The international monetary system in modern times has both public and private components. The public part comprises a series of governmental agreements among nations and the functions of international public institutions. The private component in the system is provided by the banking industry. In this unit we will address the subject of international monetary agreements and institutions.
Economic transactions across nations and the resulting balance of payments pose the monetary problems that must be solved at the international level for commerce among countries to occur. Financing must be available so that these international transactions may be conducted smoothly. The need for this financing spans a continuum that runs from the necessity to have enough funds to finance those transctions that must be done on a cash basis-a liquidity problem-to the need to have financing available to bridge the gap between demand and supply for currencies when temporary imbalances develop at the current exchange rates-an adjustment problem. When the financing of a disequilibrium is not possible or desirable, an alternative mechanishm of adjustment must be available to the countries in the system. In addition, the international financial arrangements to cope with these problems must be consistent with a degree of stability which limits the uncertainty in international business decisions.
Need for Liquidity: International transactions require that a financial instrument acceptable to both parties to the transaction be cxchanged to settle payment. Given that the currencies of most countries are not readily acceptable by financial investors, these countries need alternative avenues to obtain the currencies which are acceptable. Of course, an obvious way to obtain internationally acceptable currencies is to sell the country's goods and services in exchange for such foreign currencies. However, if a country must wait to sell its products to obtain the needed currency before purchasing anything, the international trade would suffer. For countries whose currencies are not accepted as a means of international payment, there must be a certain volume of international funds available to facilitate day - to - day trade without having to wait for offsetting trade transactions to take place. It is to everybody's advantage to have a monetary system that provides sufficient liquidity in the system to finance international transactions at a reasonable price. One possibility is to provide certain key currencies with total convertibility into other currencies and a market environment that makes then attractive to investors. Another possinility is to create international paper money. Both approaches require an international agreement among participating countries.
