Gold exchange standard


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Gold exchange standard

A fixed exchange rate system adopted in the Bretton Woods agreement. It required the U.S. to peg the dollar to gold and other countries to peg their currencies to the U.S. dollar.

Bretton Woods Agreement

An international agreement on monetary and currency policy for the period following World War II. Initially crafted in 1944 while the war was ongoing, it came into effect the following year. Among other things, the Bretton Woods Agreement created the International Monetary Fund and the International Bank for Reconstruction and Development. The latter organization was created to finance post-war reconstruction, while the IMF was intended to stabilize exchanges rates between currencies and to serve as a country's lender of last resort.

A key component of the Bretton Woods Agreement was the requirement that all countries peg their currencies to a certain amount of gold. In practice, most currencies were pegged to the U.S. dollar, which was itself pegged to gold. This helped the IMF accomplish its stated goals to stabilize currencies that had experienced a large amount of wartime inflation. The Agreement worked relatively well until the United States unilaterally depegged from gold in 1971. See also: Keynesian economics, Nixon shock.

Gold Standard

A system whereby a currency is linked to the value of gold. That is, one would be able to exchange one unit of the currency for so many ounces of gold on demand. The gold standard makes monetary policy independent from policymaker decisions. Many currencies have been linked to gold over the years, most recently under the Bretton Woods System. The gold standard reduces the likelihood of inflation, but tends to cause higher interest rates and renders a country less able to pursue full employment. The gold standard contrasts with fiat money. See also: Cross of Gold, Silver Standard.
References in periodicals archive ?
Friedman and Schwartz (1963, 359) argue that the gold exchange standard was more vulnerable to disturbances than the classical gold standard because "it raised the ratio of claims on the relevant high-powered money--in this case, ultimately, gold--to the amount of high-powered money available to meet those claims.
78) The perceived ills to be prevented included (1) floating exchange rates that were condemned as subject to destabilizing speculation; (2) a gold exchange standard that was vulnerable to problems of adjustment, liquidity and confidence, which enforced the international transmission of deflation in the early 1930s; and (3) the resort to beggar-thy-neighbor devaluations, trade restrictions, exchange controls and bilateralism after 1933.
Initially, it was a gold exchange standard with two key currencies, the dollar and the pound.
With the pound no longer backed by gold, the dollar became the gold standard's major reserve currency just when European central banks desired to prevent further losses on foreign exchange reserves by discarding the gold exchange standard and adopting a gold bullion standard.
Nevertheless, European discontent with the gold exchange standard did not subside.