Floating Exchanges Systems

A floating exchange system values currencies in terms of other currencies not in terms of a gold standard.

Before this exchange system was in place, there were three aspects of previous systems that were in conflict: autonomous domestic economic policies, constant exchange rates, and increasing international capital mobility. The Bretton Woods agreement did not hinder or preclude countries from ignoring long term effects on the exchange rate by using domestic economic policy (manipulating interest rates, for example, as under the gold standard) for domestic reasons. The effect of domestic economic policies only happen sooner then expected due to capital mobility.

The Vietnam War brought about great instability causing, central banks to exchange their dollars to gold. To put an end to the loss of gold, in 1971 Nixon "closed the gold window" by not providing gold to foreign dollar holders under any circumstance (Eichengreen, 133). This lead to the Bretton Woods System of adjustable pegs officially being abandoned in 1974. With no binding agreements in place the Jamaica Agreement was reimplemented which allowed a country to choose any exchange system it wants (Aliber, 52).

Tags: exchange system currencies exchange system agreement exchange rates jamaica agreement exchange system