IBO-06

Q1a. Difference between gold standard and gold exchange

standard

The gold standard is a monetary system where a country's

currency or paper money has a value directly linked to gold. With
the gold standard, countries agreed to convert paper money into
a fixed amount of gold. A country that uses the gold standard sets
a fixed price for gold and buys and sells gold at that price. That
fixed price is used to determine the value of the currency.
Gold-exchange standard, monetary system under which a nations
currency may be converted into bills of exchange drawn on a
country whose currency is convertible into gold at a stable rate of
exchange. A nation on the gold-exchange standard is thus able to
keep its currency at parity with gold without having to maintain as
large a gold reserve as is required under the gold standard.
The following are the differences between the two standards.-
1.In Gold standard, Monetary unit is defined in terms of gold.
Other forms of money (e.g. token coins and paper money) are
also in circulation. But they are convertible into gold.
In Gold Exchange Standard, The domestic currency is made of
token coins and paper money. The domestic currency is not
convertible into gold.
2. In Gold Exchange Standard, There is no direct link between the
volume of domestic currency and the gold reserves.
In Gold standard, the volume of domestic currency is directly
linked to the gold reserves.
3. In Gold Exchange Standard, The gold market is regulated and
controlled by the government. There is no free import and export
of gold.
In Gold standard, There is free import and export of gold.
4. In Gold standard, Gold is unlimited legal tender for all types of
payments. All values are expressed in terms of gold.
In Gold Exchange Standard, Gold is used neither as a medium of
exchange nor as a measure of value. But prices of all goods and
services are indirectly determined by the price of gold.

Q1b The Bretton Woods system of monetary management

established the rules for commercial and financial relations
among the United States, Canada, Western Europe, Australia and
Japan in the mid-20th century. The Bretton Woods system was the
first example of a fully negotiated monetary order intended to
govern monetary relations among independent nation-states. The
chief features of the Bretton Woods system were an obligation for
each country to adopt a monetary policy that maintained the
exchange rate ( 1 percent) by tying its currency to gold and the
ability of the IMF to bridge temporary imbalances of payments.
Also, there was a need to address the lack of cooperation among
other countries and to prevent competitive devaluation of the
currencies as well.
Distinctive features of the system are as follows.-
The main features of this system were as follows:

In addition to gold, the US Dollar (USD) was to be given the

status of Universal Reserve Assets. This means that in
addtion to gold reserves, countries could issue domestic
money against USD reserves. The value of USD was fixes at
1 ounce of gold = USD 35.
The US Federal Reserve Bank provided an unconditional
guarantee to buy and sell unlimited quantity of gold at this
price. This was called the Gold Convertibility Clause.
No other country was required to provide for redemption of
its currency against gold nor were they required to fix an
official gold price.
 Each member country was required to fix Parity Value for its
currency against USD.
(The Process of fixing the value for a currency as a multiple
of another currency is called as pegging. The actual rate or
multiple is called Parity. The equality between gold, USD and
domestic currency was called Par Value Mechanism.)
The USD functioned as the universal vehicle currency. All
currencies were pegged to USD at fixed parity therefore their
cross relationship were also constant.
Effectively every currency was redeemable in terms of USD
and only USD was redeemable in terms of gold. Therefore
this system was also called as Gold Exchange Standard. The
USD therefor become the means of international settlement.
Variation in the exchange rate was permitted on either side
of parity in a range of (+/-) 1%.
The extreme points of the variation zone were called Support
Point or Intervention Points.
The system introduced the concept of Central Bank
intervention as a means of ensuring protection of parity
rates. (Intervention means proactive participation of a
Central Bank in the domestic market with the intention of
influencing exchange rate movement.)
The IMF provided a commitment to the member countries to
provide assistance to countries facing temporary Balance of
Payment deficits.
In case of structural imbalances in the Balance of Payments,
member countries could devalue their currencies in
consultation with the IMF. On account of this flexibility, the
system was also viewed as the Adjustable Peg System.
The concept of dual exchange rates was abolished.
All member countries accepted the supervisory authority of
the IMF in regards to the exchange rate management system
and the domestic foreign exchange market.
Q2a An adverse Balance of Payments is always a sign of
weakness in the economy.
Q6b Countertrade is a reciprocal form of international trade in
which goods or services are exchanged for other goods or
services, rather than for hard currency. International trade
conducted in this matter is more common in lesser-developed
countries with limited foreign exchange or credit facilities.
Countertrade provides a mechanism for countries with limited access to liquid
funds to exchange goods and services with other nations. Countertrade is part of
an overall import and export strategy that ensures a country with limited domestic
resources has access to needed items. Additionally, it provides the exporting
nation with an opportunity to offer goods and services in a larger international
market, promoting growth within the industry.