The Global Economy in Turbulent Times

CHAPTER 65 What's Wrong with the International Monetary System?¹

US President Lyndon Johnson stated in 1968: “To the average citizen, the balance of payments, the strength of the US$, and the international monetary system are meaningless phrases. They seem to have little relevance to our daily lives. Yet, their consequences touch us all—consumer and captain of industry, worker, farmer and financier.”² It does not matter whether international financial arrangements are working well or not; but it gets even more evident when they are not. While not all would argue there is no life left in the international monetary system (IMS), almost all would agree the current system contains inherent contradictions, which lead to frequent breakdowns.

Basic Principles

Four basic principles underlie the IMS:

1. A country's sovereign right to regulate internal demand to maintain stable conditions at home in terms of employment and domestic prices.
2. Free international movement of goods and capital (substantial progress has been made in meeting this goal).
3. A system of mixed exchange rate regimes—from fixed exchange rate (e.g., China) to flexible exchange rate (e.g., US dollar, pound, and euro) to degrees of managed floats (e.g., yen and the ringgit).
4. A nation's right to hold international reserves in the form of gold, US$, and other major currencies.

In addition, lines of credit are available from the International Monetary Fund (IMF). The reserves available and potentially obtainable set a limit ...