The gold standard

The rise and fall of the first modern global monetary system

A- Before it became associated with monetary value , gold was valued for its natural lustre . its
malleable qualities and its resistance to tarnish , Because of these inherent values . it quickly
became recognazied as a tradable commodity . The first gold coins appeared in Lydia
somewhere between 750-550 BCE although they were actually made of naturally occuring
electrum an alloy of silver and gold . they did , however set the trend for weight standardised
monetry units . each coin was stamped with its weight and subsenquent value , which served to
guarantee that worth . Due to the immense trading onwer of Lydia . the use of commodity
money – that is , such coins made from power that had worth in their own right-spread . this
system of stabilising nominal worth based on the coin’s gold composition is khnown as the gold
specie standard; revolving around the metalic value in standarised weights and levels of
refinement , gold – and later , silver and other metal – specie standars became the basis of
econimies the world over .
B- For hundreds of years , due to the plentiful nature of silver , silver standars were prevalant , in
the mid-1800s , due to silver devaluaton – and helped , no doubt , by the gold Rush of 1848
when the excavation of newly discovered gold deposits countributed significantly to world gold
reserves – this began to change , by the beginning of the 20 th centry , the majority of major
trading nations had attached their currencies to an evaluation of gold at a fixed price or ounce .
Although it was adopted at a varying rate by different countries , general consensus marks the
period of 1870 to 1914 as the : golden years “ of a widespread international gold standard .
C- The international gold standard , while still based on specie , varied from the ancient gold specie
standard in that , although weighted coins were still in circulation , the populace traded
primarily in paper money which was freely convertible into gold . without the need to keep a
gold stock from which to mint their currency , many countries were to keep a gold stock from
which to mint their currency , many countries were able to dispense with the need fo a physical
gold reserve altogether , Instead , they operated on a gold – exchange standard whereby their
currency could be converted into exchange bills from a country with gold reserve , the british
pund sterling and the US dollar became the most widely acknolodged of these reserve
currencies .
D- While this system enjoyed many years of success , it was ultimatly unable to survive periods of
upheaval or economic difficulty . In times of unrest when greater cash suppliers were needed
most countries were forced to suspend the conversation of notes to gold specie . This is What
happenned in 1914 , and marked the beginning of the end of the gold standard 1925 saw an
attempted revival of the gold standard in many countries – this time as a gold bullion standard ,
where reprensentitive notes were exchangeable for weighted gold bars, not coins as legal
tender ,Under this system , as with the previous eonomies struggled to adjsut individually to
economic pressures and in 1931 . Britain became the first country to detach entirely from the
standard , the USA effectively followed suit shortly after in 1933 – although it continued to
purchase gold in the global market until 1971 when dollar to gold conversion was officially
ended . although some countries retained the gold standard a while longer , gold ceased to be
relevant as a major trading commodity when the usa officially withdrew from the system .
 E- The principle behind the international gold standard was that it would serve as a mechanism for
balancing supply and demand between individual economies , thus regulating the quantity and
growth of global monetary suppliers , since global gold reserves fluctuated minutely at this time
. they formed a base for international exchange rates that was as close to stable as could
realistically be achieved . In a model situation ,gold would flow across the market , stabilising
prices and regulating competitiveness in international trade . thus ,a country with a trade deficit
( importing more goods than it is able to export ) would create an outflow of money which
would reduce the gold reserves within that country . contracting its natinal economy and
causing prices to all . this would then boost its compettitiveness in the gold market .
theoretically increasing its trading power and export figures . the gold reserves would return .
the economy would expand ; prices would rise . likewise , for a trade surplus ( where exports
exceed imports) the influx of gold would lead to inflation and rising prices within the country ,
balancing their trade power with that of other nations and casing exportation to decrease .
F- Of course , in the real world , the market did not function quite so flawlessly . the different
economic models of each country were not to taken into account under a single standard , and
the system gave individual nations very little influence over monetary policy , making it almost
impossibe to adapt to eonomic change . many experts believe that the desire to return to a
facsimile of the pre – 1914 gold standard greatly hindered world economic growth in the early
of the 20th century and worsened the great depression that followed . to see the flaws inherent
in the system , one only has to look at the way in which britain dealt with the economic crisis in
1931 . by detaching its econonomy from the value of gold ,britian was able to lift itself out of the
crisiss by cutting interst rates and devaluing the pound in order to boost exports and stimulate
the economy . britain’s departure was the trigger wchich eventually led to all currencies leaving
the gold standard and becoming free—floating .

27-the gold rush

28- widespread

29- gold bullion

30- the global market

31- surplus

32- trading

33- compettitiveness

34- export

35- expand

36- F

37- A

38-D

39- E=40- E