The international monetary system is fundamentally one that is used for payments in world trade. Big trading countries have strong voices in monetary affairs and their currencies are therefore "hard" (capable of use in world trade without restrictions). Countries with small shares in world trade and weak agricultural economies have "soft" currencies, which are not accepted in payment for their imports. Their trade is limited by the amount of "hard" currencies they can earn at any given time by their exports. As the world has become more interdependent, these guidelines of an earlier era are too simple to accommodate the complexities of international trade.
The external financial pressures on developing countries are of an unparalleled intensity. Severe difficulties in meeting debt service payments are widespread. Some statistics indicate a net flow of resources from the less developed countries to the developed countries, as efforts to repay years of credit continue.
When the international monetary system was constituted, the parity of the member countries' national currencies was determined according to the value of the USA dollar, and so their parities depended on the stability and value of the dollar. When the value of the dollar began vacillating, the USA was forced to carry out devaluations, thus upsetting the system of parities. Another cause is the increasingly acute problem of international liquidity, and also the uneven distribution of monetary reserves between the developed and developing countries.
Since the collapse of the Bretton Woods monetary system of fixed exchange rates in the early 1970s, there have been several attempts to create new monetary arrangements among major trading nations: the Jamaica Accords, the Plaza Accord, efforts at economic summit meetings to coordinate domestic economic policies; the Louvre Accord, which sought to stabilize currency relationships within a vague set range, failed. All these efforts have been improvisations (often informal and confidential) in contrast to the elaborate, transparent framework of Bretton Woods.
The Intergovernmental Group of Twenty-Four on International Monetary Affairs (G-24) was established in November 1971 to increase the negotiating strength of the developing countries in discussions with the International Monetary Fund on reform of the international monetary system. Developing countries felt that they should meet regularly as a group, as the developed countries had been doing for some time in the Group of Ten (G-10). Technical support from UNDP was agreed in 1975, and took the principal form of analytical papers prepared by experts on issues in the fields of international money and finance. The UNCTAD secretariat and certain other countries continue to support the 24 countries in this work.
The contraction in international liquidity and the continuing wide fluctuations in exchange rates among major currencies have dramatized the many inadequacies of the international monetary system that have emerged with the demise of the fixed exchange rate regime established at Bretton Woods. The domestic policies of individual major industrial countries and the operations of private international banks have become the major determinants of key international monetary variables such as exchange rates, interest rates and international reserves. No mechanism has served to bring such unilateral actions into a self-adjusting integrated system. During the crisis in the Gulf in 1990, the Bank for International Settlements warned that it could pose a serious threat to the world financial system. The danger of cumulative interaction between a deteriorating economic environment (caused by the surge in oil prices) and a continuing constraint on the ability of banks to lend at a time of high demand for credit were likely to bring about an international credit squeeze.
In 1993 the Commission on the Future of the Bretton Woods Institutions established that the international monetary system in its current form, with freely floating exchange rates, had encouraged short-term volatility and currency misalignments. The instabilities had become especially apparent in 1992 and 1993 with the expensive ejection of the UK from the European exchange rate mechanism and the effective breakup of the latter in August 1993. These events were largely due to failure to coordinate financial and economic policies of Europe, North America and Japan and severely affected all the countries concerned.
A reform of the existing international monetary system is vital not only because of the shortcomings accumulated since its creation, but also because of the major changes which have taken place in the structure of the world economy and international economic relations.