"The role of monetary policy would be to manage the exchange rate. A monetary expansion would tend to lower interest rates, thus lead to short-term funds flowing into foreign currencies, and so depreciate the domestic currency"(Corden 21). Throughout the history of the economy, the exchange rate has not always been controlled under the same monetary system. Foreign exchange is usually traded as bank accounts denominated in different currencies. Most of the trade takes place between the major banks and between banks and their corporate custom

Economic Journal June 1999: 235-236.

ers. Modern communications make it a truly global market. The rates vary by minute. "Exchange rates changes are largely unexpected and so there is an important element of risk in multinational transactions that domestic transactions lack"(Husted 320). The closing rates in each financial center are reported regularly in the media. The closing rates of the previous day are listed in the morning newspaper for leisurely reading. There are two main types of foreign exchange systems: 1) fixed exchange rate, and 2) floating exchange rate. A fixed exchange rate system is where governments can set a certain fixed rate at which their currencies will exchange for each other and then commit themselves to maintaining this rate. Countries use an agreed-upon currency worth a specific measure standard. On the other hand, the unregulated forces of supply and demand determine the floating exchange rate system. "During this, there is a trade-off between the rate of inflation and the current account"(Corden 86). "If a country imports large quantities or goods, the demand will push up the exports imports large quantities of good, the demand will push up the exchange rate for that country, making the imported goods more expensive to buyers in that country. As the goods become more expensive, demand drops, and that country's money becomes cheaper in relation to other countries' money"(Gwinn 627).

Governments both will not and cannot stick to pegged or fixed rates. First, maintaining targeted or fixed rates requires a consistent and fairly uniform monetary policy among nations. There are many reasons that national governments will not consent to this, the most important reason is that different countries want different things, different economies have different needs and different governments have different policies. There are other problems with fixed rates. Even if the system could be maintained, the economies in the rest of the world probably are not integrated enough to deal with a fixed rates system and correct imbalances of trade. Money is free to flow from county to county, but labor is not and neither are many businesses. So in the 1970s the Bretton Woods system and the fixed exchange rate system gave way to a floating rate system, where, as mentioned before, the rates are largely determined by supply and demand in international currency markets. It was in 1971 that the United States replace the gold standard completely because the United States refused to convert dollars, held by foreign central banks, into gold anymore and the U.S. tried maintaining the dollar at a fixed exchange rate with other currencies instead of gold. But this still was not a good system. Then by 1973 the Bretton Woods system was no longer in effect either, and the change to the floating exchange rate system was complete. "Since March 1973, there has been five main currencies, they make up a managed floating non-system. Each country has been completely free to conduct its monetary policy as it wished, and flexible exchange rates could accommodate differential inflation rates"(Corden 179). Since then, all major industrial countries have followed the U.S. and allowed their currencies to "float" also.

Some common words found in the essay are:
Bretton Woods, , Gold Standard, Japanese Japanese, Japan United, Britain France, Agreement Governments, exchange rates, exchange rate, American Demand, rate system, fixed exchange, floating exchange, exchange rate system, fixed exchange rate, bretton woods, woods system, fixed rates, price yen, supply demand, bretton woods system, Retrieved November, Encyclopaedia Britannica, floating exchange rate, system fixed exchange,
Approximate Word count = 2185
Approximate Pages = 9 (250 words per page double spaced)