System Of Fixed Exchange Rates

This paper reviews the modern history of international currency exchange rates by focusing on the system of fixed rates based on the gold standard.

There is important historical precedence for arguing that a system of fixed exchange rates is most advantageous for the purpose of economic stability. Such international monetary stability was quite apparent in the Western World during the period between 1875 and 1914. The core mechanism for this stability was the gold standard. Most major countries then set fixed values for their currencies in relation to gold. These countries also allowed the relatively free movement of gold across their boundaries and agreed to convert their currency into gold at the established price.

The exchange rates between currencies were allowed to fluctuate in response to market demand. This meant that if country A were spending more abroad than it was taking in, the overabundance of its currency abroad might lead to a fall in its …