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gold standard

Page history last edited by Brian D Butler 11 years, 10 months ago



The Gold Standard

  • the gold standard lasted for 60+ years
  • countries fixed their currency exchange rate with gold
  • central banks held gold reserves
  • if a country imported more than exported, then there would be more of your currency in the market than what foreigners wanted to hold.  The exporter wouldn't want your currency, so he would sell it to a bank, who would sell it to a central bank, who also wouldn't want it...so they would come back to your country and ask to exchange it for gold.  Your country would need to give gold, reducing your supply of gold.  Then, according to the rules, your country would also have to reduce its money supply so that the ratio of money to gold was maintained.   With less money in the system, prices would fall (see discussion of inflation).  Once this reverse-inflation occurred, and prices fell, then exports would increase, and imports would decrease. This would take the country back to a trade balance. 
  • The trouble is that this process takes a very long time, and is very painful to the economy. 



Should we return to the gold standard?:






A Brief History:


The gold standard was the way in which the international monetary system maintained parities until the 1930’s (with a notable interruption during WWI and the years that followed it). Later, at the end of WWII, more than 40 countries signed on to the Bretton Woods agreement, which established a fixed exchange rate system between most of the major world economies.


The accord stipulated that the undersigned fixed the value of their currencies in relation to the US Dollar (USD), and that the dollar would be convertible to gold at the fixed price of U$35/ozt. The Bretton Woods lasted until 1971, when President Richard Nixon suspended the USD convertibility to gold and unilaterally changed the USD parity with other international currencies. From 1973 to 1999, the USD, the Japanese Yen and the European currencies operated a “dirty float” exchange system, that is to say the currencies were allowed to move in accordance with market forces but the central bank of each country would intervene to move the exchange rate in one or another direction. In general, exchange rates between the European currencies stayed inside a tight band from 1973. For example the German Mark and the French Franc freely floated with respect to the USD, though they stayed within a tight band between each other most of the time by virtue of an agreement known as the European Monetary System.


In January 1999, eleven countries adopted the same currency, the Euro, issued and administered by the European Central Bank (ECB), which floats against the dollar in the same way as the various European currencies did up to 1999. Today, thirteen countries have adopted the Euro, with two more due to join in 2008. After Bretton Woods fell apart, the USD remained the focus of the international monetary system, and evidence to support that abounds. In 2000, more than 70% of international reserves were in USD. However, that proportion has fallen every year, reaching a bit under 65% in 2007. It is the Euro which has gained from the reduction of dollar holdings: Euro assets have gone from a little over 18% of world reserves to nearly 26% in 2007. The British Pound has also gained, to 4.7% of total reserves in 2007.



Gold vs. Silver:


Did you know.....that before 1873 the U.S. dollar was defined as consisting of either 22.5 grains of gold or 371 grains of silver.  This set the legal price of silver in terms of gold at roughly 16:1 and put the country on a gold/silver bimetallic  standard. Since both metals had other uses than just coinage, whenever the ratio got out of whack, rational people would buy the cheaper metal and take it to the mint to coin.  That provided a natural stabilizing arbitrage. With the 1873 Coinage Act, however, the silver dollar was omitted, effectively shifting the country  from a bimetallic to a gold standard.  Other countries soon followed this shift and as tons of silver were unloaded, the market silver price of gold rose from 16:1 to 40:1.


interesting fact:  The Wizard of Oz movie was actually about the debate between Gold & Silver:   see story here:  http://bigpicture.typepad.com/comments/2006/01/gold_the_wizard.html



read more:



Following the Yellow Brick Road: How the United States Adopted the Gold Standard


Federal Reserve Bank of Chicago

Economic Perspectives, 4th Quarter, 2002






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