Gold Standard

Overview

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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?

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• 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).
  

How the Gold Standard Works

• The Gold Standard was a domestic standard, regulating the quantity 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.

Brief History of Gold Standard

• In 1844 the Bank Charter Act established that Bank of England notes, fully backed by gold, were the legal standard. This 1844 act maked the establishment of a full gold standard for British money.
  
• Other major countries joined the gold standard in the 1870s. The period from 1880 to 1913 is known as the "classical gold standard". During that time the majority of countries adhered to gold. It was also a period of unprecedented economic growth with relatively free trade in goods, labor and capital.
• Dates of adoption of Gold Standard:
  • 1871: Germany
  • 1873: Latin Monetary Union (Belgium, Italy, Switzerland, France)
  • 1873: United States de facto
  • 1875: Scandinavia by monetary Union: Denmark, Norway and Sweden
  • 1875: Netherlands
  • France internally
  • 1876: Spain
  • 1879: Austria
  • 1897: Russia
  • 1897: Japan
  • 1898: India
  • 1900: United States de jure

Pros and Cons of Gold Standard

Dan, i find these links quite helpful. Take a look - Minh
http://www.huppi.com/kangaroo/L-gold.htm
http://economics.about.com/cs/money/a/gold_standard_2.htm
http://www.auburn.edu/~garriro/g4gold.htm

Group: Minh, Dan, Nick

Works Cited

• http://en.wikipedia.org/wiki/Gold_standard
• http://www.econlib.org/library/Enc/GoldStandard.html