The Gold Standard

1. The Gold Standard By Jonathan Seals

2. 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.

3. 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

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.