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 subject to the foreign exchange
market, and therefore to the judgments of currency traders about a currency.
Yet there are rules and proceduresexchange rate policieswhich public 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 being the International Monetary 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 acceptable
between buyers and sellers of different nationality, including deferred
payment. To operate successfully, they need to inspire confidence, to provide
sufficient liquidity for fluctuating 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 Bretton
Woods in 1944.
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 and
empires have been traded. The earliest known records of pre - coinage use of bullion for
monetary exchange are from Mesopotamia and Egypt, dating from the third millennium BC.
[1]
Early money took many forms, apart from bullion; for instance bronze Spade moneywhich
became common in Zhou dynasty China in the late 7th century BC. At this time, forms of money
were also developed in Lydia, Asia minor, from where its use spread to nearby Greek cities and
later to the rest of the world.[1]
Sometimes formal monetary systems have been imposed by regional rulers. For example
scholars have tentatively suggested that the ruler Servius Tulliuscreated a primitive monetary
system in the archaic period of what was to become the Roman Republic. Tullius reigned in the
sixth century BC - several centuries before Rome is believed to have developed a formal coinage
system.[2]
As with bullion, early use of coinage is believed to have been generally the preserve of the elite.
But by about the 4th century BC they were widely used in Greek cities. Coins were generally
supported by the city state authorities, who endeavoured to ensure they retained their values

regardless of fluctuations in the availability of whatever base precious metals they were made
from.[1] From Greece the use of coins spread slowly westwards throughout Europe, and
eastwards to India. Coins were in use in India from about 400BC, initially they played a greater
role in religion than trade, but by the 2nd century had become central to commercial transactions.
Monetary systems that were developed in India were so successful they spread through parts of
Asia well into the Middle Ages.[1]
As multiple coins became common within a region, they were exchanged by moneychangers, the
predecessors of today's foreign exchange market, as famously discussed in the Biblical story
of Jesus and the money changers. In Venice and the Italian city states of the early Middle Ages,
money changers would often have to struggle to perform calculations involving six or more
currencies. This partly led to Fibonacci writing his Liber Abaci where he popularised the use
of Indo-Arabic numerals, which displaced the more difficult Roman numerals then in use by
western merchants.[3]

Historic international currencies. From top left: crystalline gold, a 5th-century BCE Persian
daric, an 8th-century English mancus, and an 18th-century Spanish real.
When a given nation or empire has achieved regional hegemony, its currency has been a basis
for international trade, and hence for a de facto monetary system. In the West Europe and the
Middle East an early such coin was the Persian daric. This was succeeded by Roman
currency of the Roman empire, such as the denarius, then the Gold Dinar of the Ottoman Empire,
and later from the 16th to 20th centuries, during the Age of Imperialism by the currency of
European colonial powers: the Spanish dollar, the Dutch Gilder, the French Franc and the British
Pound Sterling; at times one currency has been pre-eminent, at times no one dominated. With the
growth of American power, the US Dollar became the basis for the international monetary
system, formalized in the Bretton Woods agreement that established the postWorld War II
monetary order, with fixed exchange rates of currencies to the dollar, and convertibility of the
dollar into gold. Since the breakdown of the Bretton Woods system, culminating in the Nixon
shock of 1971, ending convertibility, the US dollar has remained the de facto basis of the world
monetary system, though no longer de jure, with various European currencies and the Japanese
Yen being used. Since the formation of the Euro, the Euro has gained use as a reserve
currency and a unit of transactions, though the dollar has remained the primary currency.

A dominant currency may be used directly or indirectly by other nations for example, English
kings minted gold mancus, presumably to function as dinars to exchange with Islamic Spain;
colonial powers sometimes minted coins that resembled the ones already used in a distant
territory; and more recently, a number of nations have used the US dollar as their local currency,
a custom called dollarization.
Until the 19th century, the global monetary system was loosely linked at best, with Europe, the
Americas, India and China (among others) having largely separate economies, and hence
monetary systems were regional. European colonization of the Americas, starting with the
Spanish empire, led to the integration of American and European economies and monetary
systems, and European colonization of Asia led to the dominance of European currencies,
notably the British pound sterling in the 19th century, succeeded by the US dollar in the 20th
century. Some, such as Michael Hudson, foresee the decline of a single basis for the global
monetary system, and instead the emergence of regional trade blocs, citing the emergence of the
Euro as an example of this phenomenon. See also Global financial systems, world-systems
approach and polarity in international relations. It was in the later half of the 19th century that a
monetary system with close to universal global participation emerged, based on the gold
standard.
The International Monetary Fund (IMF) is an international organization headquartered
in Washington, DC, of 188 countries working to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote high employment and sustainable
economic growth around the world.[2] Formed in 1944 at the Bretton Woods Conference, it came
into formal existence in 1945 with 29 member countries and the goal of reconstructing
theinternational payment system. Countries contribute funds to a pool through a quota system
from which countries with payment imbalances can borrow. As of 2010, the fund had XDR476.8
billion, about US$755.7 billion at then-current exchange rates.[3]
Through this fund, and other activities such as statistics keeping and analysis, surveillance of its
members' economies and the demand for self-correcting policies, the IMF works to improve the
economies of its member countries.[4] The organization's objectives stated in the Articles of
Agreement are:[5] 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.[6]
Functions[edit]
According to the IMF 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.[7] The rationale for this is that private
international capital markets function imperfectly and many countries have limited access to
financial markets. Such market imperfections, together with balance-of-payments financing,
provide the justification for official financing, without which many countries could only correct

large external payment imbalances through measures with adverse economic consequences.
[8]
The IMF provides alternate sources of financing.
Upon initial IMF formation, its two primary functions were: to oversee the fixed exchange
rate arrangements between countries,[9] thus helping national governments manage
their exchange rates and allowing these governments to prioritise economic growth,[10] and to
provide short-term capital to aidbalance of payments.[9] This assistance was meant to prevent the
spread of international economic crises. The IMF was also intended to help mend the pieces of
the international economy post the Great Depression and World War II.[11]
The IMF's role was fundamentally altered after the floating exchange rates post 1971. It shifted
to examining the economic policies of countries with IMF loan agreements to determine if a
shortage of capital was due to economic fluctuations or economic policy. The IMF also
researched what types of government policy would ensure economic recovery.[12] The new
challenge is to promote and implement policy that reduces the frequency of crises among the
emerging market countries, especially the middle-income countries that are vulnerable to
massive capital outflows.[13] Rather 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 IMF now manages economic
policy rather than just exchange rates.
In addition, the IMF negotiates conditions on lending and loans under their policy
of conditionality,[9] which was established in the 1950s.[11] Low-income countries can borrow
on concessional terms, which means there is a period of time with no interest rates, through the
Extended Credit Facility (ECF), the Standby Credit Facility (SCF) and the Rapid Credit Facility
(RCF). Nonconcessional loans, which include interest rates, are provided mainly throughStandBy Arrangements (SBA), the Flexible Credit Line (FCL), the Precautionary and Liquidity Line
(PLL), and the Extended Fund Facility. The IMF provides emergency assistance via the Rapid
Financing Instrument (RFI) to members facing urgent balance-of-payments needs.[14]
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 crisis-prevention. The IMF also lends to
countries with balance of payments difficulties, to provide temporary
financing and to support policies aimed at correcting the underlying
problems; loans to low-income countries are also aimed especially at
poverty reduction. Third, the IMF provides countries with technical
assistance and training in its areas of expertise. Supporting all three of
these activities is IMF work in economic research and statistics.

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 both its surveillance and technical assistance work to
the development ofstandards and codes of good practice in its areas of
responsibility, and to the strengthening of financial sectors.
The IMF also plays an important role in the fight against money-laundering
and terrorism
The International Monetary Fund
The International Monetary Fund (www.imf.org) is like a central bank for the world's
central banks. It is headquartered in Washington, D.C., has 184 member nations, and
cooperates closely with the World Bank, which we discuss inThe Global Market and
Developing Nations. The IMF has a board of governors consisting of one representative
from each member nation. The board of governors elects a 20-member executive board
to conduct regular operations.
The goals of the IMF are to promote world trade, stable exchange rates, and orderly
correction of balance of payments problems. One 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 by the nation.
Member nations maintain funds in the form of currency reserve units called Special
Drawing Rights (SDRs) on deposit with the IMF. (This is a bit like the federal funds that
U.S. commercial banks keep on deposit with the Federal Reserve.) From 1974 to 1980,
the value of SDRs was based on the currencies of 16 leading trading nations. Since
1980, it has been based on the currencies of the five largest exporting nations. From
1990 to 2000, these were the United States, Japan, Great Britain, Germany, and
France. The value of SDRs is reassigned every five years.
SDRs are held in the accounts of IMF nations in proportion to their contribution to the
fund. (The United States is the largest contributor, accounting for about 25 percent of
the fund.) Participating nations agree to accept SDRs in exchange for reserve
currenciesthat is, foreign exchange currenciesin settling international accounts. All
IMF accounting is done in SDRs, and commercial banks accept SDR-denominated
deposits. By using SDRs as the unit of value, the IMF simplifies its own and its member
nations' payment and accounting procedures.

In addition to maintaining the system of SDRs and promoting international liquidity, the
IMF monitors worldwide economic developments, and provides policy advice, loans,
and technical assistance in situations like the following:

After the collapse of the Soviet Union, the IMF helped Russia, the Baltic states,
and other former Soviet countries set up treasury systems to assist them in
moving from planned to market-based economies.

During the Asian financial crisis of 1997 and 1998, the IMF helped Korea to
bolster its reserves. The IMF pledged $21 billion to help Korea reform its
economy, restructure its financial and corporate sectors, and recover from
recession.

In 2000, the IMF Executive Board urged the Japanese government to stimulate
growth by keeping interest rates low, encouraging bank restructuring, and
promoting deregulation.

In October 2000, the IMF approved a $52 million loan for Kenya to help it deal
with severe drought. This was part of a three-year $193 million loan under an
IMF lending program for low-income nations.

Most economists judge the current international monetary system a success. It permits
market forces and national economic performance to determine the value of foreign
currencies, yet enables nations to maintain orderly foreign exchange markets by
cooperating through the IMF.
The World Bank: Its Role, Governance and Organizational Culture
April 1994
The 50th anniversary of the founding of the Bretton Woods institutions in 1994
prompted a flood of initiatives aimed at assessing the role played by the World Bank
and the International Monetary Fund and debating their future. Most of such
reassessments begin by stressing how much the world has changed in the 50 years
since both organizations were established. From the collapse of communism to the
communications and transportation revolution, and from the radical transformation of
financial markets to the population explosion, the inventory of the new conditions under
which the Bretton Woods institutions have to operate is certainly long. The implication,
of course, is that the institutions should adapt their goals and policies to the new
realities and then reorganize accordingly.
It will not be that easy. Among other reasons, adapting goals and strategies effectively
to new conditions requires a shared view of the fundamental purpose of the institutions.
Even though the purposes of the Fund and the Bank are often stated in official
documents, the expectations and the behavior of the different groups with influence
over their policies frequently tend to reflect very different assumptions about these
fundamental purposes.

There are significant differences among the governments that "own" the Bank and the
Fund. Top managers and the staff of the institutions have different views about the core
purpose of their organizations and, needless to say, public opinion is also divided. Many
of these differences have little to do with the changes in the environment in which the
Fund and the Bank have to operate.
In the case of the World Bank, the lack of consensus about its basic mission, limitations
in its governance system, and other conditions have led to a proliferation of goals-which
in turn has had important organizational repercussions. Furthermore, the size,
complexity and relative independence of the Bank create a substantial margin for
inconsistencies among its environment, its strategy, and its organization. Usually,
competitive pressures do not leave decision-makers much choice but to adapt goals
and strategies to environmental changes and to make the necessary internal
adjustments to support the new strategy. But, without intense competition, or other
external challenges, organizations like the Bank-large, complex, relatively autonomous,
and with a significant capacity to influence its environment-can postpone, or even avoid,
the difficult decisions required to minimize incongruities between strategy and internal
organization. They can often afford the added costs and inefficiencies that result from
the ineffectiveness of an internal structure whose objectives and policies do not respond
adequately to the new external threats and opportunities. Furthermore, in large
organizations, the structure, operating procedures and systems, internal culture, inertial
behavior, and other such factor end up shaping the strategy, not vice-versa. Therefore,
while the World Bank will certainly have to adjust its policies and operations to new
challenges, its internal structure will significantly constrain the range of strategies it can
consider seriously or implement effectively.
These are the themes of this paper. Its central message is that while the anniversary of
the Bretton Woods institutions will generate many welcome reappraisals, evaluations
and proposals about new roles, objectives and policies, a major reconsideration of the
way in which they are governed and the internal factors that influence the Bank's
performance is also in order. The Bank urgently needs a more focused mission and a
smaller number of operational priorities. Designing the process through which priorities
are defined may well be more important-and difficult-than coming up with a new mission
or new goals for the Bank. The new circumstances faced by the Bank also call for
changes in its organizational culture. The "privatization' of the Bank's culture means
more competition and more emphasis on external results than on internal priorities
Greater attention and proximity to the clients is also recommended.

World Bank performs the following functions:

(i) Granting reconstruction loans to war devastated countries.
(ii) Granting developmental loans to underdeveloped countries.

(iii) Providing loans to governments for agriculture, irrigation, power, transport, water
supply, educations, health, etc
(iv) Providing loans to private concerns for specified projects.
(v) Promoting foreign investment by guaranteeing loans provided by other
organisations.
(vi)Providing technical, economic and monetary advice to member countries for specific
projects
(vii) Encouraging industrial development of underdeveloped countries by promoting economic reforms.
The Bretton Woods system of monetary management established the rules for commercial and
financial relations among the world's major industrial states in the mid-20th century. The Bretton
Woods 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 Bretton Woods
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 IMF to bridge
temporary imbalances of payments. Also, there was a need to address the lack of cooperation
among other countries and to prevent competitive devaluation of the currencies as well.
Preparing to rebuild the international economic system while World War II was still raging, 730
delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods,
New Hampshire, United States, for the United Nations Monetary and Financial Conference, also
known as theBretton Woods Conference. The delegates deliberated during 122 July 1944, and
signed the Bretton Woods agreement on its final day. Setting up a system of rules, institutions,
and procedures to regulate the international monetary system, these accords established
the International Monetary Fund(IMF) and the International Bank for Reconstruction and
Development (IBRD), which today is part of the World Bank Group. The United States, which
controlled two thirds of the world's gold, insisted that the Bretton Woods system rest on both
gold and the US dollar. Soviet representatives attended the conference but later declined to ratify
the final agreements, charging that the institutions they had created were "branches of Wall
Street."[1] These organizations became operational in 1945 after a sufficient number of countries
had ratified the agreement.
On 15 August 1971, the United States unilaterally terminated convertibility of the US
dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar

a fiat currency.[2] This action, referred to as the Nixon shock, created the situation in which the
United States dollar became areserve currency used by many states. At the same time,
many fixed currencies (such as the pound sterling, for example), also became free-floating.