Brief History of Financial System

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Introduction

The international financial system provides the framework enabling residents of one country to make payments to residents of other countries. Over the past centuries world trade was characterised by great changes in the international financial system, beginning with the use for gold and silver in the bimetallism era, through the gold standard the gold exchange standard , the Bretton Woods system and the current floating exchange rates. Arguably gold id the oldest metal used both as store of value and as a medium of exchange as realised in the early Egyptian Pharaohs’’ (3000 B.C), who stored wealth in gold and traded with other likewise, according to Prayer (1982).

Definitions

According to Arthers and Sheffrins (2003) a financial system is a system that allows the transfer of money between savers and borrowers, comprising of a set of complex and closely interconnected financial institutions, market instruments, and transactions. This system in this regard allows the exchange of money/value among trading parties.

The international financial system is a financial system consisting of institutions that act on the international level. They operate under sets of internationally agreed rules and supporting institutions which facilitate international trade , cross border investment and the reallocation of capital between nation states.

General overview:

The international monetary system consists of:

i) exchange rate arrangements;

ii) (ii) capital flows; and

(iii) a collection of institutions, rules, and conventions that govern its operation. Domestic monetary policy frameworks dovetail, and are essential to the global system. A well-functioning system promotes economic growth and prosperity through the efficient allocation of resources, increased specialization in production based on comparative advantage, and the diversification of risk hence resulting in the continued stability of the international financial system.

In

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