Fixed Exchange Rates

The exchange rates between currencies were allowed to fluctuate in response to market demand. This meant that if country A were spending more abroad than it was taking in, the overabundance of its currency abroad might lead to a fall in its price relative to the currency of Country B. If this fall were large enough, it would be profitable for bankers and others to buy Currency A at its reduced exchange rate, convert it into gold at the fixed price in Country A, and then transport the gold to Country B where it could be exchanged back into Currency B at the fixed rate. The possibility of these gold movements served to limit the fluctuation in exchange rates, because the purchase of Currency A to convert it to gold might help reverse the original decline in Currency A's exchange rate. More fundamentally, the gold movements contributed to balance-of-payment adjustment because the los

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rate of return. Pre-1914, if Britain overissued sterling and if that sterling piled up in Paris, the French could be counted on to send it back and ask for gold in return. The process would continue until the British stopped producing excess credit. Under the gold-exchange standard, however, a new understanding developed. Central banks would not insist on gold in settling accounts but would be content to hold foreign currency instead: a paper claim on gold in a particular central bank. So France, retained excess sterling balances. Not having these funds in Paris, it kept them on deposit in London. No pain was suffered but in addition no adjustment was made. Although Britain had run a deficit, it had lost no gold. It was able to resist the deflationary measures that, under the traditional gold standard, had been unavoidable for deficit countries. Palyi (1973) has shown how this modified gold system worked. Assume, he began, that Britain incurred a 100 million pound deficit with France. Under the classical gold standard, Britain would have to ship 100 million pounds worth of gold to France. Britain lost gold. France gained it; the joint monetary base of the two countries remained the same. Now, by substituting a deb
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Some common words found in the essay are:
Currency A's, France Britain, Western World, Paris French, ERM Germany, Federal Reserve, America France, World War, Europe D-mark, Assume Britain, gold standard, exchange rates, fixed exchange, economic stability, fixed exchange rates, gold france, kindleberger 1973, international monetary, bloomfield 1959, exchange rate, flexible exchange rates, federal reserve, international gold standard,
Approximate Word count = 1442
Approximate Pages = 6 (250 words per page)

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