Page 287 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 25 : International Monetary System

oil crisis in 1973 and the increase in oil prices in 1974 led to the great recession of 1974-75 in the Notes
industrial countries of the world. As a result “the dollar went into a rapid decline, which, by late
1978, had such alarming proportions that the United States government finally decided on a policy of
massive intervention in order to prevent a further fall in the value of the dollar”. At last, the system
of managed floating exchange rates had come to stay by 1978. By the Second Amendment of the IMF
Charter in 1978, the member countries are not expected to maintain and establish par values with
gold or dollar. The Fund has no control over the exchange rate adjustment policies of the member
countries. But it exercises international “surveillance” of exchange rate policies of its members.
The Second Amendment has reduced the position of gold in the global monetary system in the
following ways by : (a) abolishing the official price of gold; (b) delinking it with the dollar in exchange
arrangements; (c) eliminating the obligations of the Fund and its members to transfer or receive gold;
and (d) selling a part of Fund’s gold holdings.
The Second Amendment has also made SDRs as the chief reserve assets of the global monetary system
whose value is expressed in currencies and not gold. It is now a unit of account, a currency peg and
medium of transactions.
The present international monetary system of floating exchange rates is not one of free flexible exchange
rates but of “managed floating”. It has rarely operated without government intervention. Periodic
intervention by governments has led the system to be called a “managed” or “dirty” floating system.
In 1977, when the intervention was very heavy, it was characterised as a “filthy” float. When
Governments do not intervene, it is a “clean” float. But the possibilities of a clean float are very
remote. Thus a system of managed floating exchange rates is evolving where the central banks are
trying to control fluctuations of exchange rates around some “normal” rates even though the Second
Amendment of the Fund makes no mention of normal rates.
“The present international monetary system has also evolved in a number of important ways, including
new allocation of SDRs, increased nations’ quota in the IMF, renewal of the General Agreements to
Borrow (GAB), the abolishment of the official gold price, and the formation of the European Monetary
System (EMS) and the Euro Currency.”
The US is the major country which has been influencing the global monetary system. It has permitted
the dollar to float in relation to other currencies with occasional interventions when the dollar has
reached extreme highs or lows. When the dollar was extremely high (appreciating), the G-5 (US, UK,
Germany, Japan and France) agreed to intervene to bring the dollar down by the Plaza Accord in
September 1985. Subsequently, the dollar depreciated substantially i.e. by more than 50% relative to
the yen. By early 1987, the dollar had become undervalued and by the Louvre Accord, the G-7 countries
(G-5 plus Canada and Italy) agreed to cooperate in keeping their exchange rates around their current
levels at that time. “The Louvre Accord was successful in stabilising exchange rates for the rest of the
year. Since then there seems to have been a consensus that exchange rates should be broadly stabilised,
but there is little overt cooperation among countries.”
Its Problems

The present international monetary system is faced with excessive fluctuations and large disequilibria
in exchange rates. Often countries, both developed and developing, have been faced with either
excessive appreciation or depreciation of their currencies in relation to the dollar which continues to
dominate the world monetary system. Even the newly created Euro of the EU which was supposed
to be a strong currency has been depreciating considerably since its inception against the dollar. This
has adversely affected the world trade.
Reform of the Present International Monetary System

Economists have suggested a number of measures in order to avoid the excessive fluctuations and
large disequilibria in exchange rates for reforming the present world monetary system.
1. Coordination and Cooperation of Policies : A few economists, and McKinnon in particular,
suggested international co-operation and co-ordination of policies among the leading developed

LOVELY PROFESSIONAL UNIVERSITY 281