Briefly describe the current international monetary system. How does the current system differ from the system that was in place prior to August 1971?
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Sample Response
The system through which the governments circulate money in the economy is referred to as the monetary system. Current international monetary system is complex in nature. Certain groups of countries follow a floating exchange rate system, while some countries have pegged their currency to a particular nation, while some of the nations have formed a monetary union to share a common currency such as European union.
According to the International monetary fund (IMF), 65 nations have adopted a free floating rate monetary system. In such a monetary system, the currency exchange rate is determined by the total volumes of bilateral trades between the countries. Thus there is very less government intervention in influencing the exchange rates. It is the most popularly followed monetary system. On the other side, certain nations have pegged their exchange rate to a particular currency (mostly dollar). Thus their currency valuation depends on the fluctuation in the pegged currency. Some countries have grouped to form a monetary union, where they share the same currency. The largest among such unions is the European Monetary Union (EMU). There are 19 countries in EMU that have adopted "euro" as their common currency.
However, prior to August 1971, the international monetary system was based on the fixed rate system. In a fixed rate system, the valuation of currency is linked to the gold reserves of the country or to the currency of another country. As the value of gold reserves changes, the value of currency also changes.Also, frequent changes in gold reserves changes the demand for the currency, which in turn leads to unequal distribution of currencies across countries. This was the major shortcoming of the gold standard system.
Thus, it can be inferred that the current monetary system is more flexible in nature as it allows the countries to adopt the exchange rate system depending upon their economic, monetary and foreign policies. Hence, the current international monetary system overcomes the limitations of the previous systems, as it is flexible in nature and promotes more international trade.
