The leaders from the Group of 20 (G20) nations are meeting on Thursday in Pittsburgh, the United States, to discuss measures to tackle the ongoing economic downturn.

Top of the agenda of the meeting is to further promote the global financial reform initiated during the two previous G20 summits.

The global financial system has had three forms since it came into being. The following is a brief introduction to its evolution through every stage.

Gold standard system

The gold standard had prevailed in major economies before World War I.

According to the system, any nation's currency was convertible into preset, fixed quantities of gold, thus the exchange rate between any two currencies was constant.

Barring all exchange fluctuations, the gold standard system was beneficial to the development of international trade. However, nations under the gold standard regime couldn't apply any monetary policies of their own.

Bretton Woods system

World War I inflicted great losses to the world, causing most nations to cease converting gold into currencies. The gold standard system inevitably fell over.

In July 1944, delegates from 44 nations gathered in Bretton Woods, the United States, to take part in the United Nations Monetary and Financial Conference and hammered out the Bretton Woods Agreement.

Under the Bretton Woods regime, the US dollar were pegged to gold and all other currencies were pegged to the US dollar.

In addition, two institutions, the International Monetary Fund (IMF) and the World Bank, were set up.

However, the Bretton Woods system was innately flawed. Its fatal defect was the Triffin's Dilemma: the United States had to keep running deficits so that the system could maintain liquidity, however long-term deficits could erode confidence in the US dollar as the reserve currency.

In the 1960s, economic and financial changes caused the United States to lose a great deal of its gold reserve and, as a result, the US dollar depreciated. The Bretton Woods system, no longer fitting in the global financial context, collapsed in 1971.

Floating rates regime

Floating rates succeeded Bretton Woods as the main rules governing the international monetary domain.

Under the floating rates regime, a currency's value is allowed to fluctuate according to the foreign exchange market, while being also affected by other factors.

The US dollar has kept its nucleus status in the new monetary system thanks to the United States's unchallenged economic power. In addition, the IMF and the World Bank, a legacy from the Bretton Woods era, are still in function.

The floating rates regime is more adaptable to setbacks than the Bretton Woods system. However, the world's economies are unequally treated in their activities due to the US dollar's hegemonical status. All nations that hold US bonds share great part of risk and loss of the US economy's woes.

(Xinhua News Agency September 24, 2009)