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...)