International Monetary System - Essay Example

Table of Contents a. 1 Introduction: 1 Background 2 World War I 2 World War II 3 Monetary System before World War I 3 Monetary System before World War II 4 Steps taken to regain normalcy after World War I 4 Steps taken to regain normalcy after world war II 4 Critical Review 5 Monetary System of World War I: 5 Monetary System of World War II: 6 Argument and Implications 6 Critical and Analytical approach 7 Conclusion 7 10 a. Introduction: An International Monetary system is defined as the political, institutional, and economic environment which decides the deliverance of two fundamental international public goods i.e. external stability and international currency. It can be also said as the set of rules, conventions and policies which governs the international liquidity supply, does the external imbalances adjustment, arrangement of bilateral and regional surveillance and prevention of crisis. The political, institutional and economic environment comprises a trade environment, economic dominance of two or more countries at the centre of the system, and the countries should be interconnected with different degree of economic development. International currency permits public and private sector agents from different countries to interact in international financial and economic activities by using them as a unit of account, as a means of payment and a store of value. The external stability means international collection of cross-country financial and real linkage (Dorrucci and McKay, 2011, p.9). It also facilitates international trade, cross border investment and reallocation of capital between nation states. The Industrial Revolution increased the production of goods and widened the basis of world trade (Hodge, 2008, p.287). The requirement of gold standard regime was that each country adjusts its household money supply in straight relation to the amount of gold it held and the domestic currencies should be defined in terms of a specific weight of gold. Background World War I It was the most destructive and violent war in European history. It took place in August 1914 and ended in November 1918 and it involved many countries of United States, Europe and other nations also all through the war. Once the war started, the countries involved in mobilizing their economic resources and total population to attain success on the battlefield. The war took place between the Allied Powers and the Central Powers. The empires included in Allied Powers are France, Serbia, UK, Belgium, Russia and Montenegro. However Central Powers includes the empire of Austria-Hungary, Germany, and Japan. Later on Ottoman Empire and Bulgaria joined the Central Powers. Italy and United States joined the Allied Powers. The long term effect of the war was financial losses, physical destruction and battlefield deaths which have badly affected the European powers. The theaters of the war were land warfare, naval warfare and aerial warfare (Keylor, 2001, p.1). World War II It was also one of the greatest wars of the 20th century. As a result of this war Soviet Union’s power extended to Eastern Europe nations enabling a Communist movement to attain power in China and marked the crucial shift of power away from the Western Europe States and towards the Soviet Union and United States. Hitler’s invasion of Poland in September 1939 drove Great Britain and France to declare war on Germany and this gave rise to World War II. Hitler created a totalitarian single- party state led by Nazis. He believed that the living space could be gain only through war (Guisepi, 2006, p.1). On January 30, 1933, he was appointed as the chancellor of Germany. When the Nazi party members were appointed to government positions, it increased the authority of Hitler over state officials (Ushmm, 2013, p.1). Monetary System before World War I The monetary system before World War I was the traditional Gold Standard 1875-1914. Most of the countries during the classical gold standard system agreed that gold would be liberally imported and exported, gold would be alone assured of unobstructed coinage and there would be cooperative convertibility between national currencies and gold at a constant ratio (Gaspar, 2012, p.1). International trade were not possible as a result of decline of Great Depression and throughout 1930s low level of economic activities were taking place. It also prevented the adoption of the new system of worldwide payment (Jereissati, 1999, p.1). Monetary System before World War II The gold standard of the late 1920s was a façade as major countries gave priority to stabilization of domestic economies by similar inflows and outflows of gold with reduction and increase in domestic money and credit. Bretton Woods system came into picture after World War II. Before World War II disorder emerged and period of widespread capital controls took place that lasted till the start of World War II. And later on Bretton Woods system also collapsed (Weber, p.2). Steps taken to regain normalcy after World War I United Nation Environment Programme: It initiates the international legal framework for environmental protection. United Nations Educational, Scientific and Cultural Organization: It also ensures that justice, the law, human rights and fundamental freedom are respected irrespective of race, sex, language or religion. It also gives emphasis to education, science, culture and communication. United Nation High Commissioner for Human Rights: It is established to give equal rights to all human beings. United Nation Development Programme: It was created to promote social mobilization of women, to remove poverty, reinforcement of democratic institutions and to promote respect for the environment (Unac, 2000, p.1). Steps taken to regain normalcy after world war II Taffies were reduced between European States for both the organizations. Intra-European traffic increases as a result of the decrease in tariffs (Ferraro, Santos, and Ginocchio, 1997, p.1). More government investment encouraged private investment, created employment opportunities and led to continuing economic growth of Europe. For constructing more houses , improving farming facilities and for setting up a new transport system, French decided to provide the financial resources to the developing countries. Foreign aid was formed. It also helped the countries which were badly affected from war to regenerate their industry and agriculture. The World Bank and International Monetary Fund (IMF) have been set up to lent money to the countries which were badly affected from war for the purpose of reconstruction and to provide short-term loans to nations having temporary unbalance of payments (Addison and Tarp, 2012, pp.14-17). After the war both chemical and electrical engineering industries made great changes. New varieties of chemical and electrical products were made after the Second World War. Critical Review Monetary System of World War I: The gold standard regime made it obligatory that national currencies should be defined in terms of exact weight of gold. It also made it obligatory that every country adjust its national money supply in straight relation towards the amount of gold that was held by it. Gold Standard came to an end with World War I. During the war, countries also suspended the convertibility of currencies in gold. After the war many attempts were made to bring back the traditional gold standard, but all attempts were proved unsuccessful because during the war most countries were concerned with their national economies rather than exchange rate stability. That’s the reason why countries have abandoned their attempt to return to gold standard (Colorado, pp.5-6). Monetary System of World War II: In World War II Interwar Period came into existence. Most of the countries suspended banknotes redemption in gold and imposed embargoes on the export of gold; therefore gold standard came to an end. The U.S. spearheads efforts to bring back the gold standard. The late 1920s gold standard was a façade because main countries gave priority to short-term economic policies of domestic economies through matching outflows and inflows of gold with decrease and increase in household money and credit. After that Bretton Woods system came into picture (Gaspar, 2012, p.1). It refers international monetary regime and it was the history’s 1st example of an entirely negotiated monetary order proposed to govern currency relations between sovereign states (Cohen, p.1). Argument and Implications Later on Bretton Woods system started to loosen and as a result of this, the U.S. balance of payments moves towards a deficit. Financial markets are also unwilling to hold overvalued U.S. dollar. Foreign holdings of the dollars increases and it exceeded the U.S. gold holdings. Further, dollar is devalued to $42 per ounce. So, the fixed exchange rate system of Bretton Woods came to an end and floating rate system came into existence. Currencies of other developing country also move towards a floating rate regime. Managed rate regime also came into existence where governments manage their value of currencies with regard to reference currency. However, pegged exchange rate system also came where government fixes its currency’s value comparative to a reference currency (Colorado, pp.10-22). Critical and Analytical approach The critical and analytical approach to reform International Monetary System is as follows: First, current double use currency should be replaced with a global currency. Second, current dominant double use currencies should be replaced with a basket of currencies. Third, to provide completion, develop regional currencies and current currencies should be leaved as it is. Some of the issues have been addressed in modest proposal. Those issues were: for international transaction, there should be a SDR-Money so that when it would be supplied a regime with low interest rate and with low volatility could be ensured all over the countries. Second, there should be IMF-Bank where surplus reserve can be deposited and can be lent at pre-decided benchmark rates (Singh, 2010, p.20). Conclusion The international monetary system of today is highly flexible as compared to past because its functioning for example capital flow regimes and exchange rates, supply of worldwide liquidity and adjustment of outside imbalances are adapted to the different economic conditions. This flexibility has resulted in a vast expansion in world output and a shift in economic power. It also eradicates poverty to some extent. References Dorrucci, E. and McKay, J., 2011. The International Monetary System After The Financial Crisis. [pdf] Available at: http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp123.pdf. [Accessed 8 March 2013] Hodge, C., 2008. Encyclopedia of the Age of Imperialism. Westport: Greenwood Publishing Group. Keylor, W., 2001. World War 1. [online]. Available at: http://www.is.wayne.edu/mnissani/WWI/encarta.htm. [Accessed 8 March 2013] Guisepi, R., 2006. World War I. [online]. Available at: http://history-world.org/world_war_ii.htm. [Accessed 8 March 2013]. Ushmm., 2013. 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