16.2 ndian onom
InternatIonal Monetary SySteM confiDence
It refers to the faith the nations of the world should
The international monetary system (IMS) refers show that the adjustment mechanism of the IMS
to the customs, rules, instruments, facilities, and is working adequately and that foreign reserves
organisations facilitating international (external) will retain their absolute and relative values. This
payments. Sometimes the IMS is also referred to confidence is based on the transparent knowledge
as an international monetary order or regime.1 information about the IMS.
IMS can be classified according to the way in
which exchange rates are determined (i.e., fixed
Bretton WoodS developMent
currency regime, floating currency regime or
managed exchange regime) and the form foreign As the powerful nations of the world were hopeful
reserves take (i.e., gold standard, a pure judiciary of a new and more stable world order with the
standard or a gold-exchange standard). emergence of the UNO, on the contrary, they
An IMS is considred good if it fulfils the were also anxious for a more homogenous world
following two objectives2 in an impartial manner: financial order, after the Second World War.
(i) maximises the flow of foreign trade and The representatives of the USA, the UK and 42
foreign investments, and other (total 44 countries) nations met at Bretton
Woods, New Hampshire, USA in July 1944 to
(ii) leads to an equitable distribution of the
decide a new international monetary system.
gains from trade among the nations of the
The International Monetary Fund (IMF) and
the World Bank (with its first group-institution
The evaluation of an IMS is done in terms IBRD) were set up together—popularly called as
of adjustment, liquidity and confidence which it the Bretton Woods’ twins3—both having their
manages to weild. headquarters in Washington DC, USA.
ADjustment 3. For the new international monetary system, basically
two plans were presented in the meeting—one by the US
It refers to the process by which the balance-of- delegation led by Harry D. White (of the US Treasury)
payment (BoP) crises of the nations of the world and the British delegation led by John Meynard Keynes.
(or the member nations) are corrected. A good It was the US plan which was ultimately agreed upon.
J.M. Keynes had proposed a more impartial, practical
IMS tries to minimise the cost of BoP and time and over-arching idea via his plan at Bretton Woods. His
for adjustment for the nations. suggestions basically included three things:
(i) Proposal to set up an International Clearing Union
liQuiDity (ICU), a central bank of all central banks, with
its own currency (Keynes named this currency
It refers to the amount of foreign currency reserves ‘bancor’)—to mitigate the balance of payment crises
of member nations.
available to settle the BoP crises of the nations.
This bank was supposed to penalise (no such provision
A good IMS maintains as much foreign reserves in the IMF) the countries holding trade surpluses (with
to mitigate such crises of the nations without any a global tax of one per cent per month) on the ground
inflationary pressures on the nations. that such countries were keeping world demand low
by under-purchasing the products produced by other
countries. The corpus collected via this tax was to be
1. D. Salvatore, International Economics (New Jersey: used to maintain an international buffer stock of primary
John Wiley & Sons 2005), pp. 737–38; Samuelson and goods (i.e., food articles)—to be used in the periods of
Nordhaus, Economics (New Delhi: Tata McGraw-Hill, food shortages among the member nations. (In place,
e e o i io e efici co ie e
2005) pp. 609–12.
2. D. Salvatore, International Economics, p. 738. (Contd...)