An international monetary system must also have means for adjusting imbal-ances in international payments. In national economies, payments imbalancesamong regions are adjusted more or less automatically through movement ofcapital and through fiscal and monetary policies. In international economic re-lations, disequilibria in payments can be settled by financing, by changing do-mestic economic policy to shift trade and investment patterns, by rationingthe supply of foreign exchange through exchange controls, or by allowing thecurrency exchange rate to change. Effective adjustment can be promoted byinternational cooperation, but successful cooperation depends primarily onimplementing domestic policies to achieve international solutions, a politicallydifficult task. In the Bretton Woods system, adjustment was based on a fixed exchangerate system supplemented by financing, exchange controls, exchange ratechanges, and adaptation of national policies. During the periods ofinterdepen-dence and globalization, a mix of adjustment mechanisms existed. Exchangerates among major members of the system floated; that is, they changed fre-quently in response to market conditions as well as to government interven-tion. Complementing these floating exchange rates were fixed rates amonggroups of countries, such as the EU, and fixed rates between two countries, aswas the case with countries who linked their currencies to the dollar or to othermajor currencies. Under floating rates, frequent exchange rate changes drivenby markets were supplemented by intervention by national authorities in cur-rency markets, financing, and changes in national economic policies. The tension between international adjustment needs and domestic politicalrequirements is a central dilemma of international monetary relations. For ex-ample, it is often necessary but politically difficult to implement policies thatreduce governmental budget def ……
