flexible or floating exchange rates (1)

Having seen how an idealized gold standard works, we turn now to the case where supply and demand are left free to determine the foreign exchange rate . In the absence of any tie to gold , the pound might have had an average price of $4.00 or $5.00 in the 1940s, and in this decade an average price of $2.00 . who Knows,once floating exchange rates become the rule ,perhaps next decade it could be at $1.50 or $3,20 . the forces of supply and demand will determine the outcome. If Americans want to buy so many English goods at an existing $1.90 level and Europeans want so few American goods , then we might be demanding more pounds as our needed foreign exchange than they will be wanting to supply us with , what then will happen ? If there is no longer a gold standard . one cannot get gold and ship it over in order to keep the foreign exchange rate within narrow gold points around the $ 1,90 parity. Instead, our urgent demand will bid up the foreign exchange rate . How far? Just far enough so that , at the new higher price of ,say,$2 for the pound , our total demand for foreign exchange will be brought again down into equality with their enhanced supply of foreign exchange .