International monetary system
Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 6 "Open Economy Macroeconomics"
Meaning
The international monetary system is the set of arrangements that governs how currencies are exchanged across countries. There is no world currency and no world central bank. Foreigners accept a national currency only if they trust that its purchasing power will stay stable. Governments built this trust by promising to convert their currency freely at a fixed price into gold or into another currency. The system manages these two things: convertibility and the conversion price. Its aim is stable international trade and finance.
Example
The system has changed over time:
- Gold standard (about 1870-1914): currencies were convertible into gold.
- Bretton Woods (1944): currencies were pegged to the US dollar, which was convertible into gold at $35 per ounce.
- Generalised floating from 1973.
- Today, most countries, including India, run managed floats and hold large foreign exchange reserves.
Don't confuse with
- International Monetary Fund (IMF): an institution created at Bretton Woods to support the system. The system itself is the set of rules and arrangements.
Related concepts
- Gold standard
- Bretton Woods system
- Triffin dilemma
- Reserve currency
- IMF quota
- Reserve tranche position
- Special Drawing Rights
- Washington Consensus
- Structural adjustment programme