Mark Carney, the Governor of the Bank of Canada gave his perspective in a speech to theForeign Policy Association in New York City in November 2009. He described it thus: “Theinternational monetary system consists of (i) exchange rate arrangements; (ii) capitalflows; and (iii) a collection of institutions, rules, and conventions that govern its operation.”.Barry Eichengreen in his book
described it as,the glue that binds national economies together. Its role is to lend order and stabilityto foreign exchange markets, to encourage the elimination of balance-of-paymentsproblems, and to provide access to international credits in the event of disruptiveshocks.But before we go any further, let's go back to the beginning and examine the path of theinternational monetary system since the days of merchantilism
when the monetary systemevolved around that precious yellow metal we call gold.The logic behind merchantilism was that gold and other precious metals symbolised anation's wealth, and the goal was to encourage exports but discourage imports.Merchantilists assumed that trade was a zero-sum game and therefore, for every winner,there was also a loser. The fallacies of this logic were exposed by David Hume in 1752,with his
theory. This theory explained that it was not the amount of gold and silver a country held that was important, it was how many goods and servicesthat could be bought with this gold and silver. So consequently, as gold and silver wereamassed there was more currency in circulation (in the form of gold and silver) so thissimply led to higher prices, therefore no one was better off. In fact most were probablyworse off because that country's exports became far more expensive, so less goods wereexported. Trade theory was expanded upon by Adam Smith in 1776 and David Ricardo in1817, with their theories of
.The international gold standard was the first major development in the internationalmonetary system and was adopted by major countries from 1876 – 1913. Exchange rateswere effectively fixed, because governments agreed to buy and sell gold at a fixed rate.This system of using gold to back national currencies ran quite smoothly until 1914 whenWorld War I began. Problems continued right through until the end of World War II in 1944.These wars interrupted trade and the free movement of gold was suspended. The
of the 1930's was also a major problem with restrictions on trade causing thisworld wide depression to continue. At the time, countries were more concerned with their national economies rather than exchange rates and trade.