Evolution of International Monetary System Essay

Evolution of International Monetary System - Essay Example Moreover, there was no mechanism to consolidate an orderly return to inflation-adjusted exchange rates. â€Å"When countries, such as the United Kingdom in 1925, tried to return to the gold standard at overvalued parities, they were forced to endure painful deflation of wages and prices in order to restore competitiveness† (Check against Delivery, 2009). â€Å"During the Great Depression, the united states stay with strict norms of the gold-exchange standard, but gradually could not use monetary policy to offset the economic contraction† (Eichengreen & Franklin, 1992). Bretton Woods: In the 1940s, British and American policy makers decided to work jointly to design a new post war international monetary system, which would combine the benefits of a liberal international system along with the freedom for government to pursue domestic policies aimed at promoting social well being and employment to all. â€Å"The principal architects of the new system, John Maynard Keynes and Harry Dexter White, created a plan which was endorsed by the 42 countries attending the 1944 Bretton Woods conference. The plan involved nations agreeing to a system of fixed but adjustable exchange rates where the currencies were pegged against the dollar, with the dollar itself convertible into gold. So in effect this was gold – dollar exchange standard† (International Monetary Systems, 2010). The main feature of Bretton Woods’s system was: Simplicity and adjustability to the rates as well as the exchange rates was a real reflection of the instability of inter-war period. â€Å"It was more administered than market-based; also exchange rates adjustment was... This essay presents a comprehensive review of the stages of the development of the international monetary systems. Possible reform measures to make the monetary system more fair and stable are discussed in the paper. International monetary systems are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross boarder investment and basically the reallocation of capital between different nations. Over the past century, different international monetary regimes have struggled to adjust to structural changes, including the integration of emerging economies into the global economy. Systemic countries failed to adapt domestic policies in a manner consistent with the monetary system of the day. Adjustment was delayed, vulnerabilities grew, and the reckoning was disruptive for all. All the developing as well as the developed economies, should accept their responsibilities for open, strong and effective management of International Monetary System. Main function would be the timely recognition of any negative effects regarding a particular monetary decision on global economies and financial systems, as well as working to mitigate those before it amplifies adverse dynamics. So countries adopting a new policy should make sure that they submit it for peer review internally and then have the IMF do an external review Globalized economy with market-based exchange rates and effective utilization of reserves will lead to proper and harmonious external balance over time.