Experiences of Flexible Exchange Rates in Earlier Periods: Theories, Evidence and a New View

Flexible exchange rates in earlier periods have usually meant that one or more countries left a metallic standard for some time. Three episodes dominate the historical material in this article: Sweden in the 18th century, England in the early 19th century and the period during and immediately after World War I. In all three cases there was a serious economic debate about the causes of the fluctuations in exchange rates. Two main views on this issue can be distinguished. One is that the fluctuations were caused by exogenous shifts in different items of the balance of payments. The other view attributes this role to the money supply. It is shown that theoretically both are possible, but that changes in the money supply probably predominate. This conclusion seems to be consistent with the empirical evidence.