Gold-foreign currency system

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Foreign exchange currency system - it involves the bonding of a country's currency with foreign currencies exchanged for gold.

Assumptions of the gold foreign exchange system

ad. b) With the currency gold exchange system, there is a serious problem of instability associated with the willingness of the participating countries to hold gold as a reserve, and the solvency of a country using the gold currency system can not satisfy all claims.

ad. c) Typically, the convertibility of a national currency into gold can be used when the central banks need it. In addition, the convertibility of the national currency into the reserve currency is subject to different restrictions. For example, reserve currency can be used only for settlement of foreign transactions (non-resident convertibility) Currency system of gold in practice

The task of the International Monetary Fund (IMF), created in 1945, was to solve the problem of balance of payments and stabilize currencies based on the dollar (gold dollar standard). Central banks, thanks to the convertibility of the dollar to gold, could receive gold for their dollars. The US currency's parity against gold was maintained at pre-war levels ($ 35 per ounce, 31.1g), set by United States President Roosevelt in 1934. IMF members have obtained gold convertibility through the established dollar parity. At the same time they pledged to keep the exchange rate of national currencies within the limits of not exceeding 1% of their parity. In case of problems with meeting this condition, the State could count on the assistance of the Fund in the form of a loan. IMF funding for this purpose came from contributions from Member States in national currencies - 75% and dollars and gold - 25%. The amount of payment depended on the level of national income and the state's share in world trade.

The end of dollar exchangeability was associated with US external debt 3 times the gold reserve. Such situation occurred in the late sixties, which resulted in an increase in the free market price of gold up to $ 40 per ounce. In this situation, the central banks of the IMF member states could exchange their foreign exchange reserves for gold at $ 35 per ounce and sell them for $ 40. Taking advantage of this situation France exchanged all its foreign exchange reserves for gold in 1967. Since 1968, central banks maintained a constant gold price at $ 35 per ounce, but did not sell gold to commercial banks. And the price of gold in the free market was driven by demand and supply. In this situation, in 1971, the United States suspended the convertibility of the dollar to gold and devalued it by 10%. Another 10% devaluation in 1973 caused numerous perturbations on the international currency market. Thus, President Nixon's decisions ended the existence of a currency gold exchange system.

The situation described above is one of the major problems in the application of the gold-foreign exchange system known as the Triffin dilemma. Bibliography

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