Functions of the International Monetary System, a

¶ … functions of the International Monetary system, a few significant institutions which deal with foreign currency as well as conclude on which system of exchange rates is more useful in the corporate world. History of the International Monetary System: In the start of the economical world, people were commonly in the habit of using the barter system to purchase goods that were in need. With time though, the system of trading gold and silver coins started to evolve. Around the 19th century, officially, countries started issuing themselves a basic currency.

This marked as the beginning of the modern day monetary system of trade. In the Pre-World War era, money unions evolved which enabled people of different countries to easily exchange currencies. In this period of time, there was a low level of financial crisis and economies were growing steadily. However, with the World War going on, global trade and the flow of capital internationally fell significantly. To control the situation, countries had to fluctuate their interest rates.

After the war came the time of the Great Depression where the U.S. And thereby the rest of the global market faced a major financial crisis which needed to be rectified. For this, a Bretten Woods Conference was held where countries agreed to a system of fixed and adjustable rates of currencies, pegged to the dollar. The dollar was convertible to gold.

This system remained for about 25 years until it was abandoned and the Smithsonian Agreement was made to enable exchange rates of currencies to float and the method of converting dollars to gold was suspended. (Eichengreen, 2008) Function of the International Monetary System: The International Monetary System refers to the global system of determining exchange rates of currencies between countries, and governing how nations trade, pay off debts and make general transactions with foreign countries.

In this system, either a currency can be allotted a fixed rate that can be adjusted and maintained through rates of interests, or they are allowed to float and find their own rate by shifts in demand and supply of exports and imports by a country. Purpose of the International Monetary Fund: The international monetary fund works to give advice to policy makers and financial managers of countries so that they may attain their macroeconomic goals.

Its main purpose at the moment is to oversee the global economical affairs and policies. It first looks at the effects of policies and ways on a country itself and then, in the long-term, the effect of that country's policies on the rest of the global economy. It also has initiated a system through which member countries release data regarding their economic activities etcetera, so that needs and improvements can statistically be fulfilled.

Alongside this, the IMF also offers a loan giving system; however, it gives conditions to eligibility for the loan which includes policy reformation to correct macroeconomic policies. (Wood, 2005) Purpose of the World Bank: The World Bank is also a financial institute and mainly specializes in providing loans to developing countries that are in need of financial assistance to improve their capital assets, i.e. infrastructure.

The main goal that the World Bank has is the reduction of global poverty, which it fulfills by extensively analyzing a country's economical situation, and through that, it makes decisions to strategically deal with such countries. In making all such decisions, it also aims to fulfill its goals of promoting international trade and investment. (Getting to know, 2005) The actions by both the IMF and World Bank deal with exchanging currencies.

The Failure of the Fixed Exchange Rate System: In 1972, the system of Bretten Woods that fixed the rate of exchange of foreign currencies failed and was replaced by a system of floating exchange rates. This occurred due to several reasons. First of all, due to the increased amount of spending done by the United States of America on the Vietnam War and other ongoing events, the U.S. Dollar value kept going up, causing the system of international fixed rates to be under threat.

Alongside this, the American economy was beginning to face problems of inflation due to its economical methods of working. Because of these issues, the President of the time, Richard Nixon, brought a pause to the system of converting dollars into gold due to which a floating currency system came about. (Thornton, 2001) Fixed or Floating Exchange Rates for International Businesses to Flourish; an argumentative conclusion: Both systems certainly have their own merits and demerits.

As for fixed exchange rates, while it is obvious that keeping a fixed rate of currency exchange reduces the uncertainty of trade and gives entrepreneurs perfect knowledge to plan ahead, there are demerits of fixing exchange rates. By fixing the rate, some countries may be able to enjoy a low rate of exchange, making their exports more affordable, decreasing competitiveness in the market. On the other hand, floating exchange rates too have pros and cons. With flexible exchange rates, markets remain comparatively competitive and the issues.