The gold standard was the major exchange rate system before 1914. All currencies were priced in terms of a specified amount of gold, and an ounce of gold was worth a certain amount in each currency.
The system was backed up by a country's willingness to buy and sell gold at a determined price and its currency was supposed to be convertible into gold.
The problem with the system was that countries had limited control over their money supply as this depended on the amount of gold available.
The system was later abandoned as countries needed gold and printed extra money to fund the two world wars and especially after the private ownership of gold was outlawed in 1933.
In 1946 a new exchange rate mechanism was established under the Bretton Woods agreement. Under this fixed exchange rate, governments pegged their currencies to the US dollar which, in turn, was valued at $35 per ounce of gold in an effort to maintain stability.
Countries were allowed to change their exchange rates only if they experienced a "fundamental disequilibrium" in their balance of payments.
The system was abandoned in favour of a floating exchange rate system in 1971 when the US government refused to continue pegging the dollar in terms of gold. This after the country experienced a substantial depletion in its gold reserves due to a growing trade deficit.
The system also did not take into account the change in gold's actual value and the impact of inflation, which lowered the US dollar's purchasing power.
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