Gold Standard: Difference between revisions
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== How the Gold Standard Works == | == How the Gold Standard Works == | ||
The | - The Gold Standard was a domestic standard, regulating the quanity and growth rate of a country's money supply. Because new production of gold would add only a small fraction to the accumulated stock, and because the authorities guaranteed free convertibility of gold into non-gold money, it would assure that the money supply and the price level would not vary much. | ||
- Also an international standard - determining the value of a country's currency in terms of other countrie's currencies. Because adherents to the standard maintained a fixed price for gold, rates of exchange between currencies tied to gold were fixed. This would cause price levels around the world to move together. A shock in one country would affect the domestic money supply, expenditure and real income in another country. | |||
=== Theory of Gold Standard === | === Theory of Gold Standard === | ||
Revision as of 20:56, 2 December 2006
Overview
The Gold Standard is a monetary system in which the standard economic unit of account is a fixed weight of gold and all currency issuance is regulated by the gold supply. Currencies that are backed by fixed amounts of gold have a constant exchange rate between each other.
Purposes of a gold standard
- To prevent inflationary expansion of the money supply
- To maintain a fixed value against which other prices can be measured
- To allow wider circulation with greater trust in the stability of money.
Why Pick Gold As The Standard?
- First known metal. Valuable throughout the ages because of scarcity. High value for its beauty and resistance to corrosion and rust.
- Soft and easy to work with (very malleable and can be easily shaped into various forms). As a result, gold had long been used as a form of money and store of wealth by merchants and traders.
- Its versatility for many applications, such as jewelry and adornment. Means of payment of armies.
- Supplant silver as the basic unit of international trade at various times (Islamic Golden Age, peak of Italian trading during the Renaissance, during the 19th century).
- Remain the metal of monetary reserve accounting until the collapse of the Bretton Woods agreement in 1971.
How the Gold Standard Works
- The Gold Standard was a domestic standard, regulating the quanity and growth rate of a country's money supply. Because new production of gold would add only a small fraction to the accumulated stock, and because the authorities guaranteed free convertibility of gold into non-gold money, it would assure that the money supply and the price level would not vary much. - Also an international standard - determining the value of a country's currency in terms of other countrie's currencies. Because adherents to the standard maintained a fixed price for gold, rates of exchange between currencies tied to gold were fixed. This would cause price levels around the world to move together. A shock in one country would affect the domestic money supply, expenditure and real income in another country.
Theory of Gold Standard
- Rest on the idea that inflation is caused by an increase in the quantity of money, an idea advocated by David Hume, and that uncertainty over the future purchasing power of money lowers business confidence and leads to reduced trade and capital investment.
- The gold standard would remove uncertainty, friction between kinds of currency, which will dramatically benefit an economy.
- Advocates of the gold standard often believe that the governments are destructive of economic activity, and that a gold standard, by reducing their ability to intervene in markets, will increase personal liberty and economic vitality.
Gold Standard History
Effect on the Great Depression
Bretton Woods Conference
International Gold Standard
Performance of Gold Standard
Pros and Cons of Gold Standard
Group: Minh, Dan, Nick
