The first episode of generalized floating exchange ratesoccurred immediately after World War I as countries abandoned the goldstandard in an effort to reconcile their external balance objectivewith the internal objective of reconstruction. During the Bretton Woods period,only one G7 currency was allowed to float, the Canadian dollar (from 1950 to1962). After the Bretton Woods system collapsed in 1973, the key G7 currenciesmoved to a system of generalized floating exchange rates. This system hascontinued, by and large, down to the present for the major “developed”currencies. The first supposed advantage of a floating rate was that it wouldrapidly move to maintain purchasing power parity, thus preventing realexchange rate misalignments, and their consequences for the balance ofpayments, which were often a feature of the Bretton Woods pegged exchangerate system. A second supposed advantage of a flexible rate systemwas that it would always move to maintain balance of payments equilibriumand so insulate a country from shocks emanating in the rest of theworld. Finally, a floating exchange rate system, because its equilibratingnature, would enable a country to hold a smaller amount of foreign exchangereserves.