Floating Rates between Currency Areas

Abstract

As already pointed out earlier, most advocates of floating exchanges are vague on the vitally important question as to whether they wish the system to operate exclusively in their own country, or in a limited number of select countries, or in all countries. Some of them do envisage, however, a situation in which a number of countries would become grouped into two or more currency areas. Within each area parities or exchange rates would be fixed, while between the areas, and also in relation to ‘independent currencies’, exchange rates would float freely. What might happen is that two or more principal currencies would fluctuate in terms of each other, and a number of minor currencies would become the satellites of the major currencies, maintaining stable relationships with one or the other of them. Alternatively, a number of currencies would be kept stable in terms of gold and therefore in terms of each other, while the rest of the currencies would fluctuate in terms of the stable currencies. Possibly some of the floating currencies would be kept stable in terms of each other.