National Monetary System Overview

National Monetary System

• A monetary system is how a government provides money for its economy.
• It involves the national treasury, the mint, the central bank, and commercial banks.
• The first recorded monetary system was created in Lydia in the 6th Century BC
• It had established monetary units and subunits, fixed content of precious metals, and a central authority for issuing currency, rules of issuance, and circulation.
• The contemporary evolution of national monetary systems is influenced by the globalization of financial relations, the rise of regional monetary systems, the creation of new forms of money, and fundamental changes in the value of currency.
• Each national monetary system must have three central components: monetary instruments, a legal framework for the system, and a supporting institutional structure.
• The national monetary system is a functional model where monetary instruments are organized under legal regulations and under the supervision of the public monetary authority.

Key Measures and Activities

• The currency selected should act as a measure of value, a standard, and a general equivalent.
• Establish a monetary unit with a specific name that serves as a standard.
• Choose effective instruments for circulation and payment, including banknotes, coins, and other forms of money.
• Regulate the printing of denominations and issuing of metallic coins.
• Regulate the issuance and circulation of banknotes, other signs of value, as well as non-cash settlements.
• Organize the institutional apparatus that supervises and supports the monetary system, including its relationships with other monetary systems.

Monetary Instruments

• Monetary Unit: The central element of a monetary system, serving as a standard of value. The names of monetary units come from various sources, including the metal used in the coin (gold, silver), the weight of the coin (drachma, pound sterling), traditions and languages, the name of a currency in another country (dollar), or a convention (SDR, Euro).
• Monetary Standard: Determines the value of a monetary unit based on a specific commodity, metal, foreign currency, or a purchasing power standard, guiding the system's operation.
• Broad Money: The term "broad money" includes all forms of money and financial assets that can be used as money in an economy.
• Monetary Issue Mechanism: Includes cash circulation and control over the overall money supply (bank deposits, loans, monetary policy, money market). The goal is to maintain smooth operation of the cash/non-cash payment systems, stable currency purchasing power, and appropriate exchange rates.
• Monetary Circulation Management: Ensuring monetary circulation validity through a complex of activities: analysis, forecasting, regulation, and supervision.
• Exchange Rate Mechanism: Establishing the exchange rate between national and foreign currencies. Two main methods are used: fixing and quoting.

International Monetary System

• Paris Conference (1867): Introduced the gold standard, gold parity, fixed exchange rates established by law, recognized GBP as international currency, and established the bill of exchange as an official payment instrument.
• Genoa Conference (1922): Maintained the gold standard and gold parity, introduced floating exchange rates, kept GBP as an international currency, mandated monetary policies from each country, and established the currency regime.
• Bretton-Woods Conference (1944): Maintained the gold standard and gold parity, established fixed exchange rates with a "currency snake" +/-1% deviation, recognized USD as the international reserve currency for trade and finance, created the IMF and World Bank, and established Special Drawing Rights (SDRs).
• Jamaica Conference (1974): Abolished the gold standard, abolished the gold parity, established floating exchange rates, created the international gold market, maintained the use of SDRs, maintained USD as international currency, and mandated monetary policies for every country.

IMF

• Established December 27, 1945, becoming effective March 1, 1946
• Goals: Promote international monetary cooperation, oversee foreign exchange policies, establish principles of foreign exchange policy documentation, provide loans to members, and develop a multilateral payment system between member countries.
• Objectives: Promote monetary and international cooperation, facilitate balanced international trade, prevent currency manipulation, and remove exchange rate restrictions hindering trade.
• World Bank structure: International Bank for Reconstruction and Development (1956), International Finance Corporation (1960), International Development Association (1988), and Multilateral Investment Guarantee Agency (MIGA).

World Bank objectives

• Promote economic development and reforms in developing countries.
• Provide long-term loans to finance investment projects and development programs.
• These loans are directed to infrastructure projects like roads, railways, telecommunications systems, and energy.

Special Drawing Rights (SDR)

• Created to increase international liquidity, establish an international currency not tied to any nation, and achieve currency stability in a fluctuating exchange rate environment.
• Used to record and issue the volume of international trade, foreign exchange reserves, international liquidity, and balance of payments status.
• Movements of SDRs are tracked by the IMF SDR Department's computerized system.

SDR Evaluation

• 1970-1974: Based on gold.
• 1974-1980: Based on a basket of 16 currencies.
• 1981-1999: Based on a basket of 5 currencies.
• 1999-2016: Based on a basket of 4 currencies: USD, EUR, JPY, GBP.
• 2016-present: Based on a basket of 5 currencies: USD, EUR, JPY, GBP, Chinese Yuan.
• Current SDR basket weights:
  • USD 41.73%
  • EURO 30.93%
  • Renminbi (Chinese Yuan) 10.92%
  • Japanese yen 8.33%
  • British pound 8.09%

Key Aspects

• SDR is an artificial currency created by the IMF for internal accounting purposes.
• SDR value is calculated from a weighted basket of major currencies.