ticipating countries would then be fixed to gold, therefore to each other. To successfully maintain this relationship some adjustments had to be made from time to time. For example, two countries A and B are doing international business together and A buys more of B's products than B buys of A's. Now B doesn't have enough of A's currency to pay for the excess products purchased. B now has what's called a balance of payment deficit. In order to correct for this deficit the following must occur; Actual gold must now be transferred to A from B. This transfer does two things. First, it reduces B's money supply (a fixed ratio must be maintain between the actual amount of gold, and the supply of money) hence lowering B's spending, aggregate income, and aggregate employment, ultimately reducing the demand for A's products. Second, A's money supply is now increased, raising A's spending, aggregate income, and aggregate employment, ultimately raising the demand for B's products. These two events happen simultaneously stabilizing the exchange rate back to its equilibrium.
             The Gold Standard served the world's economy very well until one unfortunate event happened. The Great (worldwide) Depression of the 1930's presented the world with a new set of problems to be dealt with, not only domestically, but throughout the entire world. The situation was bad, so bad that nations would do anything to dig themselves out of economic disaster. Nations now would break the biggest rule of the Gold Standard. Nations started to redefine the value of there currency to gold. This act of devaluation, as it was called, disrupted the entire world's perception of the relationship of each country's currencies to there own. Bartering systems were tried, however, eventually the Gold Standard failed.
             After The Depression international trading was crippled. A new method of international currency exchange had to be developed. Many ideas were listen...