ABSTRACT
During your lifetime, the world’s dominant currency, the dollar, has to one extent or another been allowed to float to whatever level the foreign exchange market deems appropriate. The same is true for other major currencies such as the euro, the Japanese yen, and the British pound. The current system, if it can be called a system at all, is a bewildering array of currencies that float, currencies that are fixed (pegged) to other currencies that float, and currencies that are inconvertible. Today, each country can determine how to manage the foreign exchange value of its currency. This has not always been the case. Until the early 1970s, most countries participated in an international monetary system that restricted their choices. Such systems had both costs and benefits. In this chapter, we will discuss the process of a country’s adjustment to external imbalances as it actually occurred under the various international monetary systems that existed from the late 1800s to the present.
