The document discusses the history and structure of the international financial system and the International Monetary Fund (IMF). It outlines the key elements and periods in the evolution of the international financial system, including the gold standard, Bretton Woods system, and floating exchange rates. It then provides details on the IMF, including its objectives, functions, structure, operations, facilities, special drawing rights, and role in developing countries as well as some shortcomings. The IMF aims to promote global monetary cooperation and financial stability between its 188 member countries.
2. INRODUCTION
The term international financial system implies a
mechanism of interrelated parts, functioning for some
clearly defined goals according to known laws. The
major attributes of international financial system are
knowledge, certainity and predictability.
3. The concept of international
financial system arises mainly from
two sources-
1) Structure of wider relationship- within this structure
international financial system is concerned with-
2) Flows of current and capital funds
3) Relationships between national currencies
4) Monetary systems
5) Central bank
2. parallelism- this system is the apparent parallelism
between money’s role in a domestic closed economy and
its role in world of many countries. There is a parallelism
in the institutions also and their relations in both
national and international systems. This parallelism is,
however, limited.
4. ELEMENTS OF INTERNATIONAL
FINANCIAL SYSTEMS
INTERNATIONAL MONEY: a certain form of internationally
acceptable money which is to be used for clearing residual
payments, balances with other countries and for holding
reserves to meet external defects.
Institutional arrangements: these can be in the form of
international banking system, money market, foreign exchange
markets.
Mechanism for distribution of international money: it
should have a proper mechanism whereby the distribution of
international money can be adjusted by acting upon the balance
of payments.
Central power: this system should also include a central power
to control the working of international financial arrangements.
5. HISTORICAL PERSPECTIVE
There are four period that correspond to four different
international financial systems . These four different
systems are:
1. International exchange standard
2. Gold exchange standard
3. Bretton woods system
4. Floating exchange rate
6. INTERNATIONAL GOLD STANDARD
This period ended with the beginning of first world war,
although its beginning was not agreed upon by the
scholars. By international gold standard is meant an
international financial system where all participating
countries have legally:
Defined the unit of account( rupee, dollar pound etc.
monetary unit of the country ) in terms of gold.
Established a mechanism whereby their local currencies
are kept equal in value to gold and to each other.
Fixed the external value of other currencies through the
medium of gold
Their monetary authorities are willing to buy and sell gold
at a fixed price in unlimited amounts.
7. Gold exchange standard
With the cessation of the war and restoration of peace,
monetary authorities of all countries planned to revive
the gold standard .but with paper currency having
become popular in many countries it was thought that
the gold standard of the past could not be revived.
Instead , the gold exchange standard was prescribed at
Geneva conference in 1920. The counties which had
adopted gold exchange standard chose london , new
york or paris to keep their reserves. They announced
convertability of their domestic currrencies into
pounds, dollars and francs and tries to secure
excahange stability.
8. Bretton woods system
The Bretton Woods system of monetary management established the
rules for commercial and financial relations among the world's
major industrial states in the mid-20th century. The chief features of
the Bretton Woods system were an obligation for each country to adopt
a monetary policy that maintained the exchange rate by tying its
currency to gold and the ability of the IMF to bridge
temporary imbalances of payments. Also, there was a need to address
the lack of cooperation among other countries and to prevent
competitive devaluation of the currencies as well. Preparing to rebuild
the international economic system while World War II was still raging,
730 delegates from all 44 Allied nations gathered at the Mount
Washington Hotel in Bretton Woods, New Hampshire, United States,
for the United Nations Monetary and Financial Conference, also
known as the Bretton Woods Conference. Setting up a system of rules,
institutions, and procedures to regulate the international monetary
system, these accords established IMF AND IBRD.
9. FLOATING EXCHANGE RATE
A floating exchange rate or fluctuating exchange
rate is a type of exchange-rate regime in which a
currency's value is allowed to fluctuate in response to
market mechanisms of the foreign-exchange markEt.
A currency that uses a floating exchange rate is known
as a floating currency. A floating currency is
contrasted with a fixed currency.
10. INTERNATIONAL MONETARY FUND
The International Monetary Fund (IMF) is
an international organization headquartered
in Washington, D.C. in the United States, of 188 countries
working to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and
reduce poverty around the world. Formed in 1944 at
the Bretton Woods Conference, it came into formal
existence in 1945 with 29 member countries and the goal of
reconstructing the international payment system.
Countries contribute funds to a pool through a quota
system from which countries with payment imbalances can
borrow. As of 2010, the fund had SDR476.8 billion, about
US$755.7 billion at then-current exchange rates
11. OBJECTIVES OF THE IMF
To promote international monetary cooperation through a
permanent institution which provides for consultation and
collaboration on international monetary problems.
To determine the primary objectives of economic policy of all
member countries
to establish and maintain currency convertibility by promoting
exchange stability, maintaining orderly exchange arrangements
among members.
To help in the widest extension of multilateral trade and payments
To shorten the duration and lessen the degree of disequilibrium in the
international balances of payments of members.
.
12. Functions of IMF
The imf functions as a short term credit institution .
It provides a machinery for the orderly adjustment of
exchange rates.
It is a sort of lending institution in foreign exchange
It provides a machinery for altering sometimes the par
value of the currency of a member country
It also provides a machinery for international
consultations .
The fund contributes to the promotion and maintenance of
high levels of employment and to the development of
productive resources of all member countries.
13. Structure of the fund
Under the fund structure adopted at bretton woods,
there is a board of governors , there being a governor
for every member country, appointed by the
government concerned. Generally the representatives
of the countries are their finance ministers. The board
normally meets only annually and exercises its powers
in the following matters:
Admission of new members
Revision of quotas
Election of directors etc..
14. Operations of the IMF
Provisions relating to lending operations. : any
member country short of foreign currency may buy the
required currency from the fund, paying for it with its
own currency. For this purpose , the fund receives
resources from member countries in the form of gold
and specific quantities of the currencies of the
individual member countries known as “quotas ”. The
purpose of the fund is to make temporary and short
term loans within 3 to 5 years.
15. Provisions relating to exchange
stability
AT the time of fund started functioning , members
countries were required to declare the par value of their
currencies in terms of u.s dollars.
If at any time a member country feels that there is a
“fundamental disequilibrium’’ in its balance of payments ,
it may propose a change in the par value of the currency i.e.
its devaluation.
The fund has also laid down that the member countries
should not adopt a system of multiple exchange rates.
It was also laid down that a member country should not
purchase or sell gold internationally at prices other than
those indicated by the par value.
16. Provisions relating to exchange
control operations
The fund allows the exchange controls and other
restrictions to be used at all times to control capital
flights(The movement of money from one investment
to another in search of greater stability or
increased returns).
Exchange controls are permitted in the case of
currencies which may be declared ‘scarce’ by the fund.
17. Provisions relating to the fund’s
banking functions
It collects the resources of the various central banks in
the same way in which a country’s central bank collects
cash reserves of all its commercial banks and assist
them in times of emergency
The fund cannot control the domestic and monetary
policies of the member countries, it only seeks to
maintain a multiple payment systems through an
orderly adjustment of the exchange rates.
18. facilities
The fund has developed a number of outlets for
lending. These are known as facilities and are the
following:
Gold tranche
Second credit tranche
Third credit tranche
Fourth credit tranche standby arrangements
Extended facility
standby facility
Trust fund loan facility
19. Gold tranche= member’s gold subscription + credit
extended by the member through the fund to other
members.
Credit tranches- the drawing of the first credit tranche can
be upto 25% according to the imf’s policy . the requests for
drawing beyond first credit tranche requires substantial
justification.
Standby facilities: under this , members are given assurance
that following a review of country’s financial position, the
members can purchase from fund the fund, the currencies
of other members, upto an agreed amount and during a
stated period.
20. Trust fund loan facility : the trust funds loans are made
by the fund out of the profits it has made by its gold
rate operations.
Extended facility: under it, the fund assists those
countries whose economies suffer from balance of
payments difficulties resulting from structural
imbalances in production, trade , prices etc….
21. Special drawing rights
Special drawing rights (SDR) are supplementary foreign
exchange reserve assets defined and maintained by
the International Monetary Fund (IMF). Their value is based on
a basket of key international currencies reviewed by IMF every
five years. Based on the latest review conducted on December 30,
2010, the XDR basket consists of the following four
currencies: U.S. dollars ($) 41.9 percent (compared with 44
percent at the 2005 review), euro(€) 37.4 percent (compared with
34 percent at the 2005 review),pounds sterling (£) 11.3 percent
(compared with 11 percent at the 2005 review), and the Japanese
yen(¥) 9.4 percent (compared with 11 percent at the 2005
review).The weights assigned to each currency in the XDR basket
are adjusted to take into account their current prominence in
terms of international trade and national foreign exchange
reserves.
22. allocation
Special drawing rights are allocated to member
countries by the IMF. A country's IMF quota, the
maximum amount of financial resources that it is
obligated to contribute to the fund, determines its
allotment of XDRs. Any new allocations must be voted
on in the XDR Department of the IMF and pass with
an 85% majority. All IMF member countries are
represented in the XDR Department, but this is not a
one country, one vote system; voting power is
determined by a member country's IMF quota. For
example, the United States has 16.7% of the vote as of
March 2, 2011
23. Role of imf in the growth of
developing countries.
The fund has already been providing financial
assistance to its members in past but now its activity is
substantially widened to meet the challenges.
Since 1964, the fund has organised a fiscal affairs dept.
whose officers member countries on matters of tax
policy, tax systems etc.
The fund also has organised the central banking
advisory service to provide technical advice to newly
developing countries.
To solve the current international liquidity problem,
the imf has succeeded in establishing the sdr scheme
24. Achievements of imf
Exchange rate stability : the primary goal of the fund was to
promote stability in exchange rates. The measures of
exchange stability the world has witnessed in the imf era is
remarkably superior to what was seen during the inter-war
period or gold standard regime.
Export consultations and guidance : the imf has also served
as an expert institution for consultations and guidance in
international monetary matters.
Multilateral system of payments: the fund has been
instrumental in ensuring steady progress in the
establishment of a multilateral system of payments in
respect current transactions.
25. Liberal credit policy : lately the fund has changed its
attitude of a conservative credit policy by accepting a
more liberal credit policy.
Reconstruction of European countries: the fund has
helped a lot in the rehabilitation of war devastated
European countries.
The fund has been particularly interested in the newly
developing countries of the world and has been
liberally assisting them to maintain a healthy balance
of payments and monetary stability at home
26. Shortcomings of the imf
The fund’s choice of the par values in terms of gold or u.s. dollar
was ill advised; since the original members fixed their exchange
rates at a time when over valuation of currencies was most
common.
The fund has failed in its main objective of exchange stability. It
succeeded till 1971 thereafter it became variable once again.
The fund has failed to prevent dollar shortages.
The fund has also been blamed for granting purchasing rights to
certain members without taking into account their credit
worthiness…
The fund also has failed to bring stability in the process of gold
despite many efforts made by it.
Critics say that the imf is a fund of some rich countries. It works
at he behest of rich countries like USA…..
27. CONCLUSION
Despites its various shortcomings, the fund has
achieved striking success in the field of international
monetary cooperation. If it has not proved more
successful than it did, it is because of the various
inherent difficulties faced by the fund in solving the
various problems.
