Since last 15 years, there are three major burning issues of the international monetary system. These are:

1. Symmetry of adjustment and 2. Stability of the exchange rate system

Symmetry:

Adjustment mechanism of the international monetary system has to be symmetrical, i.e., in international monetary arrangements all countries should have equal rights and equal obligations. According to Keynes, symmetrical international monetary order implies a common measure, a common standard, a common rule applicable to each country and not irksome to any one.

ADVERTISEMENTS:

In reality, the IMF had failed to bring about a symmetrical monetary order. Thus, a major problem is how fast asymmetries in the system can be eliminated. There are, however, many practical constraints in achieving this goal. Nevertheless, the IMF has made some progress, in recent years, in moderating the degrees of asymmetry between surplus and deficit countries; particularly, by facilitating adjustment in heavily-indebted countries, easing its burden, and bringing its candid influence on their policies.

In recent years, for instance, the Fund has evolved liberal credit facilities along with, the compensatory financing facilities, the oil facilities; enlargement of the access of members to the Fund’s resources. So also, the structural adjustment facility and other devices of the Fund have helped in the creation of a contingency financing mechanism that has helped the deficit countries to a great extent in correcting maladjustments in their balance of payments (BOP). The Fund has also rendered technical assistance and moral support in solving their intricate BOP problems.

The Fund always exercises its moral suasion over the industrial/surplus countries to follow policies conducive to the growth and prosperity of the global economy. In recent years, the Fund’s moral suasion has been widely and evenly exercised for injecting its due weight into the surveillance process towards symmetry in the adjustment mechanism. Yet, the Fund has to make extra efforts

for evolving a system which is just as well as efficient. Instead of mere guidelines, the Fund solve formulate more comprehensive principles for achieving the goal of symmetry, by giving it a precise shape true to the expectations of the members, at large.

ADVERTISEMENTS:

Stability :

Stability of the international monetary order is considerably jeopardised due to a high degree o exchange rate volatility in the regime of generalised floating system that has come up since the early 1970s. Developing countries have been hitted hard as a result. There have been large misalignmen of exchange rates causing misallocation of resources, undue protectionism hindering the growth of world trade, resulting into imbalances and financial instability.

Of course, this does not imply that fixed exchange rates can easily bring stability. As a matte of fact, “instability is rooted in the shortcomings and inconsistencies of national economic policies.”

A middle course is essential between excessive rigidity and extreme flexibility and misalignments in the exchange rates, through proper international coordination and better management of national economic policies – especially, monetary and fiscal policies.

ADVERTISEMENTS:

The international monetary system confronted with three interrelated serious problems, namely, ‘the confidence problem’, ‘the liquidity problem’ and ‘the adjustment problem.

In a chronological sense, the first problem that emerged is of confidence problem which pertained to: (i) speculation in major currency and (ii) speculation in a reserve currency. The inception of the problem lies in the 1967 devaluation of the pound sterling and its continuation is found in the 1972 dollar devaluation.

The next is the liquidity problem, which refers to the scarcity of international means of payments in view of the expanding world trade. The problem basically confined itself to an urgent need for creating a new international reserve asset as a substitute for gold and dollar.

This problem we shall discuss at length in the present chapter. The last problem is the adjustment problem which has two aspects: (i) Unwillingness of member countries, excepting the U.S., to change their exchange rates which has made it difficult for the IMF to design any radical change, (ii) Though, the U.S. dollar is still regarded as the basic reserve asset, the U.S. monetary authorities have no power to direct other countries’ authorities to change the exchange rate of their currency against world currencies as a whole.

ADVERTISEMENTS:

Nonetheless, as Professor Johnson remarks, the present international crisis should never be identified with an international economic breakdown.

There has, however, been a great deal of discussion about the problem of international liquidity. It has been variously diagnosed and the remedies put forward have been both numerous and diverse. In the present chapter we shall try to pose some of its highlights.