Exchange Rates: A Timeline from the Gold Standard to the Euro

1870s-1914: The Classical Gold Standard

Britain had been on gold since the early nineteenth century, and through the 1870s most other major economies followed, defining their currencies as fixed weights of gold. Because each currency had a gold value, exchange rates between them were effectively fixed within narrow bands set by the cost of shipping bullion. Adjustment of external imbalances worked through Hume’s price-specie-flow mechanism and through central bank interest rate policy, which attracted or repelled short-term capital. The system coincided with a long expansion of world trade and cross-border investment. Its cost was that domestic prices, wages, and employment absorbed the shocks the exchange rate was not permitted to absorb.

1918-1939: Interwar Breakdown

The war suspended convertibility nearly everywhere. During the reconstruction that followed, Gustav Cassel popularized purchasing power parity as a way of judging what a restored parity should be. Britain returned to gold in 1925 at the prewar parity, a decision Keynes attacked in The Economic Consequences of Mr. Churchill on the grounds that it overvalued sterling and would force painful wage deflation. The restored standard proved fragile: Britain abandoned gold in September 1931, others followed, and the 1930s brought competitive devaluations and exchange controls that fragmented the world economy just as tariffs were rising.

1944: Bretton Woods

In July 1944, delegates from forty-four nations met at Bretton Woods, New Hampshire, to design a postwar monetary order. The result was a system of adjustable pegs: member currencies were fixed to the U.S. dollar within narrow bands, and the dollar was convertible into gold at $35 per ounce. Parities could be changed in cases of “fundamental disequilibrium.” The conference created the International Monetary Fund to provide balance-of-payments lending and the International Bank for Reconstruction and Development. Keynes had proposed a supranational reserve unit called bancor; Harry Dexter White’s dollar-centered plan prevailed, reflecting American economic weight at the war’s end.

1960-1973: The Triffin Dilemma and the Nixon Shock

Robert Triffin argued in 1960 that the system contained a contradiction: the world needed a growing stock of dollars for reserves, but the accumulating overhang of foreign-held dollars would eventually exceed U.S. gold and destroy confidence in convertibility. Pressure built through the 1960s. On August 15, 1971, President Nixon suspended the dollar’s convertibility into gold, ending the arrangement’s anchor. The Smithsonian Agreement in December 1971 attempted a realignment with a devalued dollar and wider bands, but it did not hold, and by 1973 the major currencies were floating against one another — the regime that has broadly persisted since.

1979-2002: The ERM, Black Wednesday, and the Euro

Europe pursued monetary stability regionally. The European Monetary System, launched in 1979, linked member currencies through the Exchange Rate Mechanism. Strains proved severe: on 16 September 1992, known as Black Wednesday, sterling was withdrawn from the ERM after heavy market pressure defeated the Bank of England’s defense of its band. Monetary union proceeded regardless. The euro was introduced as an accounting currency in 1999, with participating national currencies locked at fixed conversion rates, and euro notes and coins entered circulation in 2002 — the most ambitious fixed-rate commitment attempted since Bretton Woods.