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 ?
The gold exchange standard in the form in which it has been adopted in India is justly known as the Lindsay scheme.
The Gold exchange standard arises out of the discovery that, so long as gold is available for payments of international indebtedness at an approximately constant rate in terms of the national currency, it is a matter of comparative indifference whether it actually forms the national currency.
The parametric test rejects the null of equal variances of the first difference of the price ratio for all pairs except one, the gold exchange standard and second interwar float.
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.
The gold exchange standard was an attempt to restore the favorable features of the classical gold standard (exchange rate and price level stability, rapid and automatic balance of payments adjustment, stabilizing capital flows) while at the same time attempting to economize on gold reserves by restricting the use of gold to central banks and by encouraging the substitution of foreign exchange.
As is well known, the gold exchange standard suffered from a number of problems (Kindleberger, 1973; Eichengreen, 1992; Temin, 1989), including the use of two reserve currencies (sterling and the dollar), the absence of leadership by a hegemonic power, the failure of cooperation between key members, and the unwillingness of the USA and France to follow the rules of the game.
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.
For instance, suppose that under the gold exchange standard the Bank of England chose to change its policy of making the pound convertible into $4.
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.
In May 1931, a run on the Kreditanstalt, the largest Austrian bank, initiated the final defense of the gold exchange standard in Britain.