Exchange Rates in a Commodity Standard System - dummies

Exchange Rates in a Commodity Standard System

By Ayse Evrensel

A metallic standard in more than one country implies a fixed exchange rate. For example, if the international monetary system is a gold standard, each country defines the price of its currency in gold or silver, which is called parity.

Suppose that the gold parity in the U.S. and the U.K. is $35 and £17 for an ounce of gold, respectively. This leads to the dollar–pound exchange rate of $2.06 per British pound ($35 = £17).

There are variations of metallic standards. For example, the Bretton Woods system introduced in 1944 was also called the reserve currency standard or dollar exchange standard, in which the dollar was pegged to the gold and all other currencies were pegged to the dollar. This particular international monetary system also leads to fixed exchange rates.

For most of the Bretton Woods years (1944–1973), the gold parity in the U.S. was $35 for an ounce of gold. In terms of other currencies being pegged to the dollar, suppose that the pound–dollar and the German mark–dollar exchange rates were £0.49 and DM1.7 per dollar, respectively. Then the pound–German mark exchange rate would be £0.29 per German mark (£0.49 = DM1.7).

The metallic standard was suspended during wars. In these times, no metallic standard existed for anchoring exchange rates.