Presented by: Ha Tran i34042

  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 The Classical Gold standard

  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 By 1973, the United States and other nations agreed to allow exchange rates to float. Bretton Woods system

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