International Finance Theory and Policy
by Steven M. Suranovic

Finance 80-4

Gold-Exchange Standard

A gold exchange standard is a mixed system consisting of a cross between a reserve currency standard and a gold standard. In general it includes the following rules.

First, a reserve currency is chosen. All non-reserve countries agree to fix their exchange rates to the reserve at some announced rate. To maintain the fixity, these non-reserve countries will hold a stockpile of reserve currency assets.

Second, the reserve currency country agrees to fix its currency value to a weight in gold. Finally, the reserve country agrees to exchange gold for its own currency with other central banks within the system, upon demand.

One key difference in this system from a gold standard is that the reserve country does not agree to exchange gold for currency with the general public, only with other central banks.

The system works exactly like a reserve currency system from the perspective of the non-reserve countries. However, if over time the non-reserve countries accumulate the reserve currency they can demand exchange for gold from the reserve country central bank. In this case gold reserves will flow away from the reserve currency country.

The fixed exchange rate system set up after World War II was a gold-exchange standard, as was the system that prevailed between 1920 and the early 1930s. The post-WWII system was agreed to by the allied countries at a conference in Bretton-Woods New Hampshire in the US in June 1944. As a result, the exchange rate system after the war also became know as the Bretton-Woods system.

Also proposed at Bretton-Woods was the establishment of an international institution to help regulate the fixed exchange rate system. This institution was the International Monetary Fund (IMF). The IMF’s main mission was to help maintain the stability of the Bretton-Woods fixed exchange rate system.

International Finance Theory and Policy - Chapter 80-4: Last Updated on 4/7/05