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The International Monetary System

Wealth may be transferred from country to country in the form of goods and services, but by far the greatest transfers are made in the form of money. Just as a stable monetary unit facilitates economic activity within a country, so international economic activity is facilitated when there are stable relationships between one country’s currency and another’s. It is not simply a question of the ease or difficulty of translating dollars in yen, francs or yuans. It is a far more important question of knowing whether an investment made in the United States, Japan, China or France today will be repaid a decade or more from now in money of the same value – whether measured in purchasing power or in the currency originally invested. Various attempts at stabilizing international currencies against one another have followed the disappearance of the gold standard. Some nations have made their currencies equivalent to a fixed number of dollars, for example. Various European nations have created their own international currency, the Euro and the yen has been another stable currency widely accepted in international financial transactions. With the spread of electronic transfers of money, reactions to any national currency’s change in reliability can be virtually instantaneous. Any government that is tempted toward inflation knows that money can flee from their economy literally in a moment. The discipline this imposes is different from that one imposed by a gold standard, but whether it is equally effective will only be known when future economic pressures put the international monetary system to a real test.
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