Introduction to Finance

Flexible Exchange Rate System: 1973–Present 
Beginning in March 1973 
major currencies were allowed to “fl oat” against one another. By the mid-1970s gold was 
abandoned as a reserve asset, and IMF members accepted a system of 
fl exible exchange rates
 
in which currency exchange rates are determined by supply and demand. A primary objection 
to fl exible exchange rates is the possibility of wide swings in response to changes in supply 
and demand, with a resulting uncertainty in world trade. Evidence indicates that exchange 
rates indeed have been much more volatile since the collapse of the Bretton Woods system 
compared to when the system was in place. 
Today, many countries, including Australia, Japan, Canada, the United States, and the 
United Kingdom, allow their currencies to fl oat against others. The European Monetary Union 
also allows the euro to fl oat freely. In contrast, India, China, and Russia employ semifl oating or 
managed fl oating systems involving active government intervention. Most countries in Africa 
currently peg their currencies to the euro. Thus, the current exchange rate system is a composite of 
fl exible or fl oating exchange rates, managed fl oating exchange rates, and pegged exchange rates.
LEARNING ACTIVITY
Go to the International Monetary Fund website, http://www.imf.org, and fi nd information 
about “special drawing rights” and how they are used as reserve assets.
6.2
European Unification
European Union
GLOBAL
The 
European Union (EU)
 
was established to promote trade and economic develop-
ment among European countries. Economic integration was to be achieved by eliminating bar-
riers that previously restricted the fl ow of labor, goods, and fi nancial capital among countries. 
The European Union’s history can be traced back to the early 1950s. Six European countries 
signed the Treaty of Rome that established the 
European Economic Community (EEC) 
in 
1957. The EEC became the 
European Community (EC)
in 1978.