Handbook of Exchange Rates

5.1 Introduction

For the first time in about three decades, the international monetary system, and, in particular, the constellation of exchange rate regimes, seems to be under reconsideration. Since the breakdown of the Bretton Woods system of pegged but adjustable exchange rates in the early 1970s, global monetary relations have been subject to little official guidance or systematic control—apart from a few episodes of concerted intervention by the major powers. Countries are able to choose among the full range of monetary regimes from fixed to floating and are able to organize their monetary and intervention policies as they see fit. While the International Monetary Fund (IMF) continues to exercise surveillance over exchange rate policies and “exchange rate manipulation” is in principle ruled out by IMF guidelines, in practice, the major countries that do not need to borrow from the IMF can safely ignore its advice.

Indeed, laisser-faire in international finance has been the norm, leading some to term this an international monetary ‘nonsystem’. Unlike the gold standard period, or the Bretton Woods system before the United States closed the ‘gold window’ that assured convertibility for the US dollar into gold at a fixed price, there is no commodity anchor for fiat currencies. In the decades since the breakdown of Bretton Woods, the US dollar has lost more than 90% of its value against gold; over that period, a broader index of commodity prices has risen more than fivefold in ...