Evolution of international monetary system:

When a subject like the international monetary system is approached the first question which arises  is  in  terms of  a definition  of  it  as opposed  to  the international financial system.  The  international financial  system often includes the monetary and  exchange rate arrangements  in  its  coverage.  The international financial system is defined as a set of global financial markets, global financial  institutions, official lenders such  as  the  IMF,  and global regulatory arrangements.This set of institutions exists and has developed to facilitate  cross  border  transactions in financial  instruments.  In  the present Unit, developments in both monetary and  financial matters would be  taken up  to elucidate any important  dimension  of  the  global financial and monetary systems'dynamics.

In economic  theory, the interdependence  of the international monetary system stems from  the fact that balances of payment are connected together.  If one country has a balance of payments surplus, the rest of  the world has a balance of payments deficit and vice versa.  If  one country has a balance of trade surplus, the rest  of  the world  has  a balance of  trade deficit. This has  an influence on the exchange  rate  system. In a world  of n  countries with  n currencies, there are n-1  independent exchange  rates. No  country can fix exchange rates. There would be too many fixed exchange rates. There is one degree of  freedom, giving rise to what  theorists  called the redundancy problem. The role of  that  extra degree of freedom was to maintain a stable price level, or in the case of the gold standard, to maintain the price of gold.

With the rapid expansion of cross-border capital  flows,  the problem of what is widely  known as the "impossible trinity" came to the fore. As you learnt above, it is impossible to achieve simultaneously the goals of a fixed exchange  rate, an open  capital  account, and  a monetary policy dedicated  to domestic economic goals.

At this stage, the fixed exchange rate regime in various countries was dropped as a goal worth pursuing. Before 1971,  in the fixed rates  regime,  the IMF  could defend and manage the anchored dollar system of fixed exchange rates. The IMF lost  its role as a guardian of  the international monetary system  since 1971 and especially after1973, the year  the international monetary system moved towards flexible exchange  rates. The Fund was  then shifted from  its role at the centre of the international monetary  system  to  a  new  role  of  ad  hoc macroeconomic consultant and debt monitor. With the breaking down of the gold exchange standard, which acted  as  a  price-stabilisation mechanism through the  interdependence of the currency system, there was inflationary pressure witnessed worldwide. Consequently, the Articles ofAgreement  of  the  IMF were amended in  1978 with a focus how on price stabilisation as  imbibed  in the amended Article IV.  

There have been severe criticisms of the role and functioning of the IMF as  a global institution playing a developmental role. The credentials of the IMF have been  questioned by  raising  several issues including if IMF-supported programs impose austerity on countries in financial crisis. Alternatively, we may ask whether IMF-supported programs will facilitate bankers and elites.

Similarly,  one may ask whether programs supported  by  IMF constrain spending on priority sectors like education and health by "imposing"  fiscal deficit limits.

On the other hand, is the IMF unaccountable?

These have given rise to various unique trends in the international monetary system. These trends are fragmented and there is no one-umbrella institution, which can be  said  to be providing  an  international monetary and  financial architecture, presently. These trends are summarised  below:

• domestic  financial market deregulation and opening by countries  since  the early 1980s
• internationalisation of domestic financial markets and institutions
• companies  and financial  institutions  approach  international  capital markets to raise needed funds
• investors seeking investment opportunities  abroad countries allow  foreign  corporations  and financial institutions  to issue bonds and  stocks denominated in different currencies (including their own) in their domestic financial markets and  also allow foreign investors to buy their domestic securities
• emergence of other international financial centers located  in Europe and
• Asia  along with  the US bond and stock markets (the  traditional international capital markets)
• growth of offshore money and  capital markets such as the markets for Eurobond etc. 
• integrated stock markets
• rapid  globalisation  of banking, insurance, and  other  intermediatioil businesses
• large  banks  from  the U.S, Europe,  Japan etc. have global network of branches and subsidiaries

Thus, the international capital market is not a single market. Instead,  it refers  to a group of oflshore  and onshore capital markets that are closely  interconnected to one another and in which domestic and foreign residents buy and sell many different types of financial instruments. It is true of banking, insurance, and other intermediation  businesses as well.