Transcript The Gold Standard

The Gold Standard
By Jonathan Seals
How the Gold Standard Came About
 Gold coins have been used as a medium of exchange, unit of
account, and store of value since ancient times; therefore, making
gold an ideal standard unit of measure.
 The gold standard as a form of practice was first seen in 1819 when
Britain first implemented it by repealing their ban on exporting gold
from the country.
 Since Britain was the world’s economic leader of that time, other
nations copied the practice in hopes of gaining their success.
 The purpose of the gold standard was to reform the international
monetary system on the basis of fixed exchange rates.
Bimetallic System
 Currency is based on both gold and silver
 Gold and silver are minted into specific denominations of currency
 The mint parity was set at 16:1 although the prices of either metal
could fluctuate
 The benefit of two metals was that it kept the stability of the currency
if one’s price suddenly changed
 The U.S. moved from the Bimetallic System to the Gold Exchange
System temporarily until it moved onto the Gold System
World War & the Gold Standard
 Before WWI Britain went off of the gold standard before WWII
began and used most of its gold to finance the war.
 During WWI the U.S. and Britain suspended gold exchange for
currency in order to fund the war.
 After WWI most major governments had returned to the gold
standard by 1922 under a new agreement.
Positives of the Gold Standard
 Stability - The gold standard sets automatic limits on national price
levels.
 Central banks obligated to fix the money price of gold, which restricts
the money supply from growing faster than the real money demand.
 Symmetry - Under the gold standard, when a country’s money
supply diminishes, foreign countries gain reserves and expand their
money supply.
 The total world money supply increases as the interest rates decrease.
 Certainty - The gold standard limits the governments ability to
create more currency, helping to reduce inflation-risk. This instills
confidence in the domestic currency.
Negatives of the Gold Standard
 Recession-Risk - During a recession, the gold standard system
constrains the ability for a country to readily expand their money
supply.
 Instability - Price levels only remain stable if the relative price of
gold and other goods remain stable.
 Market Dominance - Countries with large gold production abilities
could affect market conditions in other countries.
External Balance & the Role of the Central Bank
Under the Gold Standard
 The responsibility of the central bank was to preserve the uniformity
between currency and gold by maintaining an adequate stock of
gold.
 The gold standard created an external balance, meaning, as a
country experienced an outflow of assets, foreign countries
experienced an inflow because gold was sold at a fixed rate.
 Domestic - as money supply went down the interest rate went up
 Foreign - money supply went up as the interest rate went down
 The gold standard process helps establish this equilibrium in the
foreign exchange market.
A Brief Look at the Gold Standard in the U.S.
 The United States started out on the Bimetallic standard in 1873 when it
backed the dollar with gold and silver.
 The gold standard had a negative impact on the great depression.
 The U.S. ended its use of the gold standard in 1933 when president
Roosevelt enacted the gold standard act, outlawing private ownership of
gold, except for jewelry.
 In 1946, international governments signed the Bretton Woods agreement to
sell their gold to the U.S. for a fixed $35 an ounce.
 In 1971, President Nixon ended the Bretton Woods agreement in order to
fight the recession of the 1970’s and the high spending from the Vietnam
war.
International Importance of Bretton Woods
 The Bretton Woods agreement set up a system where foreign
countries could hold dollars or gold as reserve, and exchange their
dollars for gold from the U.S. at $35 an ounce.
 The system faced trouble in the late 1960’s when spending
increased under Johnson for the Vietnam war.
 The official price of $35 an ounce was abandoned in order to raise
funds.
 In 1973 the idea of a gold backed currency was dropped altogether
even though it was intended to be temporary, became permanent
and is our current system.
Where Did the Gold Go?
 Many countries sold their gold after coming off of the Gold Standard
system.
 Some countries still hold large quantities of gold to help instill
confidence in their own currencies
 Gold remains a promise of stability in current times where rampant
inflation are a concern and fear of both governments and individuals.