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International Monetary System
International monetary system refers to a system that forms rules and standards for facilitating international trade among the nations and helps in relocating the capital and investment from one nation to another. Moreover, it’s the worldwide network of the government and financial institutions that determine the exchange rate per currency. It is amazing how the monetary system has evolved from centuries ago where gold coins where used as a way of currency, and where people had to barter products or goods to receive something in exchange.
The international monetary system, aids countries by loaning them money so they can overcome poverty, and debts. Some countries struggle with inflation which means that there is too much product and no demand for it.
Importance of Currency Management
It is important to understand currency management because companies need to know that volatility in exchange rates can significantly affect their bottom line.
Why do economies need money? This module defines money as a unit of account, that is used as a medium of exchange in transactions. Without money, individuals and businesses would have a harder time obtaining (purchasing) or exchanging (selling) what they want, need, or make. Money provides us with a universally accepted medium of exchange.
Whenever a country or empire has regional or global control of trade, its currency becomes the dominant currency for trade and governs the monetary system of that time.
With the growing complexity in the international trade and financial market, the international monetary system is necessary, to assign a standard value of the international currencies. The rules and regulations set by the international monetary system to regulate and control the exchange value of the currencies are agreed upon by the respective governments of the nations. Thus, the government’s stand may affect the decision making of the international monetary system. For example, change in the trade policy of a government may affect the international trade of goods and services.
The aim of new international monetary system is to create a stabilized international currency system and ensure a monetary stability for all the nations.
The central banks of nations were given the task of maintaining fixed exchange rates with respect to the dollar for each currency.
Exchange Rates
Exchange rate is the ratio at which one currency is converted into another currency:
- Fixed Exchange Rate: The government manipulates the value of a country’s currency.
- Floating Exchange Rate: The value of a country’s currency changes based on market forces.
- Most countries operate under a freely floating exchange rate system.
A flexible exchange rate, which is the same as the floating exchange rate system is a system wherein the value of a currency changes with market demands. When the demand for a particular currency is high, the value of that currency goes up. When demand is low, the value goes down.
The opposite of this is a fixed exchange rate wherein a currency has a fixed value relative to another currency or commodity. Market demand has no influence on the value of the currency.
International Monetary Fund
The International Monetary Fund (IMF) is the central institution embodying the international monetary system and promotes balanced expansion of world trade, reduced trade restrictions, stable exchange rates, minimal trade imbalances, avoidance of currency devaluations, and the correction of balance-of-payment problems. The IMF’s goal is to prevent and remedy international financial crises by encouraging countries to maintain sound economic policies. Because of its size, the IMF is also a forum for discussion of global economic policies.
The IMF is headquartered in Washington, D.C., but has offices in Paris, Tokyo, New York, and Geneva.
The IMF promotes itself as “an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”
The organization’s primary purpose is to “ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other.”
In essence, the IMF’s initial primary purpose was to help manage the fixed rate exchange system; it eventually evolved to help governments correct temporary trade imbalances (typically deficits) with loans.
Lending money to poor countries is also a major initiative at the IMF. The organization provides financing to help troubled nations avoid or recover from economic challenges.
IMF Advantages
The IMF assists member nations in several different capacities. If a country has a balance of payment deficit, the IMF can step in to fill the gap. It serves as a council and adviser to countries attempting a new economic policy. It also publishes papers on new economic topics.
Its most important function is its ability to provide loans to member nations in need of a bailout. The IMF can attach conditions to these loans, including prescribed economic policies, to which borrowing governments must comply.
IMF Disadvantages
Despite its lofty status and commendable objectives, the IMF is attempting to pull off a nearly impossible economic feat: perfectly timing and sizing economic intervention on an international scale.
The IMF has been criticized for not doing much and for overreaching. It has been criticized for being too slow or too eager to assist failing national policies. Since the United States, Japan and Great Britain feature prominently in IMF policies, it has been accused of being a tool for free-market countries only.
The World Bank
The World Bank Group, like the IMF, was created at Bretton Woods in 1944. Its goal is to provide “financial and technical assistance to developing countries around the world to reduce poverty and support development.” This consists of five underlying institutions, the first two of which are collectively referred to as The World Bank.
International Bank for Reconstruction and Development: provides financial assistance to credit-worthy, middle-and low-income nations.
International Development Association: provides loans and grants to poor countries.
International Finance Corporation: provides monetary and advice to private sector entities.
Multilateral Investment Guarantee Agency: Seeks to encourage foreign direct investment in developing nations.
International Centre for Settlement of Investment Disputes: Provides physical facilities and procedural expertise to help resolve inevitable disputes that arise when money is at the heart of a disagreement between two parties association investment.
Examples Here in Utah
The international monetary system is a governing body that sets the rules and regulations by which different nations exchange currencies with each other.
The effect of this currency exchange here in Utah is the impact on Utah’s contribution to the economy of the United States in the travel and tourism industry.
According to the University Of Utah David Eccles School Of Business, travelers to Utah spent $8.4billion in tourism in 2016, helping to support more than 144,000 jobs with an estimated $5.6billion in total wages as well as generating a record of $1.23 billion in total state and local tax revenues. Out of the $8.4billion total, $721million came from out-of-state tourist for lodging, dining, gas, transportation, recreational activities and shopping.
Statistics also shows that contribution to travel and tourism in the global economy of the United States in 2016 was approximately $3.57trillion U.S dollars. With Utah’s contribution of $8.4billion to the economy, its representation is approximately 24% contribution to the United States economy.
Tourism is a key employer in most Utah counties, and the industry is an important source of employment throughout Utah, which is a major contribution to the economic growth of the United States of America.
References
Gorrell, M. (n.d.). Which counties rely the most on Utah’s $8.4B tourism industry for jobs? Retrieved March 30, 2018, from https://www.sltrib.com/news/business/2017/09/14/which-counties-rely-the-most-on-utahs-84b-tourism-industry-for-jobs/
International Monetary Fund (IMF). (n.d.). Retrieved April 08, 2018, from http://www.investinganswers.com/financial-dictionary/economics/international-monetary-fund-imf-984
International Monetary System. (2015, August 11). Retrieved April 09, 2018, from http://www.economicsdiscussion.net/articles/international-monetary-system/4256
McWhinney, J. E. (2018, March 30). IMF, WTO and World Bank: How Do They Differ? Retrieved April 10, 2018, from https://www.investopedia.com/articles/investing/070715/confused-how-imf-world-bank-wto-differ.asp
Kem, C. Gardner(Fall 2017) The state of utah. Travel and Tourism Industry from http://www.gardner.utah.edu
Gorrell, M. (n.d.). Which counties rely the most on Utah’s $8.4B tourism industry for jobs? Retrieved April 17, 2018, from https://www.sltrib.com/news/business/2017/09/14/which-counties-rely-the-most-on-utahs-84b-tourism-industry-for-jobs/
LICENSES AND ATTRIBUTIONS
What is the International Monetary System by Lumen Learning is licensed under CC BY-NC-SA 4.0 / A derivative from the original work
