ECONOMIC

over time a country's payments in foreign currencies equals its receipts inforeign currencies.At one extreme, balance between the demand for and supply of a currencyis achieved at all times through a free market in which currencies aretraded at whatever exchange rate will clear the market. Many monetary authoritiesare opposed to this degree of flexibility, however, since they fearthat large exchange rate fluctuations would create difficulties for internationalcommerce. In order to overcome some of these difficulties, most governmentshave made it a practice to enter the market as buyers and sellerswhenever changes in the private demand or supply of their currencies wouldotherwise lead to large fluctuations in exchange rates.The exchange rate at which one government would like to fix the value ofits currency relative to other currencies may not coincide with the exchangerate at which other governments would like to fix their currencies.. To avoidsuch potential conflicts, it is desirable to agree on some rules, which mayspecify when governments may or should intervene in the market, or whengovernments may or should allow exchange rates to change.The rules could be very tightly written, allowing little national discretion;or they could be written with considerable room for nations to make theirown judgments. The Bretton Woods system imposed a relatively strictdiscipline by requiring governments to intervene in the foreign exchangemarket whenever rates deviated by more than % percent from internationallyagreed rates. Exchange rates could be changed only when it couldbe demonstrated that the existing rates created a disequilibrium which wasregarded as fundamental.Under the current arrangements agreed to in March, governments haveaccepted a general obligation to intervene in the foreign exchange marketto assure orderly market conditions.* In the future international monetarysystem, the Committee of Twenty has agreed, that exchange rate rulesshould be less rigid than they were under the Bretton Woods system, butthat they should impose more precise obligations than exist under the presentarrangements.When Should Countries Use Demand Management Policies?Changing the exchange rates is not the only way of removing an imbalancein international payments flows. In fact, it is theoretically possible tohave a system of completely fixed exchange rates in which long-term balancebetween the demand for and supply of foreign currencies is achieved throughchanges in the level of domestic demand. Under the classical gold standard*The communique issued on March 16, 1973, by the Group of Ten meeting in Parisstated that the participating countries "agreed in principle that official interventionin exchange markets may be useful at appropriate times to facilitate the maintenanceof orderly conditions, keeping in mind also the desirability of encouraging reflows ofspeculative movements of funds."203