1
$\begingroup$

I recently read an article where it said that during the gold standard, right before world war 1, 1 GBP went from equaling \$4.87 to soaring up to \$6.75 . My understanding always was that Forex rates couldn't fluctuate during the gold standard since the both currencies were tied to gold. So my main question is: could Foreign exchange rates fluctuate during the gold standard? And what usually would cause these foreign rates to fluctuate relative to one another under a gold-standard system??

Here is the document: https://fraser.stlouisfed.org/files/docs/meltzer/craint89.pdf

It says "Late in July, as foreigners began liquidating their holdings of U.S securities and as U.S. debtors scrambled to meet their obligations to pay in sterling, the dollar-pound exchange rate soared as high as \$6.75, far above the parity of \$4.8665"

$\endgroup$

1 Answer 1

1
$\begingroup$

Under gold standard any change to the exchange rate can only happen when the conditions under the which the currency can be converted to gold change. For example, if central bank would change the amount of gold per unit of currency.

However, UK abandoned gold standard in 1914, so it wasn't on gold standard shortly before WWI.

$\endgroup$
3
  • $\begingroup$ Thank you for taking the time to answer William. This happened right before world war 1. So what was happening in this scenario? How did the rate of pound to dollar change so quickly if they were under the gold standard? $\endgroup$
    – Man Dem
    Jul 30, 2023 at 22:17
  • $\begingroup$ @ManDem oh sorry, I misread your question I though you are talking about WWII, however my answer still applies UK abandoned gold standard in 1914 just before WWI started. Gold standard was system built for good time UK always ditched in during major conflicts or periods of struggle $\endgroup$
    – WilliamT
    Jul 30, 2023 at 22:19
  • $\begingroup$ Agreed , so the FX rate moves in anticipation that the gold standard will soon be dropped (or impeded) by the central bank. $\endgroup$
    – dm63
    Aug 30, 2023 at 10:41

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.