Monetary system of Ukraine

    Apart from monetary systems based on money, there do also exist systems based on "favors". One example of this is the LETS system. LETS, or Local Exchange Trading Systems, are local community trading groups where members exchange their goods and services with each other.

    Another definition of monetary system it is the set of mechanisms by which a government provides money (cash) in a country's economy. It usually consists of a mint, central bank, and commercial banks.

    The first modern international monetary system was the gold standard. Operating during the late 19th and early 20th cent., the gold standard provided for the free circulation between nations of gold coins of standard specification. Under the system, gold was the only standard of value.

    The advantages of the system lay in its stabilizing influence. A nation that exported more than it imported would receive gold in payment of the balance; such an influx of gold raised prices, and thus lowered the value of the domestic currency. Higher prices resulted in decreasing the demand for exports, an outflow of gold to pay for the now relatively cheap imports, and a return to the original price level.

    A major defect in such a system was its inherent lack of liquidity; the world's supply of money would necessarily be limited by the world's supply of gold. Moreover, any unusual increase in the supply of gold, such as the discovery of a rich lode, would cause prices to rise abruptly. For these reasons and others, the international gold standard broke down in 1914.

    During the 1920s the gold standard was replaced by the gold bullion standard, under which nations no longer minted gold coins but backed their currencies with gold bullion and agreed to buy and sell the bullion at a fixed price. This system, too, was abandoned in the 1930s.

    In the decades following World War II, international trade was conducted according to the gold-exchange standard. Under such a system, nations fix the value of their currencies not with respect to gold, but to some foreign currency, which is in turn fixed to and redeemable in gold. Most nations fixed their currencies to the U.S. dollar and retained dollar reserves in the United States, which was known as the "key currency" country. At the Bretton Woods international conference in 1944, a system of fixed exchange rates was adopted, and the International Monetary Fund (IMF) was created with the task of maintaining stable exchange rates on a global level.

    During the 1960s, as U.S. commitments abroad drew gold reserves from the nation, confidence in the dollar weakened, leading some dollar-holding countries and speculators to seek exchange of their dollars for gold. A severe drain on U.S. gold reserves developed and, in order to correct the situation, the so-called two-tier system was created in 1968. In the official tier, consisting of central bank gold traders, the value of gold was set at $35 an ounce, and gold payments to noncentral bankers were prohibited. In the free-market tier, consisting of all nongovernmental gold traders, gold was completely demonetized, with its price set by supply and demand. Gold and the U.S. dollar remained the major reserve assets for the world's central banks, although Special Drawing Rights were created in the late 1960s as a new reserve currency. Despite such measures, the drain on U.S. gold reserves continued into the 1970s, and in 1971 the United States was forced to abandon gold convertibility, leaving the world without a single, unified international monetary system.

    Widespread inflation after the United States abandoned gold convertibility forced the IMF to agree (1976) on a system of floating exchange rates, by which the gold standard became obsolete and the values of various currencies were to be determined by the market. In the late 20th cent., the Japanese yen and the German Deutschmark strengthened and became increasingly important in international financial markets, while the U.S. dollar—although still the most important national currency—weakened with respect to them and diminished in importance. The euro was introduced in financial markets in 1999 as replacement for the currencies (including the Deutschmark) of 11 countries belonging to the European Union (EU); it began circulating in 2002 in 12 EU nations (see European Monetary System ). The euro replaced the European Currency Unit, which had become the second most commonly used currency after the dollar in the primary international bond market. Many large companies use the euro rather than the dollar in bond trading, with the goal of receiving a better exchange rate.

    Lets now consider modern global monetary system. The global financial system (GFS) is a financial system consisting of institutions and regulators that act on the international level, as opposed to those that act on a national or regional level. The main players are the global institutions, such as International Monetary Fund and Bank for International Settlements, national agencies and government departments, e.g., central banks and finance ministries, and private institutions acting on the global scale, e.g., banks and hedge funds. Deficiencies and reform of the GFS have been hotly discussed in recent years.

    The history of financial institutions must be differentiated from economic history and history of money. In Europe, it may have started with the first commodity exchange, the Bruges Bourse in 1309 and the first financiers and banks in the 1400–1600s in central and western Europe. The first global financiers - the Fuggers (1487) in Germany; the first stock company in England (Russia Company 1553); the first foreign exchange market (The Royal Exchange 1566, England); the first stock exchange (the Amsterdam Stock Exchange 1602).

    Milestones in the history of financial institutions are the Gold Standard (1871–1932), the founding of International Monetary Fund (IMF), World Bank at Bretton Woods, and the abolishment of fixed exchange rates in 1973.

    The most prominent international institutions are the IMF and the World Bank:

• The International Monetary Fund keeps account of international balance of payments accounts of member states. The IMF acts as a lender of last resort for members in financial distress, e.g., currency crisis, problems meeting balance of payment when in deficit and debt default. Membership is based on quotas, or the amount of money a country provides to the fund relative to the size of its role in the international trading system.
• The World Bank aims to provide funding, take up credit risk or offer favorable terms to development projects mostly in developing countries that couldn't be obtained by the private sector. The other multilateral development banks and other international financial institutions also play specific regional or functional roles.

 
 
 
 
 
 
 
 
 
 
 
 
 

3. .          Monetary policy and Central banks

    Monetary policy is the process by which the government, central bank, or monetary authority of a country controls the supply of money, availability of money, and cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary theory provides insight into how to craft optimal monetary policy.

    Monetary policy is primarily associated with interest rate and credit. For many centuries there were only two forms of monetary policy: Decisions about coinage; Decisions to print paper money to create credit. Interest rates, while now thought of as part of monetary authority, were not generally coordinated with the other forms of monetary policy during this time. Monetary policy was seen as an executive decision, and was generally in the hands of the authority with seignior age, or the power to coin. With the advent of larger trading networks came the ability to set the price between gold and silver, and the price of the local currency to foreign currencies. This official price could be enforced by law, even if it varied from the market price.

    Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (in order to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard. A policy is referred to as contractionary if it reduces the size of the money supply or raises the interest rate. An expansionary policy increases the size of the money supply, or decreases the interest rate. Furthermore, monetary policies are described as follows: accommodative, if the interest rate set by the central monetary authority is intended to create economic growth; neutral, if it is intended neither to create growth nor combat inflation; or tight if intended to reduce inflation.

    A policy is referred to as contraction if it reduces the size of the money supply or raises the interest rate. An expansionary policy increases the size of the money supply, or decreases the interest rate. Furthermore, monetary policies are described as follows: accommodative, if the interest rate set by the central monetary authority is intended to create economic growth; neutral, if it is intended neither to create growth nor combat inflation; or tight if intended to reduce inflation.

    There are several monetary policy tools available to achieve these ends: increasing interest rates by fiat; reducing the monetary base; and increasing reserve requirements. All have the effect of contracting the money supply; and, if reversed, expand the money supply. Since the 1970s, monetary policy has generally been formed separately from fiscal policy. Even prior to the 1970s, the Bretton Woods system still ensured that most nations would form the two policies separately.

    The primary tool of monetary policy is open market operations. This entails managing the quantity of money in circulation through the buying and selling of various credit instruments, foreign currencies or commodities. All of these purchases or sales result in more or less base currency entering or leaving market circulation.

    Constant market transactions by the monetary authority modify the supply of currency and this impacts other market variables such as short term interest rates and the exchange rate.

    The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.

    Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944.

    The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing financial strain, the system collapsed in 1971, after the United States unilaterally terminated convertibility of the dollars to gold. This action caused considerable financial stress in the world economy and created the unique situation whereby the United States dollar became the "reserve currency" for the states which had signed the agreement. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

      CHAPTER II. MONETARY SYSTEM OF UKRAINE AND OTHER COUNTRIES 

1. History of Ukrainian monetary system and its nature

      Formation of the strong state in Rus has begun since X century, but origin of coins has occurred much earlier.

      At a certain stage of economic development the role of money performed cattle. In other time the role of money was carried out by the fur of a marten also repeatedly mentioned in “Russian Truth”.

      Coin stamping in the Kiev Rus has begun earlier, than in many European states. There are incontestable proofs of stamping of a coin in X-XI centuries in Russia - Vladimir Monomah's (1078-1125) silver coins, the Kiev grivna (it is powerful 140-160), etc. Coins in Ancient Rus were much larger, than in the Western Europe those times. The integrated coin in weight to 3 grammes above was minted for hundreds years earlier, than in Europe. The coin of the Kiev period, especially gold, is is technically better executed, rather than the West European medieval coin. And, it is necessary to notice, that gold stamping has begun even earlier, than in France. However the coin was minted in the limited quantity and a share гривен and an overseas coin in circulation was more. Own mass coin in Russia has appeared later.

      In the middle of XVII century the financial condition of Russia under the influence of numerous wars was very heavy. Foreign trade was the major source of reception of profit. Obtained during it on thalers - foreign silver coins - Russian overprint became. Thalers were different tests and weight. It very much complicated calculations, especially with foreign dealers.

      In the conditions of war with Poland the government issues copper money with a compulsory course which have very quickly superseded silver from the reference. But copper money was easily forged, and, having depreciated, they have caused Copper revolt of 1662 after which copper money has been redeemed under the price "for rouble of copper money two silver money".

         The early Marxists expected that money would die away under socialism, made unnecessary by the abolition of markets, the use of central planning based on non-monetary units, the replacement of scarcity by abundance, and the worldwide acceptance of socialism. Since none of this came to pass, a monetary system remained, but it was a very peculiar monetary system. In contrast to a market economy, where money-based exchange is fundamental and money plays an active role, under central management money adapts itself to planned production flows and is basically passive.

      In a market economy, money has three functions (means of exchange, a measure of value, and a store of value). A whole set of institutions supports these functions. In the Soviet economy, the ruble fulfilled these functions only in a limited way. The set of monetary institutions was similarly restricted.

      Money circulation was strictly divided into two spheres. In the state sector, enterprises could legally use only noncash money, in practice transfers through a state-owned banking system. Only transfers sanctioned by a corresponding plan assignment could be legally made, and it was generally impossible to use the banking system for nonsanctioned transactions. The banking system was thus an important control mechanism. Households, on the other hand, lived in a cash economy facing mostly fixed-price markets for labor and consumer goods. There were also legal, more or less free-priced markets such as the kolkhoz markets for foodstuffs as well as illegal, often cash-based markets. To control the economy, Soviet planners put great emphasis on maintaining this duality. By and large, they succeeded. Under perestroika, enterprises found ways to convert noncash to cash money. This contributed to the collapse of the Soviet system.