Monetary systems

By the monetary system we mean the set of rules that govern the monetary aspects of the operation of an economic system and/or its relationship with other economies. More specifically, a monetary system is a specification of rules that:

1. (a) define the monetary unit, i.e. the instrument used as legal tender, which is (usually) also the unit of account

2. (b) regulate the issue of money

3. (c) define the currency's relationships with foreign currencies in terms of its value, circulation and convertibility.

Points (a) and (b) concern the domestic aspects of a monetary system. Point (c) concerns its international aspects. When we speak of an ‘international monetary system’, we refer to the set of rules concerning the international aspects (which are usually fairly independent of those governing domestic aspects) adopted by some group of countries.

In the following sections we will examine the main monetary systems, with specific reference to their international aspects. We will generally describe the structure and operation of each system in abstract terms and then examine real-life systems based on these models. Bear in mind that a real monetary system may often have features that do not exactly fit one of the abstract reference systems described here. In other words, there may not necessarily be a one-to-one correspondence between abstract and real-life systems.