Fixed exchange rate
Topic: The Making of a Global World · NCERT: Class 10, Ch 3 "The Making of a Global World"
Meaning
An exchange rate is the price of one currency in terms of another. Under a fixed exchange rate, governments keep this price at a set level against another currency or against gold. They buy or sell currency to hold it steady. This was the monetary system of the Bretton Woods order after the Second World War. It gave the post-war world economy stability.
Example
Under the Bretton Woods system, agreed in July 1944, national currencies such as the Indian rupee were pegged to the US dollar. In turn, the dollar was anchored to gold at $35 per ounce. From the 1960s, rising overseas costs weakened US finances, and the dollar could no longer hold its gold value. The fixed rates then collapsed.
Don't confuse with
- Floating exchange rate: Here the value of a currency goes up and down with supply and demand in currency markets. There is no official fixed level. Floating rates replaced fixed rates after Bretton Woods collapsed.
Related concepts
- Bretton Woods Conference
- Bretton Woods system
- International Monetary Fund
- World Bank
- Marshall Plan
- General Agreement on Tariffs and Trade
- Multinational corporation
- Group of 77
- New International Economic Order
- Floating exchange rate