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 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.

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 161 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

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
  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.

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
  1970s 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 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.

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.