Gold Exchange Standard

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)

A system whereby a country keeps its money on a gold basis by keeping it at a substantial parity with the money of a country maintaining a full gold standard.  Countries having a gold exchange standard rely upon some form of token money for circulation purposes.  Through operations in the foreign exchange market, the domestic money is maintained at a value between the normal gold points.  If the money that is used as the standard goes up to the gold export point in terms of the domestic money, the gold exchange standard country (through the maintenance of balances in the country whose money serves as the standard) sells bills on such country until the exchange rate is pushed below the export point.  Funds obtained from the sale of exchange are then sequestered until bills on the standard country are offered for it when the exchange rate drops to what would in turn be the gold import point.  In thes way the domestic money is kept at a normal gold value in the international market.  The great advantage of the gold exchange standard is its economy, since no large investment in gold is necessary.

Since currencies of member nations of the INTERNATIONAL MONETARY FUND (IMF) fixed the pars and band of permitted market fluctuation above and below the pars not directly in terms of gold but in terms of the "key reserve currency" – the U.S. gold dollar with full international convertibility of dollars into gold on official accounts - the IMF currency system was a gold exchange standard until the "gold window" was shut down by the Nixon administration in August, 1971.

Back to Information