An international monetary system consists of a set of international laws, conventions, and other formalities which facilitate the transfer of capital among nation-states and the implementation of exchange rates within the currency system. The system is usually governed by the central banks of the nations involved, although there are some exceptions such as the United States and Canada.
There are two major categories of international monetary systems: the official and the non-official system. The official system involves the establishment of the Board of Governors of the International Monetary Fund (IMF), whose objective is to ensure that the value of currencies of different countries remains stable at present and is expected to increase in the future. The Board of Governors also establishes its own currencies for trade between its member nations.
On the other hand, the non-official system is governed by a network of commercial banks that are authorized to use their own currencies. The commercial banks establish special accounts to hold the money and maintain interest rates within their respective currencies. This system has several disadvantages; especially for the country of origin, since it does not affect the value of the national currency. Some countries have difficulties in maintaining the stable exchange rate between their own currency and the one used by the country of origin’s commercial banks; however, this has been made easier by the World Trade Organization, which has established agreements that help developing countries gain access to trade with the rest of the world.
One of the main advantages of this international monetary system is the ability to use the local currency as well as foreign currency. This allows the country of origin to save on capital and spend on necessities. The main disadvantage is the risk of default. Since the exchange rate can change at any time, it may cause financial imbalance, thereby causing more damage than good. When a country defaults, its value decreases significantly and the country is left without the ability to trade with the rest of the world.
It should also be noted that although international monetary systems have many benefits for the country of origin, they have certain disadvantages as well. The most obvious disadvantage is the absence of national control over its domestic economy. Since the national government cannot influence the exchange rate, the country is under considerable pressure from its creditors to adhere to the policies of the international monetary institutions; however, the creditors can demand high interest rates for loans from the country and force the government to hike up taxes and expenditure in order to pay off its debts.
In addition, the system makes it difficult for citizens to monitor the market and participate in the currency market. Since the national government cannot intervene in the market, it can’t see if its currency values are falling or rising. The lack of direct access to the currency market makes it impossible for people to borrow the funds needed to make payments. Also, because the government cannot directly influence the market, there is less control over economic activities and they are not able to determine whether a given nation is going to default and consequently affects the value of its currency.
In addition, it also involves a number of political aspects. For example, the international monetary institutions require that countries adhere to the rules of the system and refrain from taking advantage of the weaker country in order to gain an unfair advantage. Because the rules of the system are not flexible enough, it makes it harder for poor countries to survive and can sometimes create instability.
Lastly, the system provides economic stability to those countries that have developed in comparison to those countries that haven’t. Because of this, countries that have developed, such as the US, can benefit from the system whereas countries that have not, like many other developed nations, have to rely on their own resources and experience in order to stay strong.