This chapter described international finance as the more or less free flow of money to finance international trade transactions among the countries of the world. Most concern about international finance revolves around the determination of exchange rates-the price of one currency relative to that of another.
None of the many theories devised to explain the factors that influence the exchange rate between two currencies is totally satisfactory. In the past international trade seemed to explain exchange rate determination fairly adequately. A country that experienced a prolonged deficit in its balance of trade would also experience a deterioration in its exchange rates, since its demand for foreign currency to finance excess imports would be larger than other countries' demand for its currency. With the tremendous. increase in the complexity of financial markets and the ease with which new and complex financial instruments can be created, exchange rate determination seems to have become more a function of the skills of the financial executives of a country than of its international trade position.
Various International Monetary Systems have evolved over the years from attempts to regulate exchange rates. They range from the relatively simple gold standard system of the pre-World War I years to the complex managed float system operating today. The resolution of the potentially very dangerous dilemma of international finance today requires a re-thinking of the role of the U.S. dollar as a reserve currency and the role of the United States as the world's banker.
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