INTERNATIONAL MONETARY SYSTEM – THE GOLD EXCHANGE STANDARD

Historically, some of the remaining silver standard countries began to peg their silver coin units to the gold standards of the United Kingdom or the USA towards the end of 19th century. The British India in 1898, for example, pegged the silver rupee to the pound sterling at a fixed rate of 1s 4d, while the Straits Settlements in 1906 adopted a gold exchange standard against the pound sterling with the silver Straits dollar being fixed at 2s 4d. Similarly, the Philippines also pegged the silver peso to the U.S. dollar at 50 cents where their move to hedge their currency was assisted by the passage of the Philippines Coinage Act by the United States Congress in March 1903.

When adopting the gold exchange standard, many European nations changed the name of their currency from Daler (Sweden and Denmark) or Gulden (Austria-Hungary) to Crown, since the former names were traditionally associated with silver coins and the latter with gold coins. Perhaps, the success of the gold exchange standard at the time practically depended on a parallel development that emerged out of the mechanisms that the industrializing countries used to manage the gold standard. As this monetary system differed from the gold standard in that international reserve which consists of both gold and convertible currencies, it made the said development to function with less gold.

Moreover, the mechanisms for settlement of foreign exchange holdings had evolved throughout the Europe with the development of financial markets and central banks. A government (in this case, the treasury or central bank) bought and sold foreign exchange in transactions with its own private sector; becoming the creditor by drawing down or building up its own holdings of foreign exchange. Because of the fact that those convertible currencies tend to be invested in interest-bearing financial assets, the gold exchange standard which adopted the above mechanism for the settlement of foreign exchange holdings allowed for growth over an increase of gold production.

Last but not least, following the breakdown of the Bretton Woods system, the international monetary system reverted to a more decentralized market-based model where major countries such as United Kingdom, USA, France, Germany, Japan floated their exchange rates, made their currencies convertible, and gradually liberalized capital flows. What’s more, several emerging countries in recent years apart from those dominant players also had adopted similar policies after experiencing the difficulties of managing pegged exchange rate regimes with increasingly open capital accounts.

An exchange-rate regime in the history of global finance, theoretically speaking, is defined as the way of an authority manages its currency in relation to other currencies and the foreign exchange market. The basic types of policies implemented in the pegged exchange-rate regimes are firstly, a floating exchange rate where the market dictates movements in the exchange rate; secondly, a fixed exchange rate where a central bank keeps the rate from deviating too far from a target value which ties the currency to another currency. Because of the obstacles of dealing with pegged exchange rate regimes, the decision or the move to apply a more decentralized market-based model has increased government’s control of domestic monetary policies and inflation, accelerated the development of domestic financial sectors and ultimately, boosted the overall performance of economic growth in a nation.