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International monetary systems

Belongs to subject International monetary system

An international monetary system is a set of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. The system can grow organically as the collective result of numerous individual agreements between international economic factors spread over several decades. Sometimes formal monetary systems have been imposed by regional rulers. When a given nation or empire has achieved regional hegemony, its currency has been a basis for international trade, and hence for a de facto monetary system. With the growth of American power, the US dollar became the basis for the international monetary system, formalised in the Bretton Woods agreement that established the post–World War II monetary order, with fixed exchange rates of other currencies to the dollar, and convertibility of the dollar into gold. The Bretton Woods system broke down, culminating in the Nixon shock of 1971, ending convertibility; but the US dollar has remained the de facto basis of the world monetary system, though no longer de jure, with various European currencies and the Japanese yen also being prominent in foreign exchange markets. Until the 19th century, the global monetary system was loosely linked at best, with Europe, the Americas, India and China (among others) having largely separate economies, and hence monetary systems were regional. See also Global financial systems, world-systems approach and polarity in international relations. It was in the later half of the 19th century that a monetary system with close to universal global participation emerged, based on the gold standard.

While capital controls comparable to the Bretton Woods system were not in place, damaging capital flows were far less common than they were to be in the post 1971 era. By the early 1930s, the prevailing order was essentially a fragmented system of floating exchange rates. British and American policy makers began to plan the post-war international monetary system in the early 1940s. The plan involved nations agreeing to a system of fixed but adjustable exchange rates so that the currencies were pegged against the dollar, with the dollar itself convertible into gold. So in effect this was a gold – dollar exchange standard. The new exchange rate system allowed countries facing economic hardship to devalue their currencies by up to 10% against the dollar (more if approved by the IMF) – thus they would not be forced to undergo deflation to stay in the gold standard. Keynes had argued against the dollar having such a central role in the monetary system, and suggested an international currency called bancor be used instead, but he was overruled by the Americans. This event marked the effective end of the Bretton Woods system; attempts were made to find other mechanisms to preserve the fixed exchange rates over the next few years, but they were not successful, resulting in a system of floating exchange rates.

An alternative name for the post Bretton Woods system is the Washington Consensus. The transition away from Bretton Woods was marked by a switch from a state led to a market led system. International monetary systems over two centuries

Date System Gold standard Gold, pound UK

1914–1924 Anchored dollar standard Gold, dollar US, UK, France

1924–1933 Gold standard Gold, dollar, pound US, UK, France

1933–1971 Anchored dollar standard Gold, dollar US, G-10

1971–1973 Dollar standard Dollar US

Dollar, euro Dollar, euro, yen US, Eurozone, IMF

Similar to the original Bretton Woods, this included Asian currencies being pegged to the dollar, though this time by the unilateral intervention of Asian governments in the currency market to stop their currencies appreciating. He names this relationship Bretton Woods III.

On October 13, 2008, British Prime Minister Gordon Brown

said world leaders must meet to agree to a new economic system:

We must have a new Bretton Woods, building a new international financial architecture for the years ahead.

However European leaders were united in calling for a "Bretton Woods II" summit to redesign the world's financial architecture. Despite this lack of results leaders continued to campaign for Bretton Woods II. He had been critical of the U.S.'s response to the global financial crisis of 2008, and had suggested that the dollar may be superseded as the base currency of the Bretton Woods system.

Competing ideas for the next international monetary system

System Reserve assets Leaders

Flexible exchange rates Gold standard Gold, dollar US

Dr Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes's bancor. Dr Zhou said that national currencies were unsuitable for use as global reserve currencies as a result of the Triffin dilemma – the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries' demand for reserve currency. In December 2011, the Bank of England published a paper arguing for reform, saying that the current International monetary system has performed poorly compared to the Bretton Woods system.

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