Presentation on theme: "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."— Presentation transcript:
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 worlds 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 ones 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 countrys 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 1970s 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 1960s 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.