Gold Standard, 1876-1913
• Countries set par value for their currency in terms of
gold
• This came to be known as the gold standard and
gained acceptance in Western Europe in the 1870s
• The US adopted the gold standard in 1879
• The “rules of the game” for the gold standard were
simple
– Example: US$ gold rate was $20.67/oz, the British
pound was pegged at £4.2474/oz
– US$/£ rate calculation is $20.67/£4.2472 = $4.8665/£

Because governments agreed to buy/sell gold on demand
with anyone at its own fixed parity rate, the value of each
currency in terms of gold, the exchange rates were
therefore fixed
1.Countries had to maintain adequate gold reserves to backits currency’s value in order for regime to function

2.The gold standard worked until the outbreak of WWI,
which interrupted trade flows and free movement of gold
thus forcing major nations to suspend operation of the
gold standard.