The Bretton Woods Agreement and the Fixed System Vs. The Floating Exchange Rate Argument
Introduction
There have been discussions about the optimal exchange rate regime for a very long time, reflecting the evolution of the world economy and the conduct of monetary policy. The gold standard, as well as systems tied to other commodities, provided a monetary anchor, as well as a standard for financing international transactions, for many different countries over the centuries.
Histories of gold standards recount many periods of financial turmoil and very sharp variations in output and prices. The Bretton Woods system was established, with the U.S. dollar as the centerpiece, as a system of fixed, but variable, exchange rates. When this system came under stress in the 1960s, older debates of the relative merits of fixed versus flexible exchange rates developed new life and the original Bretton Woods system was replaced by a system of floating exchange rates among the major currencies.
The Gold Standard The origin of the gold standard dates back to ancient times when gold coins were a medium of exchange, unit of account, and store of value. To facilitate trade, a system was developed so that payment could be made in paper currency that could then be converted to gold at a fixed rate of exchange. The gold standard is an important historic example of a pure fixed exchange rate regime. It is sometimes seen as a natural and ideal system because it takes central banks out of the exchange rate business and is not derived from government behavior. Unfortunately, this view is essentially inaccurate and oversimplified because the gold standard in practice requires a very peculiar and specific set of circumstances (Ickes, 2006). Under the gold standard, one U.S. dollar was defined as equivalent to 23.22 grains of "fine (pure) gold. The exchange rate between currencies was based on the gold par value - the amount of a currency needed to purchase one ounce of gold. At the height of its popularity, the gold standard flourished in what can be considered
There have been discussions about the optimal exchange rate regime for a very long time, reflecting the evolution of the world economy and the conduct of monetary policy. The gold standard, as well as systems tied to other commodities, provided a monetary anchor, as well as a standard for financing international transactions, for many different countries over the centuries.
Histories of gold standards recount many periods of financial turmoil and very sharp variations in output and prices. The Bretton Woods system was established, with the U.S. dollar as the centerpiece, as a system of fixed, but variable, exchange rates. When this system came under stress in the 1960s, older debates of the relative merits of fixed versus flexible exchange rates developed new life and the original Bretton Woods system was replaced by a system of floating exchange rates among the major currencies.
The Gold Standard The origin of the gold standard dates back to ancient times when gold coins were a medium of exchange, unit of account, and store of value. To facilitate trade, a system was developed so that payment could be made in paper currency that could then be converted to gold at a fixed rate of exchange. The gold standard is an important historic example of a pure fixed exchange rate regime. It is sometimes seen as a natural and ideal system because it takes central banks out of the exchange rate business and is not derived from government behavior. Unfortunately, this view is essentially inaccurate and oversimplified because the gold standard in practice requires a very peculiar and specific set of circumstances (Ickes, 2006). Under the gold standard, one U.S. dollar was defined as equivalent to 23.22 grains of "fine (pure) gold. The exchange rate between currencies was based on the gold par value - the amount of a currency needed to purchase one ounce of gold. At the height of its popularity, the gold standard flourished in what can be considered
References: Exchange rates: Fix or float, sink or swim? | The Economist. (1997). The Economist - World News, Politics, Economics, Business & Finance. Retrieved April 5, 2013, from http://www.economist.com/node/597868 Fixed vs. Flexible Exchange Rates. (n.d.). www.treasury.gov. Retrieved April 3, 2013, from www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/Appendix_2.pdf Gold Standard. (n.d.). Department of Economics . Retrieved April 4, 2013, from http://www2.econ.iastate.edu/classes/econ355/choi/golds.htm Hill, C. W. (2008). Global business today (5th ed.). Boston: McGraw-Hill Irwin. Ickes, B. (Director) (2006). Lecture Note on the Gold Standard. Stephey, M. (2008). A Brief History of Bretton Woods System - TIME. Breaking News, Analysis, Politics, Blogs, News Photos, Video, Tech Reviews - TIME.com. Retrieved April 6, 2013, from http://www.time.com/time/business/article/0,8599,1852254,00.html