FIXED EXCHANGE RATES:THE CLASSICAL GOLD STANDARD

At one extreme is a system of fixed exchange rates, where governments specify the exact rate at which. dollars will be converted into pesos, yen, and other currencies. Historically, the most important fielded change- rate system was the gold standard, which was used off and on from 171 7 until 1933. in this system, each country defined the value of its currency
in terms of a fixed amount of gold thereby establishing fixed exchange rates among the countries on the gold standard.

The functioning of the standard can be seen easily in a simplified sample Suppose people everywhere insisted on being paid in bits of pure gold metal. Then buying a  Britain would merely require payment in gold at a price expressed in ounces of gold. By definition there would be no foreign-exchange-sate problem. Gold would be the common world.

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