Background and Overview

Before the collapse of the Bretton Woods system of fixed but adjustable exchange rates in 1971, most countries had declared par (fixed) values for their currencies against the US dollar, with a margin of 1 per cent above and below the par values. They also had the obligation to maintain the par values unless they could demonstrate the presence of a ‘fundamental disequilibrium’ (as opposed to temporary or transitory disequilibrium) in the balance of payments, in which case the par values could be changed subject to the approval of the International Monetary Fund (IMF). The UK, for example, utilized this scheme twice by devaluing the pound in 1949 and 1967. The word ‘most’ is used here because a small number of countries did not maintain fixed par values. Some countries in Latin America experienced high inflation rates that made it necessary for them to pursue a policy of gradual depreciation (what has become to be known as a crawling peg), and both Lebanon and Canada had extensive experience with floating exchange rates (the Canadian experiment with floating lasted between 1950 and 1962).