INTRODUCTION Over the past 200+ years, the world has gone through major changes its global

exchange rate
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environment. Starting with the gold standard regime of the latter part of the 19 century to todays somewhat mixed system we can identify there 3 distinct periods: Gold Standard: 1816 - 1914 Bretton Woods: 1945 - 1973 Flexible exchange rate: 1973 the present. Goldstandard A gold standard is a monetary system under which pure gold is the standard of value for the currency of a country. In other words, a country's standard unit of exchange a pound, a dollar, or a franc, for instanceis pegged to or defined in terms of a set price for gold. Under such a system, gold is central to the monetary system of the country as the medium of exchange and the store of value. A gold standard has eight distinguishing characteristics:
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The value of the principal unit of currency of a country on a gold standard is measured in relation to a fixed and predetermined quantity of gold. Paper money and gold can be equally exchanged for each other at a legal predetermined rate. This is known as inter-convertibility. Metal coins (other than gold) can be used only as token money. That is, the nominal or face value of the coin must be greater than the intrinsic value of the metal in the coin. Monetary authorities will accept gold bullion on demand and coin it or convert the domestic currency into gold. A nominal service fee (or seigniorage) is charged to cover minting costs while providing the government with revenue. The monetary authorities will also exchange paper currency and nongold coins for gold on demand. This is referred to as convertibility. International reserves are mostly held in gold. Individuals in the country are free to hold any amount of gold in bullion or coin. Individuals are free to import and export gold in any amount. The creation of paper money is linked to the amount of gold reserves held by the central banking system.

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Britton wood era(1945-1973) The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states 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. Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944. Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments. On August 15, 1971, the United States unilaterally terminated convertibility of the dollar to gold. This action, referred to as the Nixon shock, created the situation in which the United States dollar became the sole backing of currencies and a reserve currency for the member states. Flexible(floating) exchange rate system(1973-presnt) A floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency. There are economists who think that, in most circumstances, floating exchange rates are preferable to fixed exchange rates. As floating exchange rates automatically adjust, they enable a country to dampen the impact of shocks and foreign business cycles, and to preempt the possibility of having a balance of payments crisis. Pros of gold standard It was an efficient system of hedging against inflation.because aggregate amount of money to be supplied is trial up in the amount of Gold the country has in its reserve.This prevents excessive money supply. The system ensures stable exchange rate because it avoids deliberate devaluation and revaluation of the currency The system ensued an automatic adjustment in the balance of payments because the International settlement and fund flows were tied up in the amount of gold in resrve in each country The system is an efficient method of transferring values.because there is a single and common not of value among countries. i.e the gold.

Cons of gold standard

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The money supply in a country in Gold standard is affected by factors affecting the supply of Gold in that country.Thus the Government or monetary authority can not pursue any type of monetary policy.No room for monetary policy There is a danger of deflation due to the tendecy of fixing the supply of money to the amount of Gold in reserve.Lack of expansion in money supply may affect productivity and reduce output and thus affect the gross of the economy is general Countries on Gold standard have no authority as far as monetary policy matters are concerned.Monetary issues are governed by the monetary system There is no follow up system ensuring that all countries on Gold standard stick to the rule.having their money supply tied up in the amount of Gold they have in reserve.

Pros of Britton wood System

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It economies on Gold by allowing the foreign reserves to be in USD. Effecting payment through USD is easier than the use of gold Exchange rates stability under the wood system,reduce currency risk and international monetary becomes stable.The stability of USD meant a stable international monetary system

Cons of Britton wood system The Britton wood system depended entirely on the stability of the USD in the 1960s the USA government adopted an expansionary monetary policy.Inattemp to reduce un employment and increase the supply of USD.This destabilized the system Pros of flexible(floating)exchange rate system
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All countries under the system have control over the monetary policy they can increase or decrease the money supply according to circumstances prevailing. The true value of each currency i.e the exchange rate can be established through thev forces of demand and supply i.e.It is possible to attend an equilibrium exchange rate for the currency A flexible exchange rate system cam maintain the balance of payment equilibrium by bringing about a balance between inputs and exports

Cons of flexible(floating)exchange rate system

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Currency risk increases due to variability of the exchange rates currencies.This is a special concern of multinational companies. The Central bank may misuse their power as far as the money supply is concerned this may lead to excessive money supply and increase in inflation rate