Gold exchange standard


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.