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Fixed rates were not so good either. (currency exchange rate systems - fixed or floating?)


A worldwide conference on the monetary system -- a possibility now being studied by the US Treasury at President Reagan's request -- might well meet in the hope of replacing the present floating exchange rates by a more stable regime. But is this practical? Is it even desirable?

The trends of the dollar over the past five years, first upward and now downward, have been set off by changes in the monetary and fiscal policies of the United States. The same causes might have produced the same effects under the old Bretton Woods system which President Nixon brought to an end in 1971.

This point may be illustrated by a comparison of exchange rate movements and relative inflation performances between 1961 and 1985. This period spans the fixed and the floating eras.

We would be able to conclude that one system was better than another if one reflected, ore consistently and correctly than the other, the relative inflation rates of the countries whose exchange rates we are studying. These are the five industrialized countries nowadays known as G-5. Table 1 shows their annual average inflation rates, taken from the consumer price index of each one.

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