Forex: About International Money

The main issue of international monetary arrangements is in essence whether it is desirable to have international money.

If there is to be international money, there must be decisions as to how it is issued, in what amounts, and to whose benefit. A decision against any and all international money, with amounts of money to be determined solely by national monetary policy, implies fully flexible exchange rates. Between two extremes lies a series of graded compromises. With one way of looking at it, the issue is what area by size, political characteristics, or economic behavior should have single money, issued under a fixed set of rules by a single authority.

In jargon, the question is 'what is optimum currency area?' With another way of looking at the issue, the question can be put in terms of exchange rate arrangements, with a variety of compromises possible between the fixed rate system and the fully flexible rate. The most widely discussed of these compromises are the wide band, flexible within the limits, but prevented from going outside them; the adjustable peg, in which the equivalence of exchange is altered from time to time as required by overvaluation or undervaluation; and the crawling peg, in which adjustment is minimal at any point in time but is continuous.

With flexible exchange rates, moreover, questions present themselves as to how much the monetary authorities should intervene in the determination of the exchange rate. Under clean floating, there is no intervention and the rate is left to the determination of the market. By analogy, central bank intervention in the market to move the rate or prevent its moving has been pejoratively associated with dirty floating.

Mixed systems are possible under which there is international money, for example, the dollar--- the value of which is left to the determination of the market and the intervention of other authorities. This raises the issue of symmetry, or whether the rights and duties, the benefits and costs, of the international monetary arrangements are the same for all countries in the system.

If international money is adopted, it may be a commodity such as gold, a national currency such as the dollar or the pound sterling, or a specially created unit adopted by sovereign nations as a political act will. As this is written, the world has all three, gold, the dollar, and Special Drawing rights, or SDR.

With any money, the questions are, who issues it, in what amounts, and to whom? The commodity, gold, won out as money over clamshells, beads, tin, copper, and silver because its ore deposits were spread rather thinly in the world.


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