Development and Description of the Current IMS

Both individually and as a group, the major western financial countries have intervened in the international currency exchange markets on numerous occasions since the introduction of the floating-exchange rate system, as a means of influencing the rate for one or more currencies (Little & Olivei, 1999).

The longer-term impact of an unrestricted floating-exchange rate system on the American trade balance and on the capacity of the nation to generate the inflow of foreign capital necessary to offset its international trade deficit without re-igniting inflation remains arguable. In the mid-1980s, however, the rapidly fluctuating international exchange values of the currencies of the major western industrial countries were having significant and detrimental impacts on both international trade and domestic economies. Recognition of this fact led the major western financial countries to introduce in 1986 what amounts to a managed float. The member countries of the European Community (EC) had operated such a managed float for several years, as a means of controlling the internal currency exchange rates within the EC.

An important change in the international monetary system occurred in 1999. The European Community (EC) introduced the euro (?) into the international monetary system on 1 January 1999. Key elements of the international monetary system are the currency exchange rate mechanism and the reserve currency preferences. The euro holds the potential to have a major impact on the international monetary system, especially if the currency ultimately is able to challenge the reserve currency status of the United States (US) dollar ($). The challenge of the euro thus far is weak (La Cour & Macdonald, 2000).

The gold standard was essential to the classical economic approach to the maintenance of equilibrium in international trade. Classical economic theory viewed international currency exchange rates as fixed because the currencies of all countries were freely convertible into gold. The contention was that the price of gold would remain fixed between countries, because merchants would otherwise exchange money where the price of gold was the highest. Thus, the expected maximum change in currency exchange rates was the cost of shipping gold from one country to another (Little & Olivei, 1999)gle EC currency. The strongest concern related to the euro's potential as an IMS reserve currency (La Cour & Macdonald, 2000).

Critics of the euro point out that the establishment of the American dollar as the preferred reserve currency developed over a period of 50 years. Thus, it likely will be decades before it can make a serious impact on the reserve status of the dollar regardless of the succ

 

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