International monetary systems

An international monetary system is a set of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. It should provide means of payment acceptable to buyers and sellers of different nationalities, including deferred payment. To operate successfully, it needs to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade, and to provide means by which global imbalances can be corrected. The system can grow organically as the collective result of numerous individual agreements between international economic factors spread over several decades. Alternatively, it can arise from a single architectural vision, as happened at Bretton Woods in 1944. An international monetary system is a set of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. It should provide means of payment acceptable to buyers and sellers of different nationalities, including deferred payment. To operate successfully, it needs to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade, and to provide means by which global imbalances can be corrected. The system can grow organically as the collective result of numerous individual agreements between international economic factors spread over several decades. Alternatively, it can arise from a single architectural vision, as happened at Bretton Woods in 1944. Throughout history, precious metals such as gold and silver have been used for trade, sometimes in the form of bullion, and from early history the coins of various issuers – generally kingdoms and empires – have been traded. The earliest known records of pre-coinage use of precious metals for monetary exchange are from Mesopotamia and Egypt, dating from the third millennium BC. Early money took many forms, apart from bullion; for instance bronze spade money which became common in Zhou dynasty China in the late 7th century BC. At that time, forms of money were also developed in Lydia in Asia Minor, from where its use spread to nearby Greek cities and later to many other places. Sometimes formal monetary systems have been imposed by regional rulers. For example, scholars have tentatively suggested that the Roman king Servius Tullius created a primitive monetary system in the early history of Rome. Tullius reigned in the sixth century BC - several centuries before Rome is believed to have developed a formal coinage system. As with bullion, early use of coinage is believed to have been generally the preserve of the elite. But by about the 4th century BC coins were widely used in Greek cities. They were generally supported by the city state authorities, who endeavoured to ensure they retained their values regardless of fluctuations in the availability of whatever base or precious metals they were made from. From Greece the use of coins spread slowly westwards throughout Europe, and eastwards to India. Coins were in use in India from about 400 BC; initially they played a greater role in religion than in trade, but by the 2nd century they had become central to commercial transactions. Monetary systems that were developed in India were so successful that they spread through parts of Asia well into the Middle Ages. As a variety of coins became common within a region, they were exchanged by moneychangers, the predecessors of today's foreign exchange market, as mentioned in the Biblical story of Jesus and the money changers. In Venice and the other Italian city states of the early Middle Ages, money changers would often have to struggle to perform calculations involving six or more currencies. This partly led to Fibonacci writing his Liber Abaci which popularised the use of Indo-Arabic numerals, which displaced the more difficult Roman numerals then in use by western merchants. When a given nation or empire has achieved regional hegemony, its currency has been a basis for international trade, and hence for a de facto monetary system. In the West – Europe and the Middle East – an early such coin was the Persian daric. This was succeeded by Roman currency of the Roman Empire, such as the denarius, then the Gold Dinar of the Ottoman Empire, and later – from the 16th to 20th centuries, during the Age of Imperialism – by the currency of European colonial powers: the Spanish dollar, the Dutch guilder, the French franc and the British pound sterling; at times one currency has been pre-eminent, at times no one dominated. With the growth of American power, the US dollar became the basis for the international monetary system, formalised in the Bretton Woods agreement that established the post–World War II monetary order, with fixed exchange rates of other currencies to the dollar, and convertibility of the dollar into gold. The Bretton Woods system broke down, culminating in the Nixon shock of 1971, ending convertibility; but the US dollar has remained the de facto basis of the world monetary system, though no longer de jure, with various European currencies and the Japanese yen also being prominent in foreign exchange markets. Since the formation of the Euro, the Euro has also gained use as a reserve currency and a medium of transactions, though the dollar has remained the most important currency. A dominant currency may be used directly or indirectly by other nations: for example, English kings minted the gold mancus, presumably to function as dinars to exchange with Islamic Spain; colonial powers sometimes minted coins that resembled those already used in a distant territory; and more recently, a number of nations have used the US dollar as their local currency, a custom called dollarization. Until the 19th century, the global monetary system was loosely linked at best, with Europe, the Americas, India and China (among others) having largely separate economies, and hence monetary systems were regional. European colonization of the Americas, starting with the Spanish empire, led to the integration of American and European economies and monetary systems, and European colonization of Asia led to the dominance of European currencies, notably the British pound sterling in the 19th century, succeeded by the US dollar in the 20th century. Some, such as Michael Hudson, foresee the decline of a single base for the global monetary system, and the emergence instead of regional trade blocs; he cites the emergence of the Euro as an example. See also Global financial systems, world-systems approach and polarity in international relations. It was in the later half of the 19th century that a monetary system with close to universal global participation emerged, based on the gold standard. From the 1816 to the outbreak of World War I in 1914, the world benefited from a well-integrated financial order, sometimes known as the 'first age of globalisation'.There were monetary unions which enabled member countries to accept each other's currencies as legal tender. Such unions included the Latin Monetary Union (Belgium, Italy, Switzerland, France) and the Scandinavian monetary union (Denmark, Norway and Sweden). In the absence of shared membership of a union, transactions were facilitated by widespread participation in the gold standard, by both independent nations and their colonies. Great Britain was at the time the world's pre-eminent financial, imperial, and industrial power, ruling more of the world and exporting more capital as a percentage of her national income than any other creditor nation has since.