The currency system is a form of organization and regulation of currency relations, fixed by national legislation or interstate agreements. From an economic point of view, the monetary system is a set of monetary and economic relations that have historically developed on the basis of the internationalization of economic ties. There are national, world (interstate, international) and regional monetary systems.
Historically, national monetary systems first arose as forms of organization of international monetary relations, fixed by national legislation taking into account international law. The national currency system is an integral part of the country’s monetary system, but relatively independent, and its functioning goes beyond national borders. These features are determined by the degree of development and state of the economy, as well as foreign economic relations of the state.
The national monetary system is inextricably linked with the world monetary system, which is a historically formed form of organization of international monetary relations, fixed by interstate agreements (arrangements). The main task of the world monetary system is to regulate the sphere of international settlements and foreign exchange markets to ensure sustainable economic growth, curb inflation, maintain the equilibrium of foreign economic exchange and payment turnover.
The regional currency system is created within the framework of the world monetary system, for example, the European Monetary System (EMU) is an organizational and economic form of relations between a number of countries in the monetary sphere. The basis of the regional and world monetary systems are the international division of labor, commodity production and foreign trade between countries.
The world monetary system includes the following main elements:
currency, including reserve currencies and international accounting currencies; exchange rate regimes; interstate regulation of currency relations.
The nature of the functioning and stability of the world monetary system depend on the degree of compliance of its principles with the structure of the world economy, the alignment of forces and the interests of the leading countries. When these conditions change, a periodic crisis of the world monetary system arises, which completes the functioning of this stage and means a transition to a qualitatively and fundamentally new level of its development.
The basis of any currency system is a currency – the monetary unit of the state established by law. You can classify the currency according to various criteria.
By currency status: national, foreign, international, euro currency. By mode of application (degree of conversion or reversibility): freely convertible (SCR), partially convertible (PCI), non-convertible. By types of currency transactions: contract price currency, payment currency, loan currency, clearing currency, bill currency. In relation to the rates of other currencies (in terms of stability): strong (hard), weak (soft). According to the material form: cash, non-cash. According to the principle of construction: “basket” type, ordinary. Consider these main types.
National currency is a monetary unit established by law of the relevant state, which, within the framework of its jurisdiction, exercises the right to its monopoly emission.
In international settlements, foreign currency is usually used – banknotes in the form of banknotes, treasury notes and coins in circulation and being legal tender in the territory of the relevant foreign state, as well as withdrawn and withdrawn from circulation, but subject to exchange for banknotes in circulation; as well as all payment claims that are subject to repayment in foreign currency; foreign currency account balances. Closely related to foreign currency is the concept of the motto – any means of payment denominated in foreign currency (bills of exchange, checks, letters of credit). Foreign currency is the object of purchase and sale in the foreign exchange market, is used in international settlements, is stored in bank accounts.
International accounting unit of account (international currency) is a currency unit used as a conditional scale for measuring international requirements and obligations, establishing currency parity and exchange rate (for example, the euro).
Euro currencies are the national currencies of individual countries that circulate outside the issuing country, operations with which are carried out by foreign banks on a significant scale. The euro currency is also understood as a freely convertible national currency circulating on the European market; the absence of state regulations in this market allows transnational banks to carry out private banking issue of international liquid assets. Euro currencies include Eurodollars, Eurosterlings, Euro yen. Euro currencies do not have the form of banknotes and are circulated exclusively in non-cash form, i.e. by transfer to bank accounts.
A special category of convertible national currency of the leading countries of the world, which performs the functions of an international payment and reserve means, and also serves as the basis for determining currency parity and the exchange rate of other countries, is the reserve currency.
There are objective prerequisites for the acquisition of reserve status by a currency:
the country’s dominant position in world production, exports of goods and capital, in gold and foreign exchange reserves; developed network of credit and banking services, including abroad; organized loan capital market; liberalization of foreign exchange operations, free reversibility of currency, which ensures the demand for it from other countries.
In the institutional aspect (subjective factor), a necessary condition for recognizing a national currency as a reserve currency is its introduction into international circulation through central banks and international monetary, credit and financial organizations that carry out interstate currency regulation.
Currency should also be distinguished by the degree of reversibility or conversion. Convertibility in general is a characteristic of an economy of a certain type, which, in principle, cannot be created by a one-time government decision.
Freely convertible currency is the currency (SLE) of countries that have completely abolished currency restrictions for individuals and legal entities, both foreign and this country. Hard currency can be exchanged for any foreign currency.
Partially convertible (PCI) is the national currency of countries in which currency restrictions are applied, on the one hand, for both individuals and legal entities of this country, and on the other – for certain types of exchange operations. Such currency is exchanged, as a rule, only for some foreign currencies and not for all types of international payment turnover. The currencies of most developing countries are partially convertible.
A non-convertible currency is a national currency that functions only within a given country, which cannot be exchanged for the currency of other countries at the current exchange rate.
The degree of convertibility of currencies is also determined by the type of economy. In the broadest sense, the convertibility of the national currency is a mechanism for directly connecting the domestic market with the world market, which implies a truly multilateral nature of trade (in contrast to bilateral clearings) and a sufficient degree of openness of the economy to external competition.
Full convertibility implies the absence of currency restrictions on current and financial transactions. This is typical for freely convertible currencies, which include the monetary units of Canada, the USA, the EEC countries, Switzerland, Japan, Austria, etc. Some foreign currency is widely used in international payments as a means of creating foreign exchange reserves. This status is currently held by the US dollar, the British pound sterling, the Japanese yen, the Swiss franc, as well as the euro.
Currency can act as a means of payment, be the subject of a contract, including a loan agreement, and also serve as a measure of expression of mutual exchange of goods at value (clearing currency).
The currency of the contract price is the monetary unit in which the price of the goods in the foreign trade contract is expressed.
Payment currency – the currency in which the actual payment of goods in a foreign trade transaction or the repayment of an international loan takes place. The currency of payment may or may not coincide with the currency of the transaction. In this case, they resort to the transfer rate to convert the currency of the transaction into the currency of payment.
Loan currency – the currency established by the partners when granting a loan.
Clearing currency – a currency unit used in clearing settlements; it maintains bank accounts and performs various operations between countries that have concluded clearing-type payment agreements, within the framework of which a strict balance is provided – equalization of mutual exchange of goods by value. The clearing currency operates exclusively in non-cash form in the form of accounting entries in bank accounts. Its source is mutual crediting of the supply of goods and the provision of services by the countries participating in the payment agreement.
The currency of the promissory note is the currency in which the bill is displayed.
The interconnection and interdependence of currencies characterizes the degree of their stability.
Hard currency is stable against its own nominal value, as well as the rates of other currencies. Such a currency is backed by gold or other valuables (US dollar, British pound sterling, etc.).
Soft currency is a currency that is unstable in relation to its own nominal value, as well as the rates of other currencies. These include most currencies in the world, including the Belarusian ruble.
Basket type currency is a currency used for international settlements within the framework of interstate economic integration associations (for example, the euro). The rate of such currencies is determined on the basis of the currency basket.
A currency basket is an established set of currencies used to calculate the exchange rate of a national currency. The number of currencies in the set, their composition, as well as the size of the currency parts are determined based on the tasks of establishing a weighted average rate. Specific “weights” in calculating the currency basket are indicators of the share of a given country in the total gross national product; in the foreign trade turnover of a certain group of countries.
In fact, the currencies of a number of countries are tied to one of the currencies of the leading countries of the world or a basket of currencies. The legislative establishment of the ratio between two or more currencies determines currency parity. It can serve as the basis of the exchange rate, which is also included in the structure of the elements of the monetary system and represents the price of the monetary unit of one country, denominated in the monetary units of another.
The exchange rate can be classified according to the following characteristics:
according to the method of fixation, fixed, oscillating, floating are distinguished; by type of transactions: rate of futures transactions, spot transactions; in relation to the participants of the transaction: the purchase rate, the selling rate, the cross rate; on inflation accounting: real, nominal.
A fixed exchange rate is an officially established ratio between national currencies based on legally determined currency parities. In the world monetary system, its use was associated with the activities of the International Monetary Fund (IMF). IMF member countries set the exchange rates of their national currencies against the Us dollar and determined the gold content of their national currencies in accordance with the official price in dollars, with strict restrictions on fluctuations in market exchange rates within 1%. The fixed exchange rate was used in a relatively smooth economic development and practically exhausted itself in the conditions of deepening contradictions in the economic and monetary and financial spheres.
Fixed exchange rates in the international monetary and financial sphere have been replaced by fluctuating exchange rates – a rate that changes freely under the influence of supply and demand. A variation of the fluctuating exchange rate is the floating exchange rate, which assumes the free reversibility of currencies and provides for linking changes in the market rate with the exchange rate dynamics of other countries or a set of currencies.
The parity exchange rate is understood as the calculation rate in the international payment turnover, based on currency parity.
The exchange rate of spot transactions is the exchange prices for cash transactions. This means that transactions for the purchase and sale of currency are made at the rate that has developed in the foreign exchange market at the time of the conclusion of the transaction with a maturity of two banking days.
The term exchange rate is the exchange rate that develops in the derivatives market. It is fixed at the time of conclusion of a fixed-term transaction for its execution in the future. At the same time, regardless of the exchange rate that will develop at the time of execution of the currency contract, this rate does not change.
When making transactions for the purchase and sale of currency, banks use different rates. The rate at which banks sell foreign currency for the national one is called the seller’s rate, and at which they buy it is called the buyer’s rate. Banks sell foreign currency for the national currency at a higher price than they buy it at the seller’s rate. The difference between the buyer’s rate and the seller’s rate is called the margin and is the bank’s profit on foreign exchange transactions.
In the foreign exchange markets of a number of countries, not only foreign exchange rates to the national one are established, but also the so-called cross rates. The cross rate is the exchange rates of foreign currencies to each other. At any time, any cross rate can be easily obtained by calculation from the exchange rates of foreign currencies to the national one.
The nominal exchange rate is the relative price of the currencies of two countries, or the currency of one country, denominated in the monetary units of another country. When the term “exchange rate” is used, it refers to the nominal exchange rate. As a rule, it differs significantly from the market rate. If the price of a unit of foreign currency in national monetary units grows, they talk about the depreciation (cheapening) of the national currency. Conversely, when the price of a unit of foreign currency in national monetary units falls, they talk about the rise in price of the national currency.
The real exchange rate characterizes the ratio in which the goods of one country can be sold in exchange for the goods of another country.
In general, the real exchange rate characterizes the ratio of prices for goods abroad and in a given country, denominated in one currency. That is, the real exchange rate is the relative price of goods produced in two countries.
The real exchange rate assesses a country’s competitiveness in world markets for goods and services. An increase in this indicator, or real depreciation, means that goods and services abroad have become relatively more expensive, and, consequently, consumers both at home and abroad will prefer domestic goods to foreign ones. A decrease in this indicator, or a real rise in price, on the contrary, indicates that the goods and services of a given country have become relatively more expensive, and it is losing competitiveness.
An important element of the monetary system is institutional, which is manifested in the regulation of the activities of the national governing bodies and the regulation of currency relations of the country (the central bank, the Ministry of Economy and Finance, the bodies of currency regulation and control, etc.). Interstate currency regulation is carried out by the IMF, the European Central Bank (ECB) and the European System of Central Banks. These institutions develop and maintain a regime of safe, crisis-free development of international monetary, credit and financial relations. The institutional structure of the monetary system is regulated at the national, regional and international levels. In particular, they play a leading role in regulating international foreign exchange liquidity.
International foreign exchange liquidity means the ability of one country or a group of countries to pay its external obligations uninterruptedly with acceptable means of payment. From the point of view of the world economy, international foreign exchange liquidity means a combination of sources of financing and lending to the world payment turnover and depends on the provision of the world monetary system with international reserve assets. In the national economy, international foreign exchange liquidity is used as an indicator of its solvency. There are quantitative and qualitative aspects of liquidity. Quantitative characterizes the scale of liquid reserves used to settle claims and liabilities. The structure of international foreign exchange liquidity includes: official gold and foreign exchange reserves, accounts in the Special Drawing Rights (SDR) and the Euro, a reserve position in the IMF. The main part of international foreign exchange liquidity consists of official gold and foreign exchange reserves, state-owned reserves (in bullion, coins and foreign currency) in the central bank and financial authorities of the country, as well as in international and regional monetary, credit and financial organizations, intended for international settlements.
A reserve position in the IMF – a special form of asset – means the right of a member country to automatically receive unconditional loans from the IMF in foreign currency up to a 25 percent quota, as well as the amount that it itself has lent to the IMF.
The essence of international foreign exchange liquidity is manifested in its main functions:
a means of forming liquid reserves; means of international payments; a means of currency intervention.
Various indicators are used to determine international foreign exchange liquidity: for example, the correspondence of the volume of reserves to the needs for them (the number of liquid reserves compared to the volume of international operations of a given country, the balance of payments, including current, external debt, the movement of short- and long-term capital).
The functioning of the currency in the world economy, as well as the mutual exchange of the results of the activities of national economies, lead to the emergence of international monetary relations. These relations mediate international economic relations, which relate to the sphere of both material production (i.e., primary relations of production) and the sphere of distribution, exchange, and consumption.
International currency relations are secondary to the process of reproduction, but at the same time they have relative independence and have the opposite effect on the process of reproduction. The state of international monetary relations depends on the level of development of the national and world economy, as well as the political situation.