Flexible vs. fixed exchange rates and international monetary stability

by Edward Carr Franks

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It is argued that a flexible exchange rate system (1) will not require deflation to restore equilibrium to the external balance and therefore not infringe on national autonomy, (2) will not impose increased costs on the foreign trade sector, and (3) will provide the necessary international monetary restraint. This paper argues that adjustment under either a fixed or flexible exchange rate system will result in economic recession and that, as such, flexible rates do not provide for an increase in domestic economic autonomy. The various sources of increased costs in international transactions attributable to the flexible exchange rate system are outlined. The author points out the obvious lack of monetary restraint that has prevailed under both systems. The paper concludes with a discussion of the possible future role of the International Monetary Fund and/or gold in bringing about the needed restraint.

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