Since the creation of the IMF at Bretton Woods, the
international exchange rate regime has undergone
very substantial changes, which may be broken down
into four main phases. The first was a phase of recon-
struction and gradual reduction in inconvertibility of
current account transactions under the aegis of the
Marshall Plan and the European Payments Union,
culminating in the return to current account convert-
ibility by most industrial countries in 1958. The sec-
ond phase corresponds to the heyday of the Bretton
Woods system and was characterized by fixed, though
adjustable, exchange rates, the partial removal of re-
strictions on capital account transactions in the indus-
trial countries, a gold-dollar standard centered on the
United States and its currency, and a periphery of de-
veloping country currencies that remained largely in-
convertible. The end of convertibility of the dollar
into gold in the summer of 1971 was a first step to-
ward the breakdown of this system, which collapsed
with the floating of major currencies in early 1973.
This marked the beginning of the third phase.
During the third phase, the U.S. dollar remained
firmly at the center of the system. The 1980s saw the
gradual emergence of a European currency area,
however, coupled with increasing capital market in-
tegration, and the 1990s witnessed the progressive
drawing into an increasingly globalized economy of
the developing countries and, with the collapse of the
Soviet Union, of the transition economies. Many
transition and developing countries put new empha-
sis on liberalizing their current account transactions.
Capital mobility was increasing and globalization
gradually took hold with the dramatic decrease in
transaction costs associated with the telecommunica-
tions and information technology revolution and the
attendant wave of financial innovations. Private capi-
tal flows came to play the major role in the financing
of current account imbalances for many countries.
The exchange rate regime in the third phase was a
mixed one. Th