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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
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References in periodicals archive ?
Similarly, although it might be argued US exchange rate policy was constrained by the Bretton Woods gold exchange standard prior to 1971, domestic monetary policy was loosely if at all constrained by this policy, as illustrated by consumer price index (CPI) inflation, which reached an annualized rate above 10% in March of 1969.
Alexander Martin Lindsay (1844-1906) first proposed the concept of a 'Gold Exchange Standard' (GES) in two texts published in 1876 and 1878 respectively, which he later developed in an article entitled Ricardo's Exchange Remedy (1892).
Gold exchange standard (May 1925 to August 0.0098 0.0074 1931) 8.
British adherence to the reconstructed gold exchange standard, however, lasted only six years.
The first section below briefly discusses the adjustment mechanism of the gold exchange standard and then presents two prevailing approaches for understanding international monetary cooperation during the interwar years.
The classical gold standard ended in the face of the massive shocks of World War I.(75) The gold exchange standard, which prevailed for only a few years from the mid-1920s to the Great Depression, was an attempt to restore the beneficial features of the classical gold standard while allowing a greater role for domestic stabilization policy.
In May 1931, a run on the Kreditanstalt, the largest Austrian bank, initiated the final defense of the gold exchange standard in Britain.
After World War II, the same gold exchange standard, based this time on the unique reserve currency role of the dollar, was reestablished at the heart of the Bretton Woods international monetary system.
For what the great powers (except for the United States) instituted in the wake of the war was not a gold standard but a gold exchange standard. Gold coins no longer circulated as currency after the war, and redemption in specie was available only to international investors--similar to circumstances in the United States from the end of World War II to 1971.
It lasted until the First World War whereupon it was replaced by the "gold exchange standard," which differed from its predecessor in that it was the central banks' gold reserves that regulated the supply of banknotes, and not those of private-sector banks.
The gold linkage was even more tenuous than with the post-WWI gold exchange standard. The economizing on gold reserves was even greater.
We interpret gold exchange standards as a kind of fiat standard rather than a full-fledged commodity standard.