Gold Exchange Standard

Gold Exchange Standard

Under a gold exchange standard a nation’s unit of money is convertible at an official rate into a unit of money of a pure gold standard nation—that is, a nation that maintains the convertibility of its unit of money into gold at an official rate.

A gold exchange standard became a popular monetary standard after World War I when many nations could not marshal the gold reserves to support a gold standard. In 1922 Britain proposed at a Genoa conference the adoption of an international monetary system organized with major nations holding reserves only in gold and the remaining nations holding reserves in foreign currencies. Governments (or central banks) would hold reserves to redeem domestic currencies at official rates as a means of guaranteeing currency value. Although the adoption of an international monetary system failed to materialize from the Genoa conference, many countries individually went on a gold exchange standard. Nations of the British Commonwealth often defined their currencies in terms of the British pound. Other nations defined their currencies in terms of the currencies of nations they were dependent upon politically. The gold exchange standard of the post–War World I era ended when the world’s major trading partners abandoned the gold standard early in the 1930s.

Critics of the gold exchange standard following World War I and World War II contend that it encouraged dominant nations to incur balance of payments deficits as a method of infusing the rest of the world with additional monetary reserves. Britain ran balance of payments deficits in the post–World War I era and the United States ran balance of payments deficits under the Bretton Woods system. A balance of payments deficit allows a nation to buy goods and investments from the rest of the world with payment in domestic currency never used to claim domestic goods. Historically, the gold exchange standard helped the world maintain the discipline of a gold standard when world supplies of gold were not keeping pace with the need for international monetary reserves.