Presented by: Ha Tran

i34042
 The Classical Gold
standard

 Be dominated in 19 centuries until WWI

Characteristics:
 The value of each country’s currency is defined in
terms of a fixed weight of gold
 Domestic currency is freely convertible to gold.

=> the exchange rate between two countries is constant

 The Classical Gold
standard

Domestic:
 Non-gold-producing sectors increase => increase in the
demand for money => a fall in the price level
 Gold producer earning economic profits => new entrepreneurs
to enter the industry => increase in gold production.
 Consumer sell jewelry to the government and get gold coins =>
Gold coins supply increase => In crease in the price level.
International
 Trade deficit => decrease in gold holdings => decrease in
domestic price => more competitive => current account balance
 The Classical Gold
standard

 The United States and France (surpluses) were able
to stockpile large amounts of gold
 Deficit countries losing gold had no choice but
to deflate their economies when their creditors
required to be repaid in gold.

 This system can only function well if prices are

sufficiently flexible
 The Classical Gold Standard was broken down
during the World War I
 Bretton Woods system

 In 1944, at Bretton Woods in the USA. They
considered how to resolve two very serious
problems:

 The Great depression of the 1930s would not happen

again. (ensure a stable global monetary system and
an open world trading system)
 Rebuild the war-torn economies of Europe.
 Bretton Woods system

Requirement:
 A stable exchange rate system
 A reserve asset of unit of account
 Control of international capital flows
 The availability of short-term loans to countries
facing a temporary balance of payments crisis
 Rules to keep economies open to trade
 Bretton Woods system

Agreements:
 Pegged rate ~ par value system: Members were obligated
to declare a par value; intervene in currency; alter their
par value to correct a fundamental disequilibrium in their
balance of payments.
 An adequate supply of monetary reserves: IF exchange
rates were not to float freely
 Avoid recurrence of the kind of economic warfare that
had characterized the decade of the 1930s.
 A need for an institutional forum for international
cooperation on monetary matters
 Bretton Woods system

=> 3 institutions:
 IMF: Regulatory, financial and consultative
 IBRD: facilitate private investment and
reconstruction in EU.
 GATT: Negotiations on trade liberalization
 Bretton Woods system

 Advantages: significant expansion of international trade and
investment as well as a notable macroeconomic performance

 Disadvantages:
- Exchange rate rigidity
- Pressure put on the United States
- Structure problems: US had to maintain increasing trade
deficits. But the US was not able to devalue the dollar

=> The Bretton Woods system had been lasted until 1971. By 1973,
the United States and other nations agreed to allow exchange rates
to float.
 
Thank you for your
listening!