International monetary systems

Monetary systems are a set of policies and institutions used by the government to controlmoney supply in an economy during inflation and to provide additional money to the economy in case of a slowdown. Monetary policies will be applied within the domestic market. For international markets, we call the rules, convention and the supporting institutions the international monetary systems. The international systems are not concerned with the control of money supply and provision of funds in the international market but acts to facilitate international trade, cross border trading, and the reallocation of funds between different countries. The international monetary systems will also provide means of payments acceptable to buyers and sellers in different nations- this will include transfer of deferred payments. The international monetary systems are formed as cooperation between different nations and will have the following five main elements; set of policies and regulation for controlling the exchange rate, will acts as a lender of last resort (same as a government in the domestic monetary system), acts as a currency reserve, acts as an oversight body and acts as an instrument for providing liquidity and reserves.

The international monetary systems will operates successfully if they can inspire confidence between the trading nations, provides sufficient liquidity in the market for fluctuating trade and act to control global trade imbalances. To provide sufficient liquidity in the market, the international monetary systems will encourage governments to hold adequate foreign exchange reserves that can support foreign trade. These systems will require different nations to formulate conducive economic and financial policies to maintain a well balanced international system and to preserve a state of equilibrium in the foreign exchange market.  International organizations like the IMF involved in the international monetary systems will seek to promote policies in government that offers conducive well balanced payment systems. This way the private sector businesses can have confidence in the system.

International monetary systems can form organically when a number of nations agree to work together to regulate international economic factors spread over several decades. Alternatively, the systems can be formed from a single vision as the case with Bretton wood in 1944. The first primitive formal monetary systems can be dated back to the archaic period. During this period the monetary systems were imposed by regional leaders without necessarily the nation having regional hegemony. Alternatively a country which has achieved regional hegemony can use its currency as the basis for international trade. The difference between the archaic/pre-war international monetary systems and today’s systems is that currently nations are allowed to tailor their exchange rate policies to their own needs. Moreover, countries have the final decision to float or peg their currencies.

The international monetary systems have roles to play in the global financial markets. Their roles are similar to those carried out by the domestic market. The main roles of the international markets are providing monetary cover to pay for international transactions, to provide a stable foreign exchange account and provide for a standard measure for deferred payments. These roles are similar to the once carried out by the domestic markets.

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