Monetary System
Introduction
Money, the significant factor in bettering human lives, has been in use since ages. The form of money has changed with times but the importance attached to it, remains the same in all periods. Money is the medium, which has been accepted all over the world as the means to buy various commodities and services. It is the medium of exchange, on the basis of which all trade and business are carried out. Money is also used as the unit of account and store of value. And to facilitate the smooth functioning of money, there is the need of a proper monetary system in any economy. The monetary system aims at maintaining the money supply by supervising the financial agents and the various forms of transaction.
The government of the country is responsible for forming the monetary system, according to which trade is carried by its people. Although monetary system is treated as the national issue, the trend is changing with the influence of international trade on the policies of national governments. In this paper we are going to analyze the monetary system by discussing its general meaning and role played by it in the development of nations. The needs of the people and resources available with it shape the monetary system of a country.
Monetary System
How much money can the government produce? What is its market value? Which currency is used by the people in the nation? What are the inflation rates in the nation? Which banking system exists in the nation? All these factors are decided by the monetary system, adopted by that country. The monetary system of a country is very vital to its economic development, for it is the monetary system which determines the financial planning of a nation. The value and supply of money, provided by the government is controlled by the monetary system. The value of money is measured from the amount of goods and services can be bought by it. The availability of wealth, needed for the advancement of the nation and its people, is depended on the success of the monetary system. Roger Langrick (n.d) has mentioned in his article that everyone has some ideas about money, who controls it, where it comes from and how it operates. Some say the government prints it; others say hard work makes money, while others would guess that it’s something to do with gold. (A Monetary System for the New Millennium, para.4). People are aware of the fact that money is produced by the government but they are ignorant about the rules of monetary system, which the government has to abide by while producing money. Although government is the creator of money but it is the monetary system which regulates the supply of money. The government cannot produce money without any limitations. These limitations are the outcome of the monetary system of the nation. All the areas of financial aspects of a nation are covered by the monetary system. The role of banks, private and public sectors in the economic development of the nation are defined by the monetary system. The financial institutions are governed by these rules of the monetary system. Thus monetary system is the mechanism which supervises all the financial activities of a nation. Even the financial decisions of the people are affected by the monetary system.
Diverse monetary systems
The monetary system of a nation depends on the aims and intentions of the policy makers. So the monetary system of a nation may be different from that of another. What the government wants to achieve in the field of economic development influences the choice of monetary system. Various factors such as the economic situation of the nation, the prosperity of the people or scarcity of basic commodities are considered by the policymakers while choosing the monetary system. Some countries have adopted the central monetary system, similar to the U.S monetary policy. The U.S monetary policy is formed and governed by the central bank of the nation, Federal Reserve System. All the financial activities of the nation and its people are affected by the policies of the Federal Reserve System. Although there are some loopholes in monetary policy of the U.S, it has been in use for many years. Lawrence A, Kudlow (1994) has stated in his article that in the United States, the Fed is to money as the Department of Health and Human Services is to social policy: it represents the narrow interest of elite Washington planners and their mistaken theories, not the grassroots interests of the population at large. (Fed up – replacing the current US monetary system with one that limits inflation, pg.1). In a central monetary system all the powers regarding financial decisions reside with the policy makers. The monetary system of U.S has empowered the Federal Reserve System with the task of formulating monetary policy of the nation and supervising all the financial plans of the nation. The monetary policy of U.S has aided in its growth and being a superpower, it also affects the economies of the other countries. The inflation rates, the employment sector and the growth of the nation are affected by the monetary policy of U.S. The monetary system of nation depends on various factors and the monetary policy of U.S is no exception to this rule. The central monetary system controls the various states in the nation thereby aiding in effective management of financial resources. But there are certain drawbacks in this system which may be hamper the economic development of the nation. The complete authority over the financial matters of the nation resides in the hands of one institution and this may lead to the forming of monetary policies based on the thinking of the members of that institution. The monetary systems of various countries are based on different currencies. The value of the currencies keeps on changing in the international market. The monetary system of some countries resembles the one adopted by the U.S while there are other systems which are prevalent in numerous countries. The national economic plans and the financial scenario in the nation are the decisive factors that influence the monetary system. And the success of these plans depends on the proper functioning of money which can be achieved through an apt monetary system.
International Monetary System
With the advent of technology and faster means of transport, the international trade is increasing day by day. And this increase in world trade has given rise to currency problems as there are different monetary systems in different countries. The need of for an international monetary system has arisen due to the globalization. Eduard Balladur (1999) has mentioned in his paper that the quickening pace of globalization gives even greater urgency to the underlying question: Can a globalized economy function in the long run without a global currency? (The International Monetary System: Facing the Challenge of Globalization, para. 2). If there is a single monetary system that is accepted in different countries, it will make it easier to carry trade between various countries. The first attempt in this direction was the formation of European monetary system. In this system, many nations of the European Union accepted to link their currencies so that the value of currency of each country remains near about equivalent to that of the other. Another significant endeavor was the adoption of a single currency, the euro, by the nations of European Union. But this attempt was not fully successful as many European nations have not adopted the euro, as their currency. The international monetary system can be achieved only with the co-operation of all the countries in the world. The developed countries have a major part to play in this attempt. Since 1990, a lot has been changed in the national economic field, as numerous countries are working towards to the formation of an international monetary system. Andrew Rose (2006) has stated in his paper that a large number of industrial and a growing number of developing countries now have domestic inflation targets administered by independent and transparent central banks.( A Stable International Monetary System Emerges: Inflation Targeting is Bretton Woods, Reversed, para.1). Although there is still a long way to go in the establishment of an international monetary system that is accepted by all countries, some steps are being taken to fulfill this aim. In this globalized world, the international trade has to be controlled by a single monetary system. An international monetary system will protect the nations against inflations and the changing values of the other countries’ currency. The monetary system of a nation deters the people of other countries from doing business in that nation. Catalin Popa (2007) has mentioned that the last contagious monetary or financial crises proved that in the absence of a coherent minimum control regarding the free movement of foreign capital between nations, the market is unreliable and incapable to fit itself in the new economical realities related to risks appraisal and fixed assets real value. (Monetary System. Functional and Institutional Structure, para.1). The increase in the international trade and changing values of the currencies in the international market has made it harder for the nations to control inflation rates. If there is an international monetary system then there would be no fluctuations in the value of the currency, as there would be a single currency that can be used in all countries.
Conclusion
Money is the central factor that determines the quality of human lives. And for the proper functioning of money, there is a need of a monetary system. The economy of a nation is based on the monetary system it has adopted. Monetary system controls all the financial activities in a nation whether they are related to the government or the people. The inflation rates, employment opportunities, the taxing policies and the amount of money produced by the government are regulated by the monetary system. The monetary system of a country directs the economic development of the nation and aids in forming trade relations with other nations. The banking systems of the nation are based on its monetary policy. Monetary system is adopted by the nation, considering its economic circumstances. The currency of a particular monetary system has a certain value in the international market. It may be higher or lower compared to that of other countries’ currency value. This change in the currency value creates problems in the field of world trade. So the efforts for creating an international monetary system have begun and if theses attempts are successful, it may bring immense changes in the way a nation trades with other. The monetary system has simplified the lives of human beings. As money has been accepted the medium of exchange all over the world, it makes it easier for humans to buy commodities and services in any part of the world. The policymakers in individual governments form the monetary systems of their nations. And this monetary system affects all the financial activities of the people.
References
Langrick, Roger. A Monetary System for the New Millennium. Retrieved August 15, 2008, from, http://www.worldtrans.org/whole/monetarysystem.html
Kudlow, Lawrence (1994). Fed up – replacing the current US monetary system with one that limits inflation. Retrieved August 15, 2008, from
http://findarticles.com/p/articles/mi_m1282/is_n19_v46/ai_16294514
Balladur, Eduadar (1999). The International Monetary System: Facing the Challenge of Globalization. Retrieved August 15, 2008, from,
http://www.iie.com/publications/papers/paper.cfm?ResearchID=347
Rose, Andrew (2006). A Stable International Monetary System Emerges: Inflation Targeting is Bretton Woods, Reversed. Retrieved August 15, 2008, from
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=945351
Popa, Catalin (2007). Monetary System. Functional and Institutional Structure. Retrieved August 15, 2008, from
http://mpra.ub.uni-muenchen.de/3737/
