What is Gold Standard? The Gold Standard is a pecuniary system in which the criterion unit of currency is a fixed weight of gold or freely exchangeable into gold at a fixed monetary value. Under the Gold Standard system, paper money which circulates as a medium of exchange is exchangeable into gold on demand. The exchange rate between paper or fiat money and gold is fixed. Same thing happened to the rates of exchange between national currencies, it is fixed.
The Gold Standard can be divided into two types: full Gold Standard and “ partial ” Gold Standard. A 100 per centum modesty Gold Standard or full Gold Standard occurs when all go arounding money can be represented by the appropriate sum of gold. Whilst in “ partial ” Gold Standard, go arounding notes can be redeemed for their face value ; it can be either higher than its existent value or lower.
Why gold being selected as a modesty for most states and even for today? Many states hold the gold militias in important measure in order to defence their currency and put a hedge against the US dollar. Some more, the failing of the US dollar can be offset by beef uping the gold monetary values. Yet, compared to other cherished metals or major rivals such as US dollar and existent estate, none of them has the stableness as the gold every bit good as its rareness and lastingness. Gold is besides used as a shop of value get downing from the early pecuniary system since it is high value plenty. It is high in public-service corporation and denseness, it is able to defy to corrosion, it is unvarying, and it is divisible easy. As we know, banking began by lodging the gold into a bank and it could be transferred from one bank to another bank. Until today, gold remains to be the chief fiscal plus for most of the cardinal Bankss.
By looking back at the past, before 2000 BC, the first metal that human being used as a currency in trade was silver. Harmonizing to the history, we know that gold has been used as a mean of payment since long clip ago. After 1500 old ages, the first mintage of pure gold was introduced. The acceptance of Gold Standard was preceded after that. Yet, the decree pecuniary system came and took over the Gold Standard system during the eruption of World War I. This happened for most of the states are due to the inordinate public debt and the authorities is unable to refund all the debt in gold or Ag.
IMPORTANCE OF STUDY / RESEARCH IN GOLD STANDARD
As a banking and finance pupil, we have to analyze and understand any history that respect to the field, included the subject of our assignment this clip – Gold Standard. This is because people live in present and they have to be after for and worry about the hereafter. History is the survey of yesteryear. It gives the information of the yesteryear in order to expect what is yet to come. Understanding history is of import to develop the linkages to foretell the hereafter. Yet, history besides provides us abundant of information about how the Gold Standard was formed and how it operated. Understanding the operations of the Gold Standard is hard presently since it was collapsed and we can non be exposed ourselves to it. The current informations that we have is relied on what happened into the past. By utilizing the historical stuffs, we can do our ain analysis on the Gold Standard and understand its failings and jobs.
Besides, the survey of the Gold Standard can assist us to understand the alterations of the pecuniary system and how the fiscal universe affects the planetary economic systems. From the historical information, we know when the acceptance of the Gold Standard was and when the prostration of the Gold Standard was. Yet, we besides know that the pecuniary system had been changed over clip to clip and which system was being created in order to take over the original system. For case, Gold Standard was took over by Bretton Woods System and followed by Contemporary Monetary System. There is ever a ground at that place for the alterations made. This is because of the find of the deficits of the system. Once the lacks being located, the new system would be established. If there is still do non hold any actions taken, it will impact the economic systems of the universe since finance can non be separated with the economic system.
In add-on, as a fiscal pupil, we have to understand about the differences between fiat money and Gold Standard. From the undertaking we done, we know that fiat money is money that no have intrinsic value and can non be redeemed for any trade good. The paper currencies and coins that are available in markets presents are considered as fiat money and the strength of the economic system of the publishing state is the determiner used to find the value of fiat money. Largely, rising prices will follow with the tremendous issue of fiat money. Whilst, The Gold Standard is a pecuniary system in which the criterion unit of currency is a fixed weight of gold or freely exchangeable into gold at a fixed monetary value. Under the Gold Standard system, paper money which circulates as a medium of exchange is exchangeable into gold on demand. The exchange rate between paper or fiat money and gold is fixed.
Part II: THE GOLD STANTARD
2.1.1 History of Gold Standard
The first state that officially adopted the Gold Standard system is England ( besides called as Great Britain ) in 1821. The list below is the day of the months of acceptance of the Gold Standard system:
Latin Monetary Union
Scandinavia ( Monetary Union )
During that century, there was a dramatic addition in planetary trade and production which brought tremendous finds of gold. The finds aided the Gold Standard remain integral good on the undermentioned century. The outgrowth of the International Gold Standard is on 1871 since the Germany besides started to utilize the system. By 1900, most of the developed states were linked to the Gold Standard system, but surprise that the United States was the last state to come in. This is because there was the present of a strong Ag anteroom that forbidden gold from being the exclusive pecuniary criterion with the U.S. throughout the nineteenth century.
The Gold Standard was at its pinnacle from 1871 boulder clay 1914. During the period, there were a close perfect ideal political contexts existed in the universe. Governments tried to corporate nicely in order to do the Gold Standard system work, but the system was collapsed during the continuance of the Great War in 1914. In 1925, it was reestablished. But due to the comparative scarceness of gold, many states adopted a gold-exchange criterion, supplementing their gold militias with currencies exchangeable into gold at a stable rate of exchange. Unfortunately, the gold-exchange criterion was ended during the Great Depression. The United States had set a minimal dollar monetary value for gold in order to assistance for the Restoration of international gold criterion after World War II. In 1971, dwindling gold militias and unfavourable balance of payments led the U.S. to abandon the Gold Standard system.
2.1.2 Timelines of Gold Standard
The Kingdom of Great Britain went on to an unofficial Gold Standard.
Gold was partly displacing Ag as a criterion.
The Gold Standard was first out into operation in Great Britain.
The Coinage Act of the United States Congress came into operation on 1st April and constituted the gold one-dollar piece as the exclusive unit of value.
Gold Standard Act was established on 14 March 1900 and gold was the lone criterion for delivering paper money.
The forsaking of the Gold Standard by Russia.
The return of the Gold Standard.
The forsaking of the Gold Standard by the United States.
2.1.3 Timelines of Fiat Money
There are three types of currency harmonizing to American History:
Certificates based on coin or bullion
( Fiat money is one type of currencies that being used during the clip. )
France was undergoing economic downswing and due to miss of money, fiat money being used.
There was a paper currency that printed upon one side in green has been created with a promise to pay – Greenbacks.
An statement in favour of honorable money and redeemable currency.
Paper-based planetary economic system has been collapsed.
Constitution of Fed.
Fiat money became the United States legal stamp.
The clemency of the decree money system has led to the greatest debt bubble in universe history.
Under the decree money system, money as debt.
2.1.4 History of Switching Between Fiat Money and Gold Standard in U.S.
Equally stated as below, there were a batch of switching between a fiat money and gilded criterion had been made by the United States over the past 200 old ages which in order to avoid hyper-inflation. Hyperinflation occurs when the assurance in money had gone and it leads to no value in the money. Equally mentioned as earlier, the gilded criterion was over due to the ground of the authorities was unable to refund for the excessive of public debt in gold or Ag that its states owe.
Fixed Gold Standard: 76 old ages
It was issued by American settlers for the Continent Congress in order to finance the Revolutionary War.
It was produced by the United States Federal Government.
It was authorized by the Act of March 3, 1849.
Floating Fiat Currency: 7 old ages
The fiat money of the United States above is Greenbacks.
It was created to pay for the tremendous cost of the Civil War.
It was the debt of the U.S. authorities which could be redeemable in gold at future without any specified day of the month.
It was circulated along with the Gold certifications.
Fixed Gold Standard: 34 old ages
It was ended due to the fiscal demands of World War I.
Floating Fiat Currency: 10 old ages
It was created to pay for World War I states.
There was insufficient of gold to back up the paper currency.
Fixed Gold Standard: 5 old ages
It was ended due to most of the states tried to lodge their lbs and dollars for gold when the depression occurs.
Floating Fiat Currency: 14 old ages
It was ended due to the eruption of World War II.
Fixed Gold Standard: 26 old ages
On 24 June 1968, a announcement that Federal Reserve Silver Certificates could non be redeemed in Ag was issued by President Johnson.
Floating Fiat Currency: 5 months
It was established by President Nixon on August 1971.
Fixed Dollar Standard: 2 old ages
It was passed by the Smithsonian Agreement.
Fiat Currency: 37 old ages
It was established by the Basel Accord.
2.1.5 Development of International Monetary Systems
International Monetary System had been undergoing several phases of development which are stated as below:
Bimetallism ( before 1875 )
A “ dual criterion ” in the sense that both gold and Ag were used as international agencies of payment.
Some states used the gilded criterion ; some used the silver criterion ; and some used both.
Both gold and Ag were used as money and the gold or Ag contents were the determiners used to find the exchange rates among currencies.
Classical Gold Standard ( 1875-1914 )
Most states agreed that
-Gold alone was assured of unrestricted mintage.
-There would be bipartisan convertibility between gold and national currencies at a fixed ratio.
-Gold could be freely exported or imported.
Two states relative gold contents were be the determiners used to find the exchange rate between two states ‘ currency.
Highly stable exchange rates under the classical gold criterion provided an environment that was contributing to international trade and investing.
Misalignment of exchange rates and international instabilities of payment were automatically corrected by the price-specie-flow mechanism.
Interwar Period ( 1915-1944 )
Exchange rates fluctuated as states widely used “ predatory ” depreciations of their currencies as a agency of deriving advantage in the universe export market.
Attempts were made to reconstruct the gilded criterion, but participants lacked the political will to “ follow the regulations of the game ” .
The consequence for international trade and investing was deeply damaging.
Bretton Woods System ( 1945-1971 )
Named for a 1944 meeting of 44 states at New Hampshire.
The intent was to plan a postwar international pecuniary system.
The end was exchange rate stableness without the gilded criterion.
The consequence was the creative activity of the IMF and the World Bank.
The system was a dollar-based gold exchange criterion.
Flexible Exchange Rate System ( 1971-today )
The system was declared acceptable to the International Monetary Fund ( IMF ) members.
Cardinal Bankss were allowed to step in in the exchange rate markets.
Gold was abandoned as an international modesty plus.
Managed Float System ( 1973-today )
2.2 INTERNATIONAL GOLD STANDARD
2.2.1 Chronology of Gold and International Monetary System
Maestro of the Mint, Sir Isaac Newton gave guinea statutory rating of 21 shillings.
Commence of the United Kingdom Gold Standard.
Happening of Napoleonic Wars.
Bank of England abandoned gilded payments.
Constitution of UK Coinage Act.
Bank of England obliged to purchase gold.
Except of China, most of the state abandoned Bimetallic Standard and switched to Gold Standard.
The United States system of modesty Bankss was established by Federal Reserve Act.
At least 40 % of notes were gold-backed.
U.S. prohibited gilded exports.
UK went off Gold Standard.
Constitution of London Gold Fixing.
Tax return of Gold Standard in the United Kingdom.
Constitution of UK Gold Standard Act.
The United Kingdom abandoned Gold Standard.
Suspend of the United States convertibility.
Prohibition of exports, minutess, and keeping of gold.
Presidential Proclamation of doing dollar convertible to gold once more.
Constitution of Tripartite Agreement ( Countries involved: U.S. , UK, and France )
Close of London gold market due to the eruption of war.
Constitution of Gold Exchange Standard as a consequence of Bretton Woods Conference.
International Monetary Fund ( IMF ) Articles of Agreement became effectual.
Reopen of London gold market after World War II.
Constitution of Gold Pool ( Members: Belgium, France, Germany, Italy, Netherlands, Switzerland, UK and Federal Reserve Bank of New York )
Buying of gold increased due to the devaluation of sterling.
Close of London market.
Abolition of Gold Pool and constitution of 2-tier market.
Constitution of Particular Drawing Right ( SDR ) .
Suspend of U.S. convertibility to gold.
Constitution of Smithsonian Agreement.
Devaluation of the United States dollar.
Suspend of covering in foreign exchange markets by most of the cardinal Bankss.
Adoption of drifting exchange rate government.
Abandonment of 2-tier gold market.
Abolition of limitation on citizen purchasing, selling or having gold by U.S.
First U.S. gold auction on January.
Constitution of understanding between G10 states and Switzerland on no effort to nail down the gilded monetary value.
First gold auction by IMF on June.
Disappear of formal function of gold in International Monetary System.
Constitution of European Monetary System.
Final U.S. gold auction on November.
Last 45 IMF gold auctions on May.
The United States Gold Commission reported to Congress.
Constitution of Plaza Agreement on currencies.
Constitution of Louvre Accord on currencies.
Sign of pact on European Union at Maastricht.
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain joined Economic and Monetary Union ( EMU ) .
Began of EMU.
Announcement of Central Bank Gold Agreement ( CBGA ) .
Announcement of Second Central Bank Gold Agreement.
2.2.2 Gold Standard Went International
*The image above the gold and Ag coins that available around the universe during nineteenth century.
From the chronology above, we know that most of the states ( except China ) had abandoned their Ag or bimetallistic criterion and went for a full gold criterion between the old ages of 1871 to 1900. There is ever a ground. German asked for “ war insurance ” to be paid in gold by France right after the Franco-German War. German used this gold to finance a new gold criterion in their place state. This had lead to an addition in the demand of gold and there was unload of dozenss of Ag on the adjacent states. Due to the fright towards Ag rising prices, the adjacent states decided to follow German.
The list below is the day of the month of first gilded criterion:
International Gold Standard existed when the undermentioned status being fulfilled:
Gold entirely is assured of unrestricted mintage.
There were two agencies of convertibility between gold and national currencies at a fixed ratio.
Gold may be freely imported and exported.