Problem

Lack of confidence in the international monetary system

Nature:
Under the present international monetary system, countries hold their external monetary reserves partly in gold and partly in foreign exchange. In the past, the latter have consisted mainly of gold-backed dollars and pounds as reserve currencies. The present more complex system requires political as well as economic cooperation and a greater reliance on the 'good intentions' of the USA and its now unbacked dollar. Confidence is very fragile, as both unilateral and regional actions are always possible. A weakening of confidence in the reserve currencies may affect the behaviour of both official and private holders of these currencies, inducing them to convert their existing stock of reserve currencies into gold or into other currencies considered to be stronger. A large-scale conversion of any principal OECD nation's currency into gold would not only tend to reduce the total of existing international liquid reserves, without any reduction in the need for such reserves but, by lowering the reserve assets of the reserve currency countries, might force them to undertake domestic adjustments which would be harmful to the level of world economic activity as a whole. A drastic devaluation, for example, by one of these countries could destabilize world trading patterns.
Incidence:
The present international monetary system remains highly vulnerable to sudden shocks of confidence. Despite the impressive strength of the defences that have been erected against shifts in confidence, the problems of the reserve currency system have yet to be solved. Crises of confidence cause large-scale movements of capital far in excess of the ability of any one country to deal with them by normal means. The system of floating rates of currency lead to improper allocation of the factors of production, anxiety in financial markets, a rise in interest rates and a slowdown in growth. The emergence of the ECU in Europe as a reliable common currency is still problematical as this unit of currency has not had time yet to prove itself .
Related UN Sustainable Development Goals:
GOAL 10: Reduced Inequality
Problem Type:
F: Fuzzy exceptional problems
Date of last update
01.01.2000 – 00:00 CET