ABSTRACT
By ‘flexible exchange rates’ is meant rates of foreign exchange that are determined daily in the markets for foreign exchange by the forces of demand and supply, without restrictions on the extent to which rates can move imposed by governmental policy. Flexible exchange rates are, thus, to be distinguished from the present system, (the International Monetary Fund system) of international monetary organization, under which countries commit themselves to maintain the foreign values of their currencies within a narrow margin of a fixed par value by acting as residual buyers or sellers of currency in the foreign-exchange market, subject to the possibility of effecting a change in the par value itself in case of ‘fundamental disequilibrium’; this system is frequently described as the ‘adjustable-peg’ system. Flexible exchange rates should also be distinguished from a spectral system frequently conjured up by opponents of rate flexibility: wildly fluctuating or ‘unstable’ exchange rates. The freedom of rates to move in response to market forces does not imply that they will in fact move significantly or erratically; they will do so only if the underlying forces governing demand and supply are themselves erratic, and in that case any international monetary system would be in serious difficulty. Flexible exchange rates do not necessarily imply that the national monetary authorities must refrain from any intervention in the exchange markets; whether they should intervene or not depends on whether the authorities are likely to be more, or less, intelligent and efficient speculators than the private speculators in foreign exchange, a matter on which empirical judgement is frequently inseparable from fundamental political attitudes.
