GOLD STANDARD

International Monetary System

• The institutional arrangements that countries
adopt to govern exchange rates are known as
the international monetary system
• Narrowly speaking, it refers to international
exchange rate system.
• There are three international exchange rate
systems in history: the gold standard, the
Bretton Woods, and the floating exchange rate
system
 Evolution of the
International Monetary System
• Bimetallism: Before 1875
• Classical Gold Standard: 1875-1914
• Interwar Period: 1915-1944
• Bretton Woods System: 1945-1972
• The Flexible Exchange Rate Regime: 1973-
Present
 Features of a good international
monetary system
• Adjustment : a good system must be able to adjust
imbalances in balance of payments quickly and at a
relatively lower cost;
• Stability and Confidence: the system must be able to
keep exchange rates relatively fixed and people must
have confidence in the stability of the system;
• Liquidity: the system must be able to provide enough
reserve assets for a nation to correct its balance of
payments deficits without making the nation run into
deflation or inflation.
 GOLD STANDARD
• DEFINATION:
 Rules of the game
• Fix an official gold price or “mint parity” and allow free
convertibility between domestic money and gold at that
price.
• Impose no restrictions on the import or export of gold
by private citizens, or on the use of gold for international
transactions.
• Issue national currency and coins only with gold backing,
and link the growth in national bank deposits to the
availability of national gold reserves.
• In the event of a short-run liquidity crisis associated with
gold outflows, the central bank should lend freely to
domestic banks at higher interest rates (Bagehot’s Rule).
 Adjustment of balance of
payments deficits or surpluses
• Price-specie flow mechanism:
• Deficit gold flow out of the country
• gold reserve decrease money
supply decrease quantity theory of money price
level decrease exchange rate fixed export go up,
import go down, deficit disappear
• The adjustment of surplus is the opposite.
ADVANTAGES
DOWNFALL