The International Monetary System and the International Monetary Fund

In brief, the international monetary system is the system through which countries settle debts with one another. It is needed for much the same reason as monetary systems are needed at the national level. Specialization requires things to be exchanged, and there has to be something that acts as a medium of exchange. This is the basic function of money. Specialization at the global level, or so-called globalization, requires an international medium of exchange. The world needs a system whereby people in one country using one national currency can buy and sell goods, services, and financial assets denominated in other currencies; this system is the international monetary system.

Any international monetary system comprises a number of elements. First, where countries encounter disequilibria in their balance of payments, there needs to be a mechanism through which such disequilibria can be corrected. This is the adjustment mechanism. Second, there has to be a way in which adjustment can be...