The exchange of goods and services can be dated back to the days of slavery when humans were traded in exchange for European fine arts. Subsequently the barter system was introduced at the national level in many countries.
However, as the trade market increased internationally, there needed to be a common exchange system that would be accepted by all trading countries. Gold was the demand and as such many countries accepted it as a common medium of exchange. Despite it acceptance on in the international market, many times there were discontentment between trade members as it was not a stable medium of exchange.
A major force that affects currency exchange rates is the Balance of Payments (BOP) of the various member countries. For this reason, governing bodies such as the IMF were established for member countries that may have difficulties keeping their Balance of Payment out of deficit.
INTERNATIONAL MONETARY SYSTEM (IMS)
-The IMS could be defined as the establishment of rules, customs, practices and institutions that deal with money - debts, payments, investments - by which countries value and exchange their currencies internationally -IMS exist because most countries have their own currencies and because it is necessary to have since businesses must be conducted across international barriers. -IMS also provides a mechanism for correcting the imbalances between a country’s international payments and its receipts.
HISTORY OF INTERNATIONAL MONETARY SYSTEM
The IMS spans three historical periods beginning with the Gold Standard, which functioned in the 19th and 20th Centuries and culminating with the floating exchange rate system, which has been in operation since 1973.
During the gold Standard Era all business transactions were settled in gold. The United Kingdom became the first to adopt the Gold Standard in 1821 to be followed in the 19th Century by other countries such as Russia, France, Germany and the United States.
-This is where countries agree to buy or sell gold for an established number of currency units, for example the United Kingdom pledged to buy or sell an ounce of gold for GBP 4.247 pounds and the United States for $20.67. This is referred to as pegging whereby the value of a country’s currency is tied to gold. -The use of gold was the first means of international medium of exchange. -In this regime countries agreed to buy and sell their currencies in exchange for gold.
WHY TRADE IN GOLD?
-It was recognized by international traders that a reserve in gold would provide more stability than in any other currency. One of the benefits of this medium of exchange is that it created a fixed exchange rate system. This is regarded in positive light by traders as they able to plan with the knowledge that the rate of exchange is not likely to vary. A fixed exchange rate system is one in which the price in any given currency does not change relative to another currency. -This is regarded in a positive light since it offers more stability, even stabilizing speculation - international traders are therefore able to plan with some degree of certainty knowing that the rate of exchange is not likely to vary It also imposes a price discipline on the nations.
The Collapse Gold Standard
The supply of gold was regard as inflexible and as such for long period of time the world money supply would change very little. This impacted negatively on prices and production of money. As a result countries eventually became less confident in the supply of the precious metal as it failed to keep pace with the growth in world trade. Countries therefore sought to expand their money supply compared to their gold holding, the...