In the 1950's and 1960's a strong dollar standard existed; under fixed exchange rates the monetary policies of most nations were governed by the stable monetary policy of the United States. In the 1970's, the dollar standard was reduced to a weak form where industrial (but not less-developed) countries float their exchange rates to secure more domestic monetary independence, but the financial processes underlying international trade itself remain dollar based. What are the elements of the weak dollar standard necessary for world trade to remain largely monetized and multilateral? How can nations avoid a relapse to the bilateralism and barter that characterized the 1930's? I shall consider first, necessary restraints on foreign exchange intervention and reserve holdings by central banks of industrial economies other than the United States; and second, the proper American monetary policy for reconciling the weakened international role of the dollar with domestic monetary stability.

NO WORLD CENTRAL BANK issues a separate currency for commerce across national boundaries. Instead, a system of national monies works more or less well in providing a medium of exchange and unit of account for current international transactions, as well as a store of value and standard of deferred payment for longer-term borrowing and lending. How do national governments and banking institutions interact to provide international money for merchants and investors? By necessity, this monetary interaction changes with time, place, political circumstances, and financial technology. To better understand its historical evolution, let us follow Robert Mundell and distinguish between a monetary system and a monetary order: