I cannot understand the Gold Standard and Bretton woods system of exchange rate. Could you please discuss the same?
Gold Standard System
Under the gold standard system, gold was taken as a common unit for measuring other country’s currency. Thus, the value of a currency was defined in terms of gold. The exchange rate in an open market was determined by its worth in terms of gold. It was fixed in lower limits and upper limits, under which it was allowed to fluctuate. So, the exchange rate became stable under gold standard. All the countries maintained stock of gold to exchange currency.
In simple words, the value of the currency in international markets was determined by the quantity of gold that could be purchased in exchange of one unit of that currency.
Bretton woods system
Bretton Woods System is one of the earlier system of exchange rate wherein, the monetary authorities of different countries (other than USA) maintained fixed exchange rate among their currencies and the USD (dollar) by intervening in the foreign exchange market. In case the value of a currency is lower as compared to the value of USD, then the monetary authority of that country will buy its own currency in exchange of USD in the foreign exchange market, thereby, pulling up the price of the currency. On the other hand, if the value of currency is high as compared to the value of USD, then the monetary authority will sell its own currency in exchange of USD. This would push down the value of country's currency.
Under the gold standard system, gold was taken as a common unit for measuring other country’s currency. Thus, the value of a currency was defined in terms of gold. The exchange rate in an open market was determined by its worth in terms of gold. It was fixed in lower limits and upper limits, under which it was allowed to fluctuate. So, the exchange rate became stable under gold standard. All the countries maintained stock of gold to exchange currency.
In simple words, the value of the currency in international markets was determined by the quantity of gold that could be purchased in exchange of one unit of that currency.
Bretton woods system
Bretton Woods System is one of the earlier system of exchange rate wherein, the monetary authorities of different countries (other than USA) maintained fixed exchange rate among their currencies and the USD (dollar) by intervening in the foreign exchange market. In case the value of a currency is lower as compared to the value of USD, then the monetary authority of that country will buy its own currency in exchange of USD in the foreign exchange market, thereby, pulling up the price of the currency. On the other hand, if the value of currency is high as compared to the value of USD, then the monetary authority will sell its own currency in exchange of USD. This would push down the value of country's currency.