Gold standard
Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 6 "Open Economy Macroeconomics"
Meaning
Under the gold standard, which was dominant from about 1870 to 1914, each currency could be exchanged for a fixed amount of gold. That fixed price was called the mint parity. Because every currency was tied to gold, exchange rates between currencies were also fixed. Imbalances in the balance of payments corrected themselves through the price-specie-flow mechanism:
- A deficit country lost gold, so its money supply and prices fell.
- Its goods became cheaper, so exports rose and imports fell.
- The deficit closed. The surplus country went through the reverse.
Example
World War I suspended the convertibility of currencies into gold. After the war, a weaker "gold-exchange standard" was tried, but the Great Depression ended it. Britain left gold in 1931.
Don't confuse with
- Bretton Woods system (1944): here currencies were pegged to the US dollar, and only the dollar was convertible into gold, at $35 per ounce. The pegs could also be adjusted.
Related concepts
- International monetary system
- Bretton Woods system
- Triffin dilemma
- Reserve currency
- IMF quota
- Reserve tranche position
- Special Drawing Rights
- Washington Consensus
- Structural adjustment programme