The Early History of the Case for Floating Exchange Rates

Abstract

Friedman was neither the first nor the only economist to make the case for flexible exchange rates (Machlup 1964, 79–80).¹ Roy Harrod (1933, 102–3, 137–0, 173–5, 180–1), for example, described ‘The New Freedom. … When the Gold Standard is Abandoned.… The only well-tried expedient is laissez-faire; most of the authorities, who think about the matter at all, probably hope that the old expedient will still serve. Their hope is not likely to be realized’ [emphases in original]. Harrod advocated ‘international co-operation’ through an ‘international committee’ so that exchange rates could be changed (by a maximum of 2 per cent per annum) in a ‘regular and orderly manner’. Harrod also conceded that his analysis of world monetary reform could be ‘condemned as merely academic’. But he added that ‘The present generation of politicians and bankers will pass away. They will endeavour to hand on their stock of clichés to those who succeed them. But even clichés pass out of fashion in time.’