But reserves are not unlimited. Sooner or later the authorities will have to change the par-value of their currency. An additional objection to fixed exchange rates is the doubtful viability of the system in the long run. Up to 1971, most currencies were pegged to the US dollar, and the dollar to gold. Yet currency after currency ran out of reserves and had to be devalued.
Countries differ with respect to both inflation-unemployment preferences and economic structure.
Today the prevailing system is a hybrid of fixed and variable exchange rates. Although the exchange rates are market determined for the industrial countries, they are not free of governmental intervention. Summary Exchange rates are simply the price of one currency in terms of another. Just as money serves as a medium of exchange in an economy to facilitate the trade of goods, exchange rates serve as an intermediate exchange to facilitate international trade. Corporations and other institutions have developed various markets to facilitate exchange and to hedge against exchange risk.