ABSTRACT
The principal statements of the case for flexible exchange rates prior to the 1973 collapse of the international monetary system are to be found in Friedman, Meade, Sohmen and Johnson. Friedman proceeded to list a number of problems, including the promotion of rearmament, that would take on a different cast and become far easier to solve in a world of flexible exchange rates and its corollary, free convertibility of currencies. Friedman identified support for flexible exchange rates with an enlightened commitment to the price system. Exchange rate flexibility was advocated as a solution to the international liquidity problem. Exchange rate flexibility restores control of the monetary supply to the domestic authorities. Under flexible exchange rates, each country is free to determine its money supply growth rate so as to achieve its preferred long-run inflation rate. Johnson, like Friedman, identified exchange rate flexibility with the efficient functioning of the price mechanism.
