Meaning A monetary system where the value of circulating money is linked to the value of gold.
. Or
The monetary system adopting gold as the medium of
exchange was termed as gold standard. HISTORY The concept of gold standard was originated in England in the 17th C. During that period, pound was minted of gold coins. The ever official announcement in the year 1816 with the declaration of gold as legal and official tender in England. The concept of gold standard was treated as the oldest exchange rate regime prevailed during the period of late half of the 19th Century till the end of the 1st World War. MINT PAR PARITY THEORY • Under this system, the currency in use was made of gold or was convertible into gold at a fixed rate. • The value of the currency unit was defined in terms of certain weight of gold, that is, so many grams of gold to the rupee, the dollar, the pound etc. • The rate at which the standard money of the country was convertible into gold was called the mint price of gold. FEATURES • The value of currency was fixed by government in terms of a given weight and quality of gold. • It had the option of two way convertibility. • Free flow of goods allowed among countries by facilitating export and import of gold among gold standard countries. FUNCTIONS • To regulate the volume of currency. • To maintain the stability of exchange rate. ADVANTAGES • It was an easy system to introduce and operate • It provided for a very high level of stability in exchange rates which promoted both international investment and trade. • It provided a fully secured system for settlement of international transaction. DISADVANTAGES • The cost of manufacturing gold gradually increased to levels beyond the official prices. • Countries with persistent trade deficit suffered from recession resulting in reduced investment and unemployment. BRETTON WOODS SYSTEM BRETTON WOODS SYSTEM The Bretton woods system was the first system used to control the value of the money between different countries. It meant that each country had to have a monetary policy that kept the exchange rate of its currency with in a fixed value plus or minus one percent in terms of gold. HISTORY Ueven and rigorous changes in the exchange rate in the international market during the post World War period had created the urge of establishing an effective and systematic interanatioanl monetary system. The solution came out as a decision taken in the Bretton wood Conference for establishment of International monetary fund (IMF) in the year 1945. Due to its origin, IMF is popularly termed as Bretton wood system. It was established for the purpose of controlling and regulating exchange rate to facilitate international trading activities.The Bretton wood system of monetary management established the rule for commercial and financial relations among the United Nations, Canada, western European countries, Australia, and Japan after the 1994 Bretton wood agreement. FEATURES • Avoiding unstable exchange rate and competitive devaluations caused by 2 nd World War. • Financing the reconstruction of Europe during the post World War period. THANK YOU