228-235.
Walter, A. (1993). British Hegemony and the International Gold Standard and selections from International Monetary Disorder in the Interwar Period, in World Power and World Money: The Role of Hegemony and International Monetary Order. New York: Harvester Wheatsheaf, 1993, pp. 85-115, 126-140.
