FACULTY OF FINANCE AND ECONOMIC SCIENCES

INTERNATIONAL BUSINESS
INTERNATIONAL FINANCE
NATALIA SANTIAGO

The International Monetary System

The International Monetary System (SMI) are those agreements established

between two or more currencies that promote international monetary relations. It is
made up of those institutions and norms that govern commercial and financial
transactions between several countries, that is, the Monetary flow, its main objective
is to guarantee freedom in this exchange and prevent monetary imbalances that
affect the system (Roldán. P, 2018).

Throughout history, the SMI has presented important changes, just as in the
19th century, when countries issued their currencies based on their reserves of gold,
maintaining a fixed exchange rate. Within the relevant systems developed by the
SMI to adapt to the environment of the time can be named the gold-dollar Bretton
Woods pattern given after the Second World War and was in force until 1971, which
aimed to maintain price stability without harming the trade, so that countries
establish the value of their currencies based on the dollar which maintained a fixed
value. In this period, institutions such as the International Monetary Fund (IMF) and
the World Bank (WB) were created. After Bretton Woods, the free float system
appeared, which is characterized by the fact that the currencies are not backed by
metals or another form of reserve, but by the confidence in the country, therefore, it
is backed by the Central Bank that issued the currency.

The value of these currencies is classified as: Fiduciary, when subject to

confidence in the currency or the country, for example by a Central Bank; metallic, in
this it depends on an endorsement of the gold or silver reserves. In both, they must
comply with the three characteristics (unit of account, deposit of value and means of
payment) Today we can find different actors depending on the scope of each one, at
the international level, mainly the International Monetary Fund (IMF), the World Bank
(WB), the World Bank (WB) (Vivo, 2018).

At the regional level, there are organizations such as the Inter-American

Development Bank (IDB), the African Development Bank (AFDB), the Asian
Development Bank (ADB), the Andean Development Corporation (CAF), the
European Union (EU), the Organization for Economic Cooperation and Development
(OECD) (Durangomas, 2018).

Among the objectives of the SMI are: the common framework, which seeks to
provide rules and norms accepted at a broad level, so that countries can freely
exchange financial flows; convertibility, seeks to ensure the convertibility of
currencies, that is, that they have a relative price that the conversion to other
currency; the third objective is related to liquidity, seeks to ensure that countries
have sufficient liquidity so that the flow between countries is not restricted; the
objective of adjustment seeks to correct imbalances in the balance of payments of
the countries, providing them, for example, financing; finally, the global payment
objective creates and generates them internationally, accepted at this level.

The SMI has two main characteristics, the flotation, which is presented by
having flexible exchange rates, adjusting to market value, although in countries like
China, this value with respect to the dollar is determined by the government, also in
times of crisis. like Japan or Switzerland have applied that strategy too; The second
characteristic is that it is fiduciary, that is, the currencies do not have a support in
metals (gold or silver), but their value is determined by the confidence in the Central
Bank, internationally the dollar and the euro are used as a reserve for liquidity within
the system (Roldán. P, 2018).

Finally, international agreements are negotiated according to international

regulations, by the organizations that make up the SMI, who also make decisions
regarding international reserves, access to credit, the creation of national reserve
currencies such as the SDR (Special Rights of Giro) which is an international reserve
asset created by the IMF, to complement the reserves of the member countries,
which can be exchanged for freely usable currencies, its base is made up of the US
Dollar, the Euro, the Chinese Yuan , Japanese Yen and the Pound Sterling
(International Monetary Fund, 2018), among other aspects that influence
international exchange relations (Roldan. P, 2018).

It is important to emphasize that there are some aspects in favor and against
the SMI, such as (Rahnema. A, 2007):

In favor

● The effectiveness of the monetary policy that can be used to balance

the system also prevents countries from importing inflation from
abroad.
● A symmetric treatment of all countries is generated, since the foreign
exchange market is free and not regulated by the government of each
country.
● By adapting to changes in the market, it can act as a stabilizer both
internally and externally.

Against:

● In the absence of a fixed exchange rate, countries may lose motivation

to coordinate their economic policies, generating incoordination among
countries.
● The currency market can be destabilized by speculative movements
that can cause exchange rates to fluctuate a lot.
● The variability of exchange rates can generate uncertainty about
prices.
 Although the international monetary system is not perfect and has flaws, it has
adapted to changes in the international system, always seeking to generate freedom
in the flow of foreign currency, thanks to the fact that it is not controlled by the
governments of each country. If not for the market, it is still important to generate a
balance through the regulations in function of the international organizations that
conform it and that with these rules generate to a certain extent greater security
within this changing market.

Bibliography

Durangomas. (August 14, 2018). ​Sistema Monetario Internacional, qué es y cómo

funciona.​ Taken from Durangomas:
http://www.durangomas.mx/2018/08/sistema-monetario-internacional-que-es-
y-como-funciona/

International Monetary Fund. (April 19, 2018). ​Special Drawing Right (SDR).​ Taken
from International Monetary Fund:
https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Dr
awing-Right-SDR

Rahnema, A. (2007). ​Sistemas Monetarios Internacionales.​ Taken from EFI-

Economía Pontificia Universidad Católica del Ecuador :
http://puceae.puce.edu.ec/efi/index.php/finanzas/2-uncategorised/42-sistemas
-monetarios-internacionales

Roldan, P. (2018). ​Sistema Monetario Internacional.​ Taken from economipedia:

https://economipedia.com/definiciones/sistema-monetario-internacional.html

Vivo, M. (2018). ​REFORMULACIÓN DEL SISTEMA MONETARIO

PARA REDUCIR LA VOLATILIDAD MONETARIA.​ Taken from
UNIVERSIDAD DE ALICANTE:
https://rua.ua.es/dspace/bitstream/10045/76718/1/Reformulacion_del_Sistem
a_Monetario_Internacional_para_re_VIVO_LLORCA_MARTIN.pdf