When discussing the relative pros and cons of a fixed exchange rate system compared to a floating exchange rate system, it is imperative to understand the meaning of both systems. “A fixed exchange rate is when a country ties the value of its currency to some other widely-used commodity or currency” (Amadeo, 2020). With international trade, the currency most used around the world is the United States Dollar. Today, most fixed exchange rates are attached to the U.S. dollar. Countries that trade a lot with others may also fix their currency with those they trade with the most. With a fixed exchange rate, the government completely or partially sets that rate.
Now let’s look at the other end of the spectrum, the floating exchange rate system. With a floating exchange rate system, the system is tied to the supply and demand, relative to other currencies (the open market) (Mitchell, 2020). With a floating exchange rate, it is impossible for other countries and individuals to manipulate the currency price since the government and central bank diligently work on keeping the price advantageous for international trade.
When having a multinational business, you have to decide where you are going to operate primarily and where you want your plants and sales to generate from. Both a fixed rate exchange system and a floating exchange rate system have pros and cons for a multinational business, and it is important to review both sides and deciding what is considered important criteria when picking where and how you conduct business. With a fixed rate system, since the currency is tied to other countries that they trade with and the government sets the rate, the rules and regulations in place can benefit the country. With a fixed exchange rate, you can always exchange your money with one currency to another currency, one for one. That is another benefit with having a fixed exchange rate. There are also benefits with the floating exchange rate system. Since the system is tied to other currencies, the countries that they trade with could theoretically benefit the currency for both countries, especially if they have a lot of goods and products going back and forth. Without the ability to influence the currency, is keeps things honest for the businesses that operate in that country.
When deciding between fixed exchange rate and floating, one may be interested in the history between the two and how it began. Knowing the history can influence the past as so many things are cyclical. In the past, currencies were fixed to an ounce of gold. In 1944, with the Bretton Woods agreement, countries around the world agreed to peg its currency to the United States dollar. Flash forward about thirty years, President Richard Nixon decided to remove the dollar from the gold standard in order to end the recession. After this happened, many countries around the world still kept their currency pegged to the united states dollar. There can be something said about using a system that has been around and trusted for so many years with so many different countries around the world.
Amadeo, K. (2020, January 15). What the Riyal, Lev, and Krone All Have in Common. Retrieved February 6, 2020, from https://www.thebalance.com/fixed-exchange-rate-definition-pros-cons-examples-3306257
Hill, C.W. (2018). International Business: Competing in the Global Marketplace (12th ed.). New York, NY: McGraw Hill Education.
Mitchell, C. (2020, January 29). Floating Exchange Rate Definition and History. Retrieved February 6, 2020, from https://www.investopedia.com/terms/f/floatingexchangerate.asp