Economists now accept exchange-rate intervention can work

Milton friedman, a Nobel-prizewinning economist, was an early fan of floating currencies. The case for flexible exchange rates, he once pointed out, is the same as the argument for daylight-saving time. In theory, people could start their summer days an hour earlier without any change in the clocks. In practice, it is easier to change the time than to change everyone’s habits. By a similar logic, whenever there is a shortfall in demand for a country’s goods and assets, it is easier to let one price, the exchange rate, drop than it is to cut all of a country’s other prices instead.

Friedman made his analogy in the sedate 1950s when exchange rates seldom changed. In today’s more volatile markets, the clocks can be brutal. The yen has fallen by 20% against the dollar this year, the South Korean won by 17% and India’s rupee by 9%. After Kwasi Kwarteng, Britain’s chancellor, unveiled fresh tax cuts on September 23rd, the restless pound fell close to parity with the dollar. It was as wrenching as an alarm in the middle of a dream.