'The International Monetary System' (also see: The Creature of Jekyll Island )
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The International Monetary System
This document summarizes the rules and procedures by which different national currencies are exchanged for each other in world trade. The first formal international monetary system of modern times was the gold standard, in effect during the late 19th and early 20th cent. Gold served as an instrument of exchange and the only standard of value. The international gold standard broke down in 1914, however, partly because of its inherent lack of liquidity. It was replaced by a gold-bullion standard, but that, too, was abandoned in the 1930s. In the decades following World War II, international trade was conducted under a gold-exchange standard. Under this system, nations fixed the value of their currencies not to gold but to some foreign currency, which was in turn fixed to and redeemable in gold. Most nations fixed their currencies to the U.S. dollar. During the 1960s, however, a severe drain onU.S. gold reserves led to the introduction (1968) of the so-called two-tier system.In the official tier, the value of gold was set at $35 an ounce; in the free-market tier, the price was free to fluctuate according to supply and demand. Atthe same time, the International Monetary Fund (IMF) created Special Drawing rights as a new reserve currency. In the early 1970s new troubles plagued the international monetary system, resulting in the temporary adoption of floating exchange rates based largely on supply and demand. Finally, under a 1976 agreement IMF members accepted a system of controlled floating rates and took steps to diminish the importance of gold in international transactions, including elimination of the official price. Since the 1970s the U.S. dollar, Japanese yen, German Deutchmark, and the European Monetary System's European Currency Unit and euro have played the most important roles in international trade. See foreign exchange.
European Monetary System
European Monetary System (EMS), arrangement by which most European Union (EU) nations link their currencies to prevent large fluctuations relative to one another. It was organized in 1979 to stabilize foreign exchange and counter inflation among members; after 1986 changes in national interest rates were used to keep the currencies within a narrow range. The European Currency Unit (ECU) was also established; it was a unit of accounting based on the currencies of EMS members and designed to facilitate international business within the European Union. In the early 1990s the system was strained by the differing economic policies and conditions of its members. In 1998 the European Central Bank (ECB) was created; it superseded the transitional European Monetary Institute (est. 1994). A single European currency, the euro, was adopted by Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain in 1999; the ECB, in conjunction with the national central banks, also became responsible for a single monetary policy for the adopting nations. Greece adopted the euro in 2001. The euro will be introduced into circulation in 2002.
European Union (EU), name given since the ratification of the Maastricht treaty (Nov. 1993) to the European Community (EC) and other organizations responsible for a common EU foreign and security policy and for EU cooperation on justice and home affairs. Austria, Belgium, Britain, Denmark, Finland, France, Germany (originally West Germany), Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and Sweden are full members. It includes the Council of the European Union (the former Council of Ministers),the European Commission, the European Parliament (directly elected by voters), and a Court of Justice. The EC, which is the core of the EU, resulted from the consolidation (1967) of three supranational groups: the European Coal and Steel Community (or Schuman Plan), established (1952) when six nations pooled their coal and steel resources to create unified products and labor markets; the Common Market, or European Economic Community (est. 1958), which sought to integrate the economies of Western Europe through the gradual elimination of internal tariff and customs barriers and the development of common price levels and a monetary union (see European Monetary System); and the European Atomic Energy Community, or Euratom (est. 1958), pledged to the common development of Europe's nuclear resources. The EC grew out of the efforts of such statesmen as France's Jean Monnet and Robert Schuman and Belgium's Paul Henri Spaak, who envisioned a unified Europe. In 1991 EC members signed the Treaty on European Union, or Maastricht treaty, officially creating the EU, strengthening the parliament, calling for the creation of the European Central Bank (est. 1998) and a common currency (the euro), and moving toward a common defense policy. The member countries also established a single market in 1993 and agreed to participate in a larger common market, the European Economic Area (est. 1994), with most of the European Free Trade Association nations. Britain's some timesstormy relationship with the EU was aggravated in 1996 by the banning of British beef because of mad cow disease (see prion) but eased with a British plan to eradicate the disease and the ban's lifting in 1999. That same year the EU was rocked by charges of corruption and mismanagement leveled at its executive body, which resulted in the group's resignation and the installation of a new president and commissioners. The EU also moved toward becoming a military power with defensive and peacekeeping capabilities. See also Western European Union.
Western European Union
Western European Union (WEU), organization founded (1955) for defensive, economic, social, and cultural purposes by Belgium, France, West Germany (now Germany), Great Britain, Italy, Luxembourg, and the Netherlands. Portugal and Spain joined in 1988, Greece in 1995. Initially its primary function was the supervision of German rearmament under the Paris Pacts; after 1960 it was concerned mainly with military affairs. Under the Maastricht treaty (1992), the WEU was envisioned as the future military arm of the European Union (EU). In 1995 the Eurocorps, a force drawn from some WEU members, began operating. In 1999, however, the EU voted to absorb the WEU's functions in preparation for making the EU a defensive and peacekeeping military organization as well as a social and economic one.
Special Drawing Rights
Special Drawing Rights (SDRs), type of international monetary reserves established (1968) by the International Monetary Fund (IMF). Created inresponse to concern over the limitations of gold and dollars as the sole meansof settling international accounts, SDRs were designed to augment international liquidity. Also known as paper gold, SDRs are assigned to the accounts of IMF members in proportion to their contributions to the fund. Each member agrees to accept them as exchangeable for gold or reserve currencies, and deficit countries can use them to purchase stronger currencies. In 1976 the IMF increased the share of the less-developed countries and moved to make SDRs the primary reserve asset of the international monetary system, supplanting gold and dollars.
Supply and Demand
Supply and demand, in classical economics, factors that are said to determine price and that may be thought of as the guiding forces in an economy based on private property. Supply refers to the varying amounts of a good that producers will supply at different prices; in general, a higher price yields a greater supply. Demand refers to the quantity of a good that consumers want (and are able to buy) at any given price. According to the law of demand, demand decreases as the price rises. In a perfectly competitive market, the upward-sloping supply curve and the downward-sloping demand curve yield a supply-and-demand schedule that, where the curves intersect, reveals the equilibrium, or market, price of an item. In reality, however, monopolies, government regulation, and other factors combine to limit the effect of supply and demand.