What numeraire under flexible exchange rates?
Unfortunately, there was not at the time much understanding of how the new regime would work or of what would fulfil the functions formerly filled by gold and the dollar. Unlike the previous system, which had been built upon the experience of hundreds of years of monetary history, there was no precedent for the new regime of paper currencies connected by fluctuating exchange rates. In addition there had been little theoretical analysis of the problems likely to be encountered. One of the problems related to the use of a unit of account. With all currencies on the same footing, international payments would be in chaos. At the most rudimentary level, how would exchange rates be quoted? With n currencies in the world there are ½ n (n-1) exchange rates. If n = 200 there are 9900 exchange rates! Flexible exchange rates in the absence of a numeraire in which to express currency prices would involve enormous confusion. Fortunately, the market found the solution. Under flexible exchange rates
