History of Exchange Rate Systems Chapter 33 Appendix

The Gold Standard: A Fixed Exchange Rate System Between 1867 and 1933, most of the world’s economies used the gold standard. Gold standard – a system of fixed exchange rates in which the value of currencies was fixed relative to the value of gold and gold was used as the primary reserve asset.

The Gold Standard: A Fixed Exchange Rate System Under the gold standard, the amount of money a country issued was directly tied to gold. By fixing its currency’s price to gold, it automatically fixed its currency’s price to other currencies.

The Gold Standard: A Fixed Exchange Rate System The gold specie flow mechanism was the long-run mechanism that maintained the gold standard. Gold flowed out of the country when it experienced a balance of payments deficit and into the country with a balance of payments surplus.

The Gold Standard: A Fixed Exchange Rate System The gold standard determined a country’s monetary policy. This prevented governments from using expansionary monetary policy to deal with recessions.

The Gold Standard: A Fixed Exchange Rate System The Depression led the U.S. to partially abandon the gold standard in 1933. U.S. citizens could no longer exchange gold for their dollars, but instead were given silver. That ended in the late 1960s.

The Gold Standard: A Fixed Exchange Rate System In 1971, the U.S. totally cut off the relationship between dollars and gold.

The Bretton Woods System: A Fixed Exchange Rate System Bretton Woods system – an agreement that fixed exchange rates that governed international financial relationships from the period after World War II until 1971.

The Bretton Woods System: A Fixed Exchange Rate System The Bretton Woods system established the International Monetary Fund (IMF) and the World Bank. The International Monetary Fund (IMF) arranges short-term loans between countries. The World Bank makes longer-term loans to developing countries.

The Bretton Woods System: A Fixed Exchange Rate System The Bretton Woods system was not based on a gold standard. A country would buy or sell other currencies when it experienced a balance of payments deficit or surplus.

The Bretton Woods System: A Fixed Exchange Rate System A stabilization fund was set up to make short-term loans to countries that ran out of currency reserves. Exchange rate adjustments were overseen by the IMF.

The Bretton Woods System: A Fixed Exchange Rate System The Bretton Woods system helped to maintain the value of European currencies as they rebuilt after World War II. It also provided a mechanism for long-term loans to Europe from the U.S.

The Bretton Woods System: A Fixed Exchange Rate System The IMF created a type of international money called special drawing rights (SDRs). SDRs never became established as an international currency. Instead, U.S. dollars served as official reserves for individuals and countries.

The Bretton Woods System: A Fixed Exchange Rate System By the early 1970s, the number of U.S. dollars held by foreigners exceeded the amount of U.S. gold.

The Bretton Woods System: A Fixed Exchange Rate System When France and other countries demanded gold for their dollars, the U.S. ended its policy of exchanging gold for dollars in 1971. With that change, the Bretton Woods system was dead.

The Present System: A Partially Flexible Exchange Rate System The exchange rates of most Western countries are now allowed to fluctuate. At various times, governments buy or sell their own currencies to affect the exchange rate.

The Present System: A Partially Flexible Exchange Rate System Under the present system, countries must continually decide whether a balance of payments surplus or deficit is temporary or permanent.

The Present System: A Partially Flexible Exchange Rate System Some countries have agreed to fix the exchange rates of their currencies to the currencies of other countries.

History of Exchange Rate Systems End of Chapter 33 Appendix