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CONVENTION QUITO Year 2009/2010

Licence 3

International Economics

Homework 2

What are the main characteristics and drawbacks of the current international Money and financial system?

Correct by Jean-François PONSOT

INTRODUCTION
The purpose of this paper is to analyze the main characteristic and drawbacks of the current international monetary and financial system,highlighting the most important issues. Given the current economic outlook characterized by economic and financial crisis, it is important to develop an objective analysis to understand what has been the role of the international monetary and financial system in the evolution of the global economy. Firstly, it describes basis concepts about the international monetary and financial system; secondly, itanalyze the main characteristics about the current international monetary and financial system, taking into account the US dollar´s hegemony since the Bretton Woods Treaty; lastly, it concludes by analyzing the main drawbacks of the current international monetary and financial system.

INTERNATIONAL MONETARY AND FINANCIAL SYSTEMS
The international monetary system is a set of institutionalarrangements for determining the exchange rates between currencies, to allocate the flow of international trade and capital, and make necessary adjustments in balances of payments of different countries. In addition this international system provides means of payment, which are easily acceptable between buyers and sellers of different nationality to carry out transactions within markets, besides offer theopportunity to defer payments. To operate successfully, it need to inspire confidence , to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected. Establish an international monetary system should require a high degree of cooperation between the governments of major countries. It requires sacrifice in terms of nationalsovereignty and national interests to achieve the common good. Over the past 120 years, it has made several attempts to optimize the international monetary system. Currently, it is necessary evolving to adapt better to the demands of the global economy.
Whereas, the International Financial System is the financial system constituting by institutions that act as regulators on international levels unlike tothose that act on a national level. The main actors, in the international financial system, are international institutions such as the International Monetary Fund, the Bank for International Settlements and the World Bank. In the last 60 years, these international institutions have played an important role in international financial flows, especially in seventies and eighties when the monetaryand fiscal policies implemented by the developing countries were influenced by the “recommendations” of these institutions. The globalization process has accelerated international flows of goods, services and capital.

THE MAIN CHARACTERISTICS
British and American policy makers began to plan the post war international monetary system in the early 1940s. The objective was to create a system ableto combine the benefits of liberal international system with the freedom for governments to implement their own policies at the national level, thus was established the Bretton Woods System. Nevertheless, this treaty changed the organization of international monetary system, since the US dollar became the main world´s currency replacing to the gold standard. For this, it adopted a gold-currencystandard, which U.S. should keep the price of gold in $ 35.00 per ounce and was granted the right to exchange dollars for gold at that price without restrictions or limitations. By keeping fixed the price of one currency (the dollar), other countries should fix the price of their currencies in relation to it.
The result was a decrease of automatic international mechanism of adjustment by the...