The International Monetary System

At the domestic level a national currency performs three major functions — a medium of exchange, a unit of account and a store of value. The pricing of goods and services in terms of the local money and the latter’s status as legal tender facilitates domestic trade. A currency also allows the storing of purchasing power for future use. With respect to trade between countries, there is no international currency issued by a supranational central bank. The functions of money have largely been performed by metal, mainly gold and silver, or by the currencies of the major powers. In the post-war period, the US dollar has been the main money performing the role of an international currency. The pricing of goods and services, the settling of debt and the keeping of reserves in US dollars have reduced information and transaction costs. To enhance the role of the dollar as an international currency, the US government assumed specific responsibilities within the institutional arrangements that came into force at the end of the Second World War. Those arrangements while reflecting the economic imperatives and intellectual fervour of the time, were filled with compromises that left many critical questions hanging in the air. Many of the problems which the founding fathers of the Bretton Woods system grappled with are still with us today.