Jeffry A. Frieden
An international monetary system of fixed nominal rates is at one and the same time very simple and very complex. Such a system is rudimentary in that all participants simply agree to a set of stable values of their currencies. The prime example of a fixed-rate system is the classical gold standard, which was a pillar of the world economy from about 1870 until 1914. That such a system is complex in many ways is indicated by the abject failure of continued attempts to reestablish the gold standard during the interwar years, and by the involved and extended negotiations over a limited fixed-rate system among the members of the European Community since 1973.
The purpose of this essay is to examine the dynamics of international monetary systems, specifically systems of fixed nominal exchange rates. The broad question is how such systems can arise and become stable over time. More specifically, I focus on explaining how and why the classical gold standard arose, and how and why it was as stable as it was before World War One. This explanation provides the tools to understand why subsequent attempts at establishing fixed-rate systems have met with less stability and success.
* Reprinted from Jack Snyder and Robert Jervis (eds), Coping with Complexity in the International System, Boulder, Colorado: Westview Press, 1992, pp. 137-162. Copyright © 1992 Westview Press. Reprinted by permission of Westview Press.