Gold Standart
The gold standard was a commitment by participating countries to fix prices of their national currencies in terms of a quantity of gold. National money and other forms of money (bank deposits and promissory notes) were freely converted into gold at a fixed price. England adopted a de facto gold standard in 1717 after the master of the Mint, Sir Isaac Newton, overvalued silver and guinea formally adopted the gold standard in 1819. The United States, although formally in a bimetallic (gold and silver) standard, gold becomes de facto and de jure in 1834 in 1900. In 1834 the United States has set the price of gold in 20.67 dollars per ounce, where it remained until 1933. Other major countries joined the gold standard in the 1870’s. The period from 1880 to 1914 is known as the classical gold standard. During that time most countries joined (to a greater or lesser degree) in gold. It is also an unprecedented period of economic growth relatively free trade in goods, labour and capital.
The gold standard was broken during World War I as the main belligerents resorted to inflationary financing and was restored briefly from 1925 to 1931 as the gold exchange standard. Under this standard countries could hold gold or dollars or pounds as reserves, with the exception of the United States and the United Kingdom, which was held only in gold reserves. This version was broken in 1931 after the departure of Great Britain gold in the face of gold and massive capital outflows. In 1933 President Roosevelt nationalized gold owned by private citizens and abrogated the contract in which payment may be specified in gold.
Between 1946 and 1971 the countries that operate under the Bretton Woods system. Under this new amendment to the gold standard, most countries settled their international commitments balances in U.S. dollars, but the U.S. government promised to redeem other central banks of dollars in holdings of gold at a fixed rate of $ 35 per ounce. However, persistent U.S. the balance of payments steadily reducing the U.S. deficit gold reserves, which reduces confidence in the ability of the United States to redeem its currency in gold. Finally, on August 15, 1971, President Nixon announced that the United States no longer redeem currency for gold. This was the final step in abandoning the gold standard.
A widespread dissatisfaction with high inflation in recent seventies and early eighties brought a renewed interest in the gold standard. Although the interest is not strong today, reinforced every time inflation moves much above 6 percent. This makes sense. Whether there were other problems with the gold standard, persistent inflation was not one of them. Between 1880 and 1914, the period when the U.S. was in the "classical gold standard", inflation averaged only 0.1 per cent per annum.
How the gold standard worked
The gold standard was a national standard, which regulate the amount and rate of growth of a country of the money supply. Due to the new gold production would add only a small fraction accumulated in stocks, and because the authorities guarantee the free convertibility of gold in nongold money, the golden rule of security that the money supply and hence The price level does not vary much. However, periodic surges in the world of gold stocks, with discoveries of gold in Australia and California around 1850, caused price levels to be very volatile in the short term.
The gold standard was also an international standard to determine the value of a currency of the country in terms of currencies other countries. Since acceding to the rule maintains a fixed price for gold, exchange rates between currencies tied to gold are necessarily fixed. For example, the United States has set the price of gold in 20.67 dollars per ounce; Britain has set the price of £ 3 17s. 10.5d. per ounce. The exchange rate between dollars and pounds-the "nominal exchange rate"-necessarily equaled $ 4867 per pound.
Since the exchange rate is fixed, the gold standard caused price levels around the world to move forward together. Comovement This occurred mainly through an automatic balance of payments adjustment process called price-flow kind of mechanism. Here is how the mechanism worked: Suppose that a technological innovation brought faster real economic growth in the United States. With the money supply (gold) essentially fixed in the short term, this caused U.S. prices to fall. The prices of exports from U.S. then fell in relation to import prices. This caused the British to demand more U.S. and U.S. exports to demand fewer imports. A U.S. the balance of payments surplus was created, causing gold (species) to the flow of the United Kingdom to the United States. The influx of U.S. gold increased the money supply, reversing the initial drop in prices. In the UK output of gold reduced the money supply and hence reduced the price level. The net result was balanced prices among countries.
The fixed exchange rate also caused both monetary and non-monetary (real) shocks that are transmitted through gold and capital flows between countries. Therefore, a shock in a country affected the domestic money supply, costs, price levels, real incomes and in another country.
An example of a monetary shock was the discovery of gold in California in 1848. The gold produced recently the U.S. increased the money supply, which then raised domestic spending, the nominal incomes and, ultimately, the price level. The increase in domestic price levels of U.S. exports became more expensive, causing a shortfall in the U.S. the balance of payments. For americas trading partners the same forces necessarily produce a balance of trade surplus. The U.S. the trade deficit was financed by a gold (species) to exit its trading partners, reducing the stock of monetary gold in the United States. In trading partners of the money supply increased, raising domestic spending, the nominal incomes and, ultimately, the price level. Depending on the relative share of the U.S. gold at the world total population, world prices and revenues increased. Although the initial effect of the discovery of gold was to increase actual production (because wages and prices do not increase immediately), in the long run was the total effect on price levels alone.
For the gold standard to work fully, central banks, where they existed, were supposed to play by the "rules of the game." In other words, was supposed to raise their discount rates of the interest rate that the central bank lends money to member banks-to a rate of gold, and reduced its discount rates to facilitate an exit from gold. Thus, if a country was running a balance of payments deficit, the rules of the game necessary to allow an outflow of gold until the ratio of its price level with their largest trading partners was restored on a par with the exchange rate .
The example of the central bank was the behavior of the Bank of England, which has played by the rules in much of the period between 1870 and 1914. Every time that Britain was facing a balance of payments deficit and the Bank of England saw its gold reserves in decline, which raised its "bank rates" (discount rate). In another cause interest rates in the United Kingdom also increased, increasing the bank rate was supposed to cause holdings to reduce inventory investment and other expenses to decrease. These reductions then cause a reduction in overall domestic spending and a drop in the price level. At the same time, the place where the bank rate stem short-term capital outflows and attract short-term funds abroad.
Most other countries in the gold standard-in particular France and Belgium, however, did not follow the rules of the game. They never allowed interest rates to rise enough to reduce the domestic price levels. In addition, many countries often broke the rules of "sterilization" to protect the domestic money supply external imbalance of purchase or sale of domestic securities. If, for example, France’s central bank wants to avoid a flow of gold to increase their supply of money, securities are sold for gold, which reduces the amount of gold circulating.
However, central bankers "breaches of the rules must be put into perspective. While exchange rates in major countries often deviates pair, governments rarely debased their currencies or otherwise manipulate the" gold standard "To support domestic economic activity. The suspension of convertibility in England (1797-1821, 1914-1925) and the United States (1862-1879) occurred emergencies during wartime. However, as promised, convertibility the initial parity was resumed after the emergency passed. resumptions These fortified the credibility of the golden rule standard.
The implementation of the gold standard
As mentioned, the great virtue of the gold standard is that ensures long-term price stability. Compare the aforementioned average annual inflation rate of 0.1 percent between 1880 and 1914 with the average of 4.2 percent between 1946 and 1990. (The reason for excluding the period from 1914 to 1946 is that was neither a period of the classical gold standard or a period during which the government understands how to manage monetary policy.)
But because the economies under the gold standard were so real and vulnerable to currency crises, prices are very volatile in the short term. A measure of short-term price volatility is the coefficient of variation, which is the relationship between the standard deviation of annual percentage changes in the price level to the average annual percentage change. The higher the coefficient of variation, the greater the short-term volatility. For the United States between 1879 and 1913, the ratio was 17.0, which is quite high. Between 1946 and 1990 was only 0.8.
Moreover, because the golden rule of government gives very little discretion to use monetary policy, economies in the "gold standard" are less able to prevent or compensate, either real or monetary crisis. Actual production, hence, is more variable under the gold standard. The coefficient of variation in the actual production was 3.5 between 1879 and 1913, and only 1.5 between 1946 and 1990. It is no coincidence, since the government could not have discretion over monetary policy, unemployment was higher during the gold standard. It is an average of 6.8 percent in the United States between 1879 and 1913 compared to 5.6 percent between 1946 and 1990.
Finally, any consideration of the pros and cons of the gold standard must include a big negative: the resource cost of producing gold. Milton Friedman estimated that the cost of maintaining a full gold coin standard for the United States in 1960 to be over 2.5 percent of GNP. In 1990, this cost would have been $ 137 million.
Conclusion
Despite the last vestiges of the gold standard disappeared in 1971, his appeal is still strong. Those who oppose giving discretionary powers to the central bank are attracted by the simplicity of its basic rule. Others see it as an effective means of anchoring the world price level. Still others look back longingly to the fixity of exchange rates. However, despite its appeal, many of the conditions that made the gold standard so successful disappeared in 1914. In particular, the importance that governments attach to full employment means that it is unlikely to make the maintenance of the golden rule of liaison and its corollary, long-term price stability, the overriding objective of economic policy.Gold Standart
Leave a Reply