The Classical Gold Standard (1876 – 1914)

The gold standard was a commitment by participating nations to fix the price of their domestic currencies in terms of a specified amount of gold. The government announces the gold par value which is the amount of its currency needed to buy one ounce of gold. Therefore, the gold was the international currency under the gold standard.
Exports rise Imports shrink
BOP surpluses Gold inflows
BOP deficits Gold outflows
Exports decline Imports increase
Money supply up Prices up
Performance of the gold standard

Gold Standard and Exchange Values


Pegging the value of each currency to gold established an exchange rate system. The gold par value determined the exchange rate between two currencies known as “mint par of exchange”


The centerpiece of the system is to select an international currency as a medium of exchange in international settlements. Commodity money such as gold or silver were widely used in history. Gold or silver were inconvenient to carry and impractical in settlement.

0.8008 and 0.792 are called gold export and import points.
Price-specie-flow mechanism
Rapid growth rate (tech innovation)
Outputs increase Prices fall

Long-term price stability (lower inflation rate) 0.1% (1880 – 1914), 4.2% (1946 – 1990) No central bank needed Vulnerable to real and monetary shocks Inflation in one country would influence prices, money supply and real income of another country.


Commodity-backed money refers to the bank notes which are backed by gold or silver. The bank notes can be freely converted into gold or silver.

Fiat money is inconvertible money that is made legal tender by government decree. The only thing gives the money value is the faith placed in it by the people that use it. An international monetary system needs to solve the following problems: An international currency; The determination of the exchange rate; A mechanism of balance-of-payments adjustment.


Higher unemployment rate 6.8% (1879 – 1913), 5.6% (1946 – 1990)
Higher cost to maintain the system, in 1990 the cost would be $137 billion. Limited supply of the gold can hamper the rapid growth of international trade and investment.


பைடு நூலகம்
The International Monetary System from 1914 to 1944

World War I interrupted trade and the free movement of gold.
Main countries suspended convertibility of gold. They also imposed embargoes on gold exports. Exchange rate were fluctuated over fairly wide ranges because of the predatory devaluation of the domestic currency.
International monetary system is based on the exchange rate system adopted by individual nations. The exchange rate system is a set of rules governing the value of a currency relative to other currencies.
The BOP disequilibrium was corrected by “Price-specie-flow mechanism”.


Example of gold export and import

If the gold par value in New Zealand was NZ$125/ounce and A$100/ounce in Australia, so mint par of exchange: 100/125 = A$0.80/NZ$ Costs of gold transportation: A$0.008/NZ$ The exchange rate would fluctuate between (0.80 + 0.008) = 0.8008 and (0.80 – 0.008) = 0.792


Bretton Woods System (1944 – 1971)

Bretton Woods Agreement was to design a new international monetary system. International monetary fund (IMF) to lend to member countries experiencing a shortage of foreign exchange reserves The International Bank for Reconstruction and Development (IBRD) (World bank) to finance postwar reconstruction



GATT (WTO) to promote the reduction of trade barriers and settle trade disputes Pegged exchange rate system US dollar was the international currency. Each country pegged the value of their currencies to the US dollar. US dollar was pegged to the gold. ($35/ounce) Parity band was within 1% on either side. The pegged value was adjustable.

The Bretton Woods System
•The value of the dollar was pegged to gold and the dollar was convertible to gold at the mint parity rate. •A pegged exchange rate system in which a country pegs the value of its currency to the currency of another nation. •In practice a dollar-exchangerate system as nations pegged to the dollar and freely exchanged the domestic currency for the dollar at the parity rate.
Chapter 4