The economic and political developments in the early sixties of the last century led to the statement of the outcome of the international monetary system based on the Bretton Woods agreement, which adopts a system of fixed exchange rates based on the US dollar, which is convertible into gold without any change in the price.
As it is no longer able to control the continuous large changes in currency exchange rates in the countries participating in the agreement.
Therefore, after the collapse of this agreement, the idea of floating the currency began, as the Simchonian Agreement of 1971 strengthened it.
The price of an ounce of gold increased until it reached $38.
In addition to what the agreement also provides for the opportunity to change currency rates, provided that this does not exceed 2.25% of their value.
However, this agreement was not able to last for a long time and suffered a severe setback, which led to the tendency of economic officials to float the currency.
The flotation policy has witnessed several developments until it has become the most important tool used by the monetary authorities in order to be able to achieve their economic goals.
The currency float policy is implemented through the implementation of some intervention measures, the most important of which are:
Flotation affects the coin market by:
Its impact on both the supply and demand movements, which is done through buying or selling the local currency.
Its effect on the interest rate, so that this is done by raising or lowering the discount rate.
The effect of flotation on the volume of foreign trade: by defining imports in quantitative terms, or by boosting exports.
Reasons for floating the currency
The difference in economic growth rates among the most important advanced industrial countries, through the emergence of major economic powers such as Western Europe and Japan, which are competing with the United States of America.
The effect of varying levels of inflation among industrialized countries on interest rates, in addition to their impact on changes in currency exchange rates as well.
The impact of the high rate of US spending, including spending on foreign investment and financing spending on the Vietnam War, which exacerbated the deficit in the US balance of payments.
The rate of competition and conflict of interests that took place between the advanced industrial countries increased.
The collapse of the Bretton Woods system, which is due to the international economy's lack of global liquidity provided by the outflow of US dollars as a result of the trade balance deficit.
Financing the speculative movements, especially when the European dollar market financed the speculative movements witnessed by the French franc, the pound sterling, the Italian lira and the German mark in the late sixties, affected by the wide range of capital movements used in intense speculation.
The United States of America is the most prominent country that has adopted the floating approach in the world in order to be able to maintain its competitive level and support its economic and political orientations.
The agreement of the International Monetary Fund in May of 1976 ratified that floating currencies represents an initiative towards reforming the international monetary system, in an attempt to keep pace with such new developments at the economic and political level.