In the 19th century, the international economy had standardized the gold standard or the gold exchange system as a fixed exchange rate system for the international trade and investment. The system was in place till the outbreak of World War I. The system was adopted as gold, being a precious metal and a fixed asset, can avert the risks that are involved in exchange rate, like fluctuation of currencies. Moreover, it has a self-equilibrating property by which it can solve payment issues.

However, the gold standard system needed the nations of the world to abide by certain regulations. The primary rule was the supply of money in the countries (in form of bank notes) should be connected to the gold reserves held by the respective monetary authorities. In addition to it the monetary authorities should be willing to exchange cash for gold or gold for cash as per pre-set fixed rate. This was modus operandi of the nations like the Great Britain, France, Germany, and the United States in the economic sphere of the 19th century. These nations linked their currencies to gold. The result was a settled rate of exchange between the currencies.

The gold exchange rate helped in international trade and investment. There was no risk of loss due to exchange rate fluctuations. It also provided an automatic mechanism for maintaining a nation's balance of payments in equilibrium.

The gold exchange system started crashing with the outbreak of World War I. The British Government prohibited the convertibility of Bank of England notes to gold in 1914. This was because the government needed money to ready its army for the war. After the war was over, the country was a on a series of fiat currency regulations. The United States government also endorsed similar measures in the post war period. Germany was so devastated after the war that it could not produce gold Reichsmarks any more. It needed gold for reparation. The country moved to paper currency. However, later in the Weimar Republic, Rentenmark and gold-backed Reichsmark was introduced to gain control upon inflation. Although the countries return to gold standard after the World War I, but it didn't work any more. It crashed during the time of the Great Depression.

The main demerit of gold exchange system was that prosperity of a country's economy is dependent upon its supply of gold. The resourcefulness of its people and businesses does not matter much. Therefore, countries without any gold are at the rough end. Moreover, this system makes the countries obsessed about preserving their gold rather than developing the business climate by investing it.

After the World War II it was replaced by the Bretton Woods fixed exchange rate system. This system commenced in 1947 and existed till 1972. This system was basically derived from the old system actually. It was referred as gold exchange standard. In this the exchange rates of the currencies were settled, via the U.S. dollar, against gold.

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