The International Monetary System (IMS) is a catchall term for the various attempts to formalize financial transactions around the globe. The main objective of these attempts has been the development of a set of guidelines, rules, and regulations governing countries' fiscal and monetary policies.
As the previous section pointed out, exchange rate determination is neither an intuitively obvious nor a simple process. Under conditions of a free market system, exchange rates will be determined by one or a combination of the three main factors mentioned-inflation, interest rates, and growth. It is well known, however, that the "free market" is fiction. All national markets are more or less regulated markets in which governments intervene by means of fiscal and monetary policies. Fiscal poliCies manipulate taxes and government transfer; monetary policies deal with the money supply and interest rates. Obviously, taxes, money supply, and interest rates all affect the general economic activity, which in turn affects exchange rates.
Historically, the International Monetary System evolved from the rather simple and easy-to-administer gold standard system to today's very complex and virtually incomprehensible managed float system. 1 Figure 8.3 summarizes the evolution of the International Monetary System.
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