1. Lectures in Macroeconomics- Charles W. Upton More on the Gold Standard

2. 2 The Goldsmith Wilson comes along and wants to borrow 20 oz of gold. You give him a gold receipt. Assets 100 oz of gold 20 oz IOU from Wilson Liabilities 120 oz of gold accounts You have invented fractional banking!

3. More on the Gold Standard 3 International Effects All major countries use Gold. –You don’t care whether you get paid in Dollars, Pounds, Rubles, Marks, Francs, etc. It is all gold.

4. More on the Gold Standard 4 International Effects All major countries use Gold. –You don’t care whether you get paid in Dollars, Pounds, Rubles, Marks, Francs, etc. It is all gold. In fact very little gold moves. –Receipts are changed –Look at US after WWII.

5. More on the Gold Standard 5 World Price Movements

6. More on the Gold Standard 6 Two Scenarios No new gold discoveries –Global deflation A nation finds gold –Global inflation

7. More on the Gold Standard 7 Comes the day… A Bank Panic –Your customers lose confidence in you and demand their gold

8. More on the Gold Standard 8 Comes the day… A Bank Panic –Your customers lose confidence in you and demand their gold –There is a run –Your bank fails

9. More on the Gold Standard 9 Comes the day… A Bank Panic –Your customers lose confidence in you and demand their gold –There is a run –Your bank fails –Contagion occurs

10. More on the Gold Standard 10 Comes the day… A Bank Panic The money supply shrinks –Deflation –Collapse of economic activity

11. More on the Gold Standard 11 International Contagion Your bank fails, and people rush to get gold.

12. More on the Gold Standard 12 International Contagion Your bank fails, and people rush to get gold. They begin to get gold out of other banks.

13. More on the Gold Standard 13 International Contagion Your bank fails, and people rush to get gold. They begin to get gold out of other banks. And France and the UK and Germany and…

14. More on the Gold Standard 14 International Contagion Your bank fails, and people rush to get gold. They begin to get gold out of other banks. And France and the UK and Germany and… The deflation becomes worldwide.

15. More on the Gold Standard 15 Some History The Panic of 1893 –We run out of gold –JP Morgan borrows gold for US from Europe

16. More on the Gold Standard 16 Some History The Panic of 1893 –We run out of gold –JP Morgan borrows gold for US from Europe The Deflation of the 1890’s –Who won, who lost –The Free Silver Movement –William Jennings Bryan

17. More on the Gold Standard 17 Good News, Bad News A nation could not increase its monetary base willy-nilly.

18. More on the Gold Standard 18 Good News, Bad News A nation could not increase its monetary base willy-nilly. A nation could not control its money supply

19. More on the Gold Standard 19 Good News, Bad News A nation could not increase its monetary base willy-nilly. A nation could not control its money supply A run on its banks could not be offset

20. More on the Gold Standard 20 Offsetting A Run Suppose the Monetary Base is $1,000 and the M 2 Multiplier is 8. M 2 = $8,000. For some reason people want to hold more cash and the M 2 Multiplier falls to 4.

21. More on the Gold Standard 21 With a Gold Standard Under a gold standard, nothing the government can do. –M 2 will fall to $4,000 –A sharp decline in M 2 usually means a decline in GDP

22. More on the Gold Standard 22 With Fiat Money With fiat money, the government can offset decline. –M b is increased to $2,000 –M 2 remains at $8,000 –No money-induced decline in GDP

23. More on the Gold Standard 23 This Can Happen Here A run on another nation’s banks would lead to deflation here. Many examples of monetary panics crossing national boundaries while we were on the gold standard.

24. More on the Gold Standard 24 With Fiat Money Nothing stops the government from increasing the money supply any time it wants to. Clearly inflationary. –1789-1913: Prices essentially stable –1913-present: 14-fold increase in price level.

25. More on the Gold Standard 25 End ©2005 Charles W. Upton. All rights reserved