Flexible exchange rates have always been controversial. Advocated for a long time by many academic economists, they were often looked upon with suspicion, even hostility, by most practitioners of international finance. In the early 1970s the growing crisis of the pegged exchange rate system forced a reluctant adoption of flexible rates by the major industrial countries. Resort to exchange rate flexibility was a stopgap measure, not a deliberate attempt to reform the international monetary system.
Initially, it was widely assumed that the international monetary system would soon return to some new form of generally pegged rates, albeit perhaps allowing greater scope for exchange rate flexibility.
Experience with floating rates, however, showed them to be a much more viable basis for the evolving international monetary arrangements than critics had anticipated. Not only did greater exchange rate flexibility help cushion the severe international financial shocks of the oil price explosion, but as underlying economic and financial conditions began to stabilize, so did the volatility of exchange rates.
Although criticism of floating rates was never fully muted, appreciation of the contributions that flexible rates could make in reducing a wide range of international monetary problems led to their institutionalization in the Second Amendment of the International Monetary Fund's Articles of Agreement, which recognized flexible rates as an integral element of the new international monetary system.
In 1976 the American Enterprise Institute organized a conference to review the experience of the initial years of floating and to consider some of the major problems involved in the operation of the new flexible rate system, such as international surveillance of exchange rate management to guard against beggar-thy-neighbor policies and the management of international liquidity.
Since the time of that conference, the international monetary climate has shown signs of worsening substantially. The resurgence of strong inflationary pressures in a number of major countries, including