Beyond Bretton Woods: Floating Exchange Rates and Capital Movements

Abstract

‘Comme la république était belle sous l’empire!’ This seems to be an apt description of the present state of mind of many economists (and some policy makers) who during the sixties came out so strongly in favour of floating exchange rates. Exchange rate adjustments were considered essential to ensure adequate freedom for domestic economic policy, and floating appeared to be the right way to let this happen gradually and in an orderly way. International trade would not suffer, since short-term transactions could be covered by forward contracts and, as for trade in capital goods or direct investment, pegged (but adjustable) rates made them at least as risky as floating ones. Moreover, the absence of pegging should not result necessarily in frequent and erratic exchange rate fluctuations, since speculation (as opposed to what was happening in a world of fixed rates) would have a stabilising influence. Last but not least, central banks would cease to be the permanent loosers; foreign exchange losses would be shifted to private speculators who would thus forego the benefit of riskless oneway rides.