Money Matters: An IMF Exhibit -- The Importance of Global Cooperation

Reinventing the System (1972-1981)

Part 1 of 7


Conflict &
(1871 - 1944)

Destruction &
(1945 - 1958)
The System
in Crisis

(1959 - 1971)
the System
(1972 - 1981)
Debt &

(1981 - 1989)
Globalization and Integration
(1989 - 1999)

Would Floating Rates Sink the System?

The System in Crisis Next-->

In spite of the surprising U.S. decision in 1971 to take the dollar off the gold standard, the world still clung to the old system. In attempts to set more realistic exchange rates, the U.S. dollar was devalued and stronger currencies, like the German mark and the Japanese yen, were revalued. But even after two devaluations, the flight from the U.S. dollar continued. No new set of exchange rates could be sustained. Finally, in early 1973, fixed exchange rates based on gold were abandoned altogether and currencies were left to float. Although governments continued to intervene, market forces now determined exchange rates.

Could an international monetary system based on floating rates actually work?


Monetary Revolution

For thousands of years, "money" had been based on a tangible, valuable commodity such as gold or silver. In the early 1970s, the international community abandoned the security and discipline of a fixed-rate metal standard. In its place, the world adopted a system of "floating" exchange rates: each currency’s value moved up or down depending on international demand and the amount of confidence in its country’s economy.


stack of gold bars
Gold Bullion

Floating Rate Systems

Free Floating Exchange Rate

The currency's value is determined solely by supply and demand in the market, rather than official policy. Countries generally permit a free float only as a temporary solution, because it could result in excessive fluctuations. Such fluctuations disrupt international transactions by constantly altering the cost of goods and value of payments between companies in different countries.


International Monetary Situation


Managed Floating Exchange Rate

This type is similar to a free floating exchange rate, but a government intervenes by buying or selling its own currency to minimize fluctuations. Australia, Canada, Jamaica, Japan, the Philippines, the United States, and others adopted this type of exchange rate.


Currency Peg

The currency's value is pegged to a basket of currencies or to another country's currency. Many developing countries pegged their exchange rates to the SDR or to the currency of an industrial country with which they traded heavily.


The European Snake

Beginning in mid-1972, the EEC stabilized its own currencies in relation to one another. This system was dubbed the "European Snake." Each country agreed not to allow its currency to fluctuate more than 1 1/8% up or down from an agreed central exchange rate. The EEC currencies floated jointly against the dollar. The Snake was the forerunner of the European Monetary System, which went into effect in 1979.


With the collapse of the Bretton Woods system, had the IMF outlived its usefulness?

Critics argued that the world no longer needed an organization designed to monitor a system that was now obsolete.

But the IMF adapted to the new circumstances and actually began to take an even more influential role in the world’s monetary system.

  • Instead of monitoring fixed exchange rates, the IMF took on the responsibility of exercising firm surveillance over its members' exchange-rate policies.
  • To help countries with balance of payments deficits, the IMF increased its lending activities.


Would Floating Rates
Sink the System?
OPEC Takes Center Stage Petrodollar Problem
Recycling Petrodollars Stagflation Rush from the Dollar War on Inflation

The System in Crisis Next-->