The gold standard is a monetary standard that pegs currencies to gold and guarantees convertibility to gold. It was thought that the gold standard contained an automatic mechanism that contributed to de simultaneous achievement of balance-of- payments equilibrium by all countries. The gold standard broke down during the 1930’s as countries engaged in competitive devaluations.
The Bretton Woods system of fixed exchange rates was established in 1944. The U.S. dollar was the central currency of this system; the value of every other currency was pegged to its value. Significant exchange rate devaluations were allowed only with the permission of the IMF. The role of the IMF was to maintain order in the international monetary system to avoid a repetition of the competitive devaluations of the 1930s and to control price inflation by imposing monetary discipline on countries.
The fixed exchange rate system collapsed in 1937, primarily due to speculative pressure on the dollar following a rise in U.S inflation and a growing U.S. balance-of-trade deficit.
Since 1973 the world has operated with a floating exchange rate regime, and exchange rates have become more volatile and far less predictable. Volatile exchange rate movements have helped reopen the debate over the merits of fixed and floating systems
The case for a floating exchange rate regime claims that such a system gives countries autonomy regarding their monetary policy and that floating exchange rates facilitate smooth adjustment of trade imbalances.
The case for a Fixed exchange rate regime claims that the need to maintain a fixed exchange rate imposes monetary discipline on a country; floating exchange rate regimes are vulnerable to speculative pressure, the uncertainty that accompanies floating exchanges rates dampens the growth of international trade and investment, and far from correcting trade imbalances,