The “International Monetary and Financial System” (IMFS or IMS, broadly-speaking) covers four major components with regard to the commitments of International Monetary Fund (IMF) member countries: rules governing international current account transfers and payments; capital flows; foreign exchange reserves; and, finally, exchange rate relations and the exchange rates that make up the IMS in the narrower sense. The key motivation behind the agreements and rules laid down in these different areas is to facilitate the exchange of goods and services, as well as capital flows between countries.

Let us focus on the evolution of the IMS following the dismantling of the Bretton Woods system. Established after the Second World War, it was a system of fixed but adjustable exchange rates, based on the US dollar, which was itself convertible into gold. Since the system was dismantled in 1973, relations between the convertible currencies of advanced economies have been based on the concept of the free floating of the currencies concerned, and, progressively, the free movement of capital.

The international community has endeavored, following the end of the Bretton Woods system, to seek the optimal monetary and financial relations to ensure the stability of the international system, while trying to create the conditions for significant and smooth growth. After a difficult period in the 1970s and the first half of the 1980s, advanced economies gradually entered a period of steady real growth and price stability, characterized by a marked mitigation of economic cycles and low volatility with regard to growth and inflation. Two interpretations may be associated with this “Great Moderation” of a little over twenty years – from the mid-1980s to 2007.

The prevailing view was that advanced economies, and to a large extent the world economy as a whole, were characterized by a close-to-optimal situation in terms of growth, price stability, and relative financial stability.

The contrary assessment pointed out that this period was marked by a succession of serious financial crises: sovereign risk crises in developing and emerging countries in Latin America, Africa, and the Middle East in the 1980s and early 1990s; financial crises in eastern and central Europe, culminating in the Soviet Union’s collapse in 1991; the Mexican financial crisis of 1994; the sovereign risk crisis in Asia from 1997; the Russian financial crisis of 1998; and the bursting of the dot-com bubble in 2000. […]

OUTLINE

• Strengthening and deepening of the international financial architecture
• Possible ways to improve exchange rate relations
• The creation of a global currency
• Strengthening special drawing rights
• Improving the management of exchange rate relations between major convertible currencies

Jean-Claude Trichet is Chairman of the Trilateral Commission for Europe. Member of the Académie des sciences morales et politiques. Former Director of the French Treasury, Governor of the Banque de France and then President of the ECB.