Gold Standard System "describe, Explain And Evaluate The

Macroeconomics Of The Gold Standard System." Essay - 2,460

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Gold Standard System "Describe, explain and evaluate the macroeconomics of the Gold Standard System." Table of Contents:
Introduction: Body: Part I Part II Part III Conclusion: Bibliography: Introduction I should start by saying that until the Franco-
German War of 1870-1871, Europe's currencies were based on a combined gold and silver standard (BIMETALLISM). In the
Versailles Peace Treaty, France had to agree to pay 5 billion Gold Francs in reparations, over the next few years. Germany partially
made use of this influx by switching from the bimetallic to a pure gold standard; most other European countries followed soon. When
the world's richest goldfields were found at WITWATERSRAND near Johannesburg, in the Transvaal, sufficient gold was available
to keep the standard in a period of a strongly growing world economy. The Gold Standard was kept up until 1914, when, during World
War I, it could no more be upheld. In the 1920es a number of countries, such as Great Britain and the Netherlands, tried to
reintroduce it and to stick to it despite heavy problems for their respective economies; Britain gave up the gold standard in 1931.

In the following essay I am going to speak about the macroeconomics of the Gold standard system. I will present various educated
findings together with my personal opinion on the given matter. Body: Part I: The gold standard is a monetary system in which the
standard unit of currency is a fixed weight of gold or is kept at the value of a fixed rate of gold with paper money convertible on
demand into gold. Under such a system money represents gold: coins are made of the corresponding amount of gold, and/or coins
and notes represent an amount of gold held in a vault somewhere. Rates of exchange between countries were fixed by their currency
values in gold (Thompson, 89). Most financially important countries were on the gold standard from 1900 until it was suspended in
many nations during World War I (notably in the United States it was not suspended during the war).

It was reintroduced partially in 1925 as the Gold Exchange Standard but finally abandoned in 1931. In Great Britian it was Winston
Churchill in his role as Chancellor of the Exchequer that was responsible for initiating the 1925 return (Snyder, 134). In an internal
gold-standard system, which implies the use of an international gold standard, gold coins circulate as legal tender or paper money is
freely convertible into gold at a fixed price (Moure, 78). Here is the rational. In an international gold-standard system, which may
exist in the absence of any internal gold standard, gold or a currency that is convertible into gold at a fixed price is used as a means
of making international payments. Under such a system, exchange rates rise above or fall below the fixed mint rate by more than the
cost of shipping gold from one country to another, large inflows or outflows occur until the rates return to the official level (Rockwell,
9). If all circulating money can be represented by the appropriate amount of gold, then this is known as a 100% reserve gold
standard, or a full gold standard.

Some believe there is no other form of gold standard, since on any "partial" gold standard the value of circulating representative
paper in a free economy will always reflect the faith that the market has in that note being redeemable for gold (Thompson, 92).
Others, such as some modern advocates of supply-side economics contest that so long as gold is the accepted unit of account then it
is a true gold standard. The commitment to maintain gold convertibility tightly restrains credit creation, because doing so would be to
commit fraud. Credit creation by banking entities under a gold standard threatens the convertibility of the notes they have issued,
and consequently leads to undesirable gold outflows from that bank. This is caused when people realise that the bank notes are, in a
sense "oversold", and go to redeem their notes for their printed face value in gold - if they are quick enough (Snyder, 137). Hence,
notes circulating in any "partial" gold standard will either be redeemed for their face value of gold (which would be higher than it's
actual value) - this constitutes a bank "run"; or the market value of such notes will be viewed as less than a gold coin representing
the same amount (Moure, 83).

Part II In classical economics imbalances in international trade were rectified automatically by the gold standard. A country in deficit
would have to pay its debts in gold thus depleting gold reserves and would therefore have to reduce its money supply. The resulting
fall in demand would reduce imports and the lowering of prices would boost exports; thus theoretically the deficit would be rectified
(Rockwell, 10). In practice however this could seriously destabilise the economy of countries which ran a trade deficit, because
people tended to make a run on the bank to retrieve their money before gold reserves were exported, thus causing banks to collapse
and wiping out savings. Bank runs and failiures were a common feature of life during the period when the gold standard was the
established economic system (Thompson, 96). The gold standard limits the power of governments to cause price inflation by
excessive issue of paper currency, although there is evidence that before World War I monetary authorities did not expand or
contract the supply of money when the country incurred a gold outflow. Theoretically it also creates certainty in international trade
by providing a fixed pattern of exchange rates (Snyder, 139).

Thus, the gold standard is supported by many advocates of classical economics, monetarism, Objectivism, and even proponents of
libertarianism (Moure, 88). However, the disadvantages are that it may not provide sufficient flexibility in the supply of money,
because the supply of newly mined gold is not closely related to the growing needs of the world economy for a commensurate supply
of money. A single country may also not be able to isolate its economy from depression or inflation in the rest of the world. In
addition, the process of adjustment for a country with a payments deficit can be long and painful whenever an increase in
unemployment or decline in the rate of economic expansion occurs. Opponents of the gold standard such as Keynesianists argue that
the gold standard creates deflation which intensifies recessions as people are unwilling to spend money as prices fall, thus creating a
downward spiral of economic activity. The gold standard also removes the abillity of governments to fight recessions by increasing
the money supply to boost economic growth (Michaels, 61).

Opponents of the gold standard thus argue that an expanding economy with a supply of gold that increases more slowly than the
economy expands would cause a tiny, but steady, deflation. It is believed by gold standard opponents that this gradual deflation
would throw the economy into recession (Snyder, 139). No mainstream economist today advocates a return to the gold standard.
However, a near century-long period of deflation has already occurred in Britain while on the Gold Standard during the 1800s.
During that century the price, in gold, of goods and services in Britain was halved. The gradual century of deflation did not cause a
century of recession.

Quite the contrary, the British empire during that period was the undisputed economic power of the world (T
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