INTERNATIONAL MONETARY SYSTEM

IMPORTANCE
(1) The importance of the international monetary system was well described by economist
Robert Solomon:
Like the traffic lights in a city, the international monetary system is taken for granted
until it begins to malfunction and to disrupt people’s lives. … A wellfunctioning monetary
system will facilitate international trade and investment and smooth adaptation to change. A
monetary system that functions poorly may not only discourage the development of trade and
investment among nations but subject their economies to disruptive shocks when necessary
adjustments to change are prevented or delayed.
Robert Solomon, The International Monetary System, 1945 – 1981: An Insider’s
View (Harper & Row, New York 1982), pp. 1,7.
(2) The international monetary system provides the institutional framework for determining the
rules and procedures for international payments, determination of exchange rates, and movement
of capital.
(3) It helps in reallocating the capital and investment from one nation to another. It is a
governing body that sets rules and regulations by which different nations exchange currencies
with each other. With the growing complexity in the international trade and financial market, the
international monetary system is necessary to assign a standard value of the international
currencies.
International monetary system motivates and encourages the nations to participate in the
international trade to improve their BOP and minimize the trade deficit. It has grown over the
years as a single architectural body with a vision to integrate the global economy. Some of the
important achievements of the international monetary system over the years have been the
establishment of World Bank and International Monetary Fund in the year 1944.
(4) The purpose of the international monetary system (IMS) is to facilitate international
economic exchange since most countries have national currencies that are not typically accepted
as legal payment beyond their borders. When the IMS is operating mellifluously, international
trade/investment can flourish; however, when the IMS operates inefficiently or even completely
fails (as in the Great Depression or the recent Credit Crisis), international trade/investment is
throttled.
The essential element of the IMS is to facilitate the exchange of goods, services, and capital
among countries. The IMS seeks to contribute to stable and high global growth while currently
fostering price and financial stability. The IMS regulates the balance of payments, which is an
accounting device that records all international transactions between a country and the rest of the
world for a given period, and comprises four elements: 1) exchange arrangements/rates, 2)
international payments and transfers relating to current international transactions, 3) international
capital movements, and 4) international reserves.
(5) It stipulates the rules that should be applied in international trade. The system also clarifies the
means of payment that should be used in international trade. Generally, the international monetary
system was set in order to promote international trade and investment.
(6) The international monetary system determines how foreign exchange rates are set and how
governments can affect exchange rates
(7) The International Monetary System (IMS) constitutes an integrated set of money flows and
related governance institutions that establish the quantities of money, the means for supporting
currency requirements and the basis for exchange among currencies in order to meet payments
obligations within and across countries.  Central banks, international financial institutions,
commercial banks and various types of money market funds — along with open markets for
currency and, depending on institutional structure, government bonds — are all part of the
international monetary system.   

References:
https://home.gwu.edu/~jwyang/B102%20Notes%20on%20IMS.pdf
https://www.sciencedirect.com/topics/economics-econometrics-and-finance/international-
monetary-system
https://www.economicsdiscussion.net/articles/international-monetary-system/4256
https://empireresume.com/what-is-the-international-monetary-system/
https://studycorgi.com/international-monetary-system-and-its-importance/
https://www.chathamhouse.org/sites/default/files/field/field_document/0212gt_fosler.pdf