INTERNATIONAL MONETARY SYSTEM AND CURRENCY EXCHANGE
The main element of the international monetary system is the currency exchange rate mechanism (Czinkota, Ronkainen, & Moffett, 1996, pp. 105-109).
The industrial countries have employed two general types of international monetary rate change systems since the end of the Second World War·fixed-rate systems and flexible-rate systems. A fixed-rate exchange system is one in which different countries have agreed upon the rates at which their various currencies will be exchanged in international trading, or one in which one country has a fixed-exchange rate for its own currency which it is prepared to defend. Each of these situations existed among the western industrial countries prior to the introduction of the flexible-rate exchange system (Gurley & Shaw, 1994, p. 86).
Under a floating exchange rate system, each currency is permitted to find its own level of exchange, which will change from time-to-time, as economic conditions change. It is important to note, however, that countries do not, in all situations, permit their currencies to find their own level of exchange. Both individually and as a group, the major western financial countries have intervened in the international currency exchange markets on numerous occasions since the introduction of the floating exchange rate system, as a means of influencing the rate for one or more currencies.
While the longer-term impacts of the floating exchange rate system on the American trade balance, and on the capacity of the United States to fund its federal budget deficit without re-igniting inflation remained in doubt, there is little doubt that the rapidly fluctuating international exchange values of the currencies of the major western industrial countries were having significant and detrimental impacts on both international trade and domestic economies in the mid-1980s. Recognition of this fact led to major western fina...