A History Of The Gold Standard Economics Essay

A History Of The florid precedent economics EssayWhat is specious commonplace? The aureate measuring stick is a fiscal st vagabondgy in which the ideal unit of currency is a contumacious weight of amber or freely mass meetingable into currency at a frosty price. chthonic the amber standard agreement, paper silver which circulates as a medium of exchange is standardized into prosperousen on demand. The exchange rate between paper or revision money and lucky is fixed. said(prenominal) thing happened to the evaluate of exchange between national currencies, it is fixed.The Gold meter stern be change integrity into two types full Gold Standard and partial Gold Standard. A 100 percent have got Gold Standard or full Gold Standard occurs when all circulating money ass be represented by the appropriate amount of bullion. Whilst in partial Gold Standard, circulating notes potty be redeemed for their face range it poop be either higher than its actual foste r or lower.Why gold beingness selected as a reserve for most countries and even for straightaway? Many nations hold the gold reserves in significant quantity in order to denial their currency and put a hedge against the US dollar. Some more, the weakness of the US dollar can be offset by strengthening the gold prices. Yet, compared to other precious metals or major competitors such(prenominal) as US dollar and real estate, none of them has the stability as the gold as easily as its rarity and durability. Gold is also used as a store of value scratch from the early monetary system since it is high value enough. It is high in utility and density, it is able to live on to corrosion, it is uniform, and it is divisible easily. As we know, banking began by depositing the gold into a bank and it could be transferred from one bank to some other bank. Until today, gold remains to be the main financial asset for most of the central banks.By feeling back at the past, before two hundre d0 BC, the eldest metal that human being used as a currency in trade was silver. According to the history, we know that gold has been used as a besotted of payment since long time ago. After 1500 years, the first coinage of pure gold was introduced. The bridal of Gold Standard was preceded after that. Yet, the order of magnitude monetary system came and took over the Gold Standard system during the blast of World war I. This happened for most of the nations are delinquent to the excessive public debt and the government is otiose to honor all the debt in gold or silver.IMPORTANCE OF STUDY / RESEARCH IN prosperous idealAs a banking and finance student, we have to study and understand any history that regard to the field, include the topic of our assignment this time Gold Standard. This is because people live in present and they have to platform for and worry rough the future. History is the study of past. It gives the nurture of the past in order to anticipate what is soon enough to come. Understanding history is important to develop the linkages to predict the future. Yet, history also provides us abundant of information about how the Gold Standard was formed and how it operated. Understanding the operations of the Gold Standard is difficult presently since it was collapsed and we cannot be exposed ourselves to it. The current data that we have is relied on what happened into the past. By using the historic materials, we can make our own analysis on the Gold Standard and understand its weaknesses and problems.Be spots, the study of the Gold Standard can help us to understand the changes of the monetary system and how the financial globe affects the global economies. From the historical information, we know when the adoption of the Gold Standard was and when the collapse of the Gold Standard was. Yet, we also know that the monetary system had been changed over time to time and which system was being created in order to take over the original s ystem. For instance, Gold Standard was took over by Bretton Woods formation and followed by Contemporary fiscal System. There is always a reason there for the changes make. This is because of the discovery of the shortages of the system. Once the deficiencies being located, the new system would be established. If there is still do not have any actions taken, it will affect the economies of the world since finance cannot be separated with the economy.In addition, as a financial student, we have to understand about the differences between social club money and Gold Standard. From the project we done, we know that fiat money is money that no have intrinsic value and cannot be redeemed for any commodity. The paper currencies and coins that are gettable in markets nowadays are considered as fiat money and the strength of the economy of the issuing nation is the determinative used to determine the value of fiat money. intimatelyly, inflation will follow with the enormous issuing of f iat money. Whilst, The Gold Standard is a monetary system in which the standard unit of currency is a fixed weight of gold or freely convertible into gold at a fixed price. Under the Gold Standard system, paper money which circulates as a medium of exchange is convertible into gold on demand. The exchange rate between paper or fiat money and gold is fixed.PART II THE GOLD STANTARD2.1 HISTORY2.1.1 History of Gold StandardThe first nation that officially adopted the Gold Standard system is England (also called as Great Britain) in 1821. The list under is the dates of adoption of the Gold Standard system1821England1871Germany1873Latin Monetary UnionBelgiumItalySwitzerlandFrance1875Scandinavia(Monetary Union)DenmarkNorwaySweden1875Netherlands1876France1876Spain1879Austria1893Russia1897Japan1898India1900United StatesDuring that century, there was a dramatic increase in global trade and production which brought enormous discoveries of gold. The discoveries aided the Gold Standard remai n intact well on the following century. The emergence of the world(prenominal) Gold Standard is on 1871 since the Germany also started to use the system. By 1900, most of the developed countries were linked to the Gold Standard system, but ramp that the United States was the last nation to enter. This is because there was the present of a strong silver lobby that command gold from being the sole monetary standard with the U.S. throughout the 19th century.The Gold Standard was at its pinnacle from 1871 till 1914. During the period, there were a near perfect ideal political contexts existed in the world. Governments tried to corporate nicely in order to make the Gold Standard system work, but the system was collapsed during the duration of the Great state of war in 1914. In 1925, it was reestablished. But payable to the relative scarcity of gold, many countries adopted a gold-exchange standard, supplementing their gold reserves with currencies convertible into gold at a stable r ate of exchange. Unfortunately, the gold-exchange standard was ended during the Great Depression. The United States had set a minimum dollar price for gold in order to aid for the restoration of international gold standard after World war II. In 1971, dwindling gold reserves and unfavorable balance of payments led the U.S. to abandon the Gold Standard system.2.1.2 Timelines of Gold Standard1717The Kingdom of Great Britain went on to an unofficial Gold Standard.1816Gold was partially displacing silver as a standard.1821The Gold Standard was first out into operation in Great Britain.1873The specie Act of the United States Congress came into operation on 1st April and constituted the gold one-dollar piece as the sole unit of value.1900Gold Standard Act was established on 14 March 1900 and gold was the only standard for redeeming paper money.1914The abandonment of the Gold Standard by Russia.1925The return of the Gold Standard.1971The abandonment of the Gold Standard by the United Sta tes.2.1.3 Timelines of revisal Money1690There are trey types of currency according to American HistoryFiat moneyCertificates based on coin or bullionBank notes(Fiat money is one type of currencies that being used during the time.)1789France was undergoing economic downturn and due to lack of money, fiat money being used.1862There was a paper currency that printed upon one side in green has been created with a promise to pay Greenbacks.1878An argument in favor of honest money and redeemable currency.1896Paper-based global economy has been collapsed.1913 plaque of Fed.Fiat money became the United States legal tender.The mercy of the fiat money system has led to the greatest debt bubble in world history.1933Inflation occurred.2008Under the fiat money system, money as debt.2.1.4 History of Shifting Between Fiat Money and Gold Standard in U.S.As stated as below, there were a lot of shifting between a fiat money and gold standard had been made by the United States over the past 200 yea rs which in order to avoid hyper-inflation. Hyperinflation occurs when the confidence in money had gone and it bleeds to no value in the money. As mentioned as earlier, the gold standard was over due to the reason of the government was unable to repay for the excessive of public debt in gold or silver that its countries owe.1785-1861Fixed Gold Standard 76 yearsIt was issued by American colonists for the Continent Congress in order to finance the subverter War.It was produced by the United States Federal Government.It was authorized by the Act of March 3, 1849.1862-1879Floating Fiat notes 7 yearsThe fiat money of the United States above is Greenbacks.It was created to pay for the enormous cost of the accomplished War.It was the debt of the U.S. government which could be redeemable in gold at future without any specified date.It was circulated on with the Gold certificates.1880-1914Fixed Gold Standard 34 yearsIt was ended due to the financial necessarily of World War I.1915-192 5Floating Fiat currentness 10 yearsIt was created to pay for World War I countries.There was insufficient of gold to support the paper currency.1926-1931Fixed Gold Standard 5 yearsIt was ended due to most of the nations tried to deposit their pounds and dollars for gold when the depression occurs.1931-1945Floating Fiat Currency 14 yearsIt was ended due to the outbreak of World War II.1945-1968Fixed Gold Standard 26 yearsOn 24 June 1968, a proclamation that Federal Reserve liquid Certificates could not be redeemed in silver was issued by President Johnson.1971Floating Fiat Currency 5 monthsIt was established by President Nixon on August 1971.1971-1973Fixed Dollar Standard 2 yearsIt was passed by the Smithsonian Agreement.1973-todayFiat Currency 37 yearsIt was established by the Basel Accord.2.1.5 Evolution of transnational Monetary SystemsInternational Monetary System had been undergoing several stages of evolution which are stated as belowBimetallism (before 1875)A double s tandard in the sense that both gold and silver were used as international means of payment.Some nations used the gold standard some used the silver standard and some used both.Both gold and silver were used as money and the gold or silver contents were the determinants used to determine the exchange evaluate among currencies.Classical Gold Standard (1875-1914)Most nations agreed that-Gold alone was assured of unrestricted coinage.-There would be two-way convertibility between gold and national currencies at a fixed ratio.-Gold could be freely exported or imported.Two countries relative gold contents were be the determinants used to determine the exchange rate between two countries currency.Highly stable exchange rates under the classical gold standard provided an environment that was conducive to international trade and investment.Misalignment of exchange rates and international imbalances of payment were automatically corrected by the price-specie-flow mechanism.Interwar Period ( 1915-1944)Exchange rates fluctuated as countries astray used predatory depreciations of their currencies as a means of gaining advantage in the world export market.Attempts were made to restore the gold standard, but participants lacked the political will to follow the rules of the game.The resultant for international trade and investment was profoundly detrimental.Bretton Woods System (1945-1971)Named for a 1944 meeting of 44 countries at New Hampshire.The purpose was to devise a postwar international monetary system.The goal was exchange rate stability without the gold standard.The result was the creation of the IMF and the World Bank.The system was a dollar-based gold exchange standard.Flexible Exchange Rate System (1971-today)The system was declared acceptable to the International Monetary Fund (IMF) members. underlying banks were allowed to intervene in the exchange rate markets.Gold was addicted as an international reserve asset.Managed Float System (1973-today)2.2 INTERNA TIONAL GOLD STANDARD2.2.1 Chronology of Gold and International Monetary System1717Master of the Mint, Sir Isaac Newton gave guinea statutory valuation of 21 shillings.Commence of the United Kingdom Gold Standard.1797Occurrence of Napoleonic Wars.Bank of England abandoned gold payments.1816 boldness of UK Coinage Act.1844Bank of England obliged to buy gold.1870-1900Except of China, most of the nation abandoned bimetal Standard and switched to Gold Standard.1913The United States system of reserve banks was established by Federal Reserve Act.At least 40% of notes were gold-backed.1917U.S. prohibited gold exports.1919UK went off Gold Standard.Establishment of London Gold Fixing.1925 coming back of Gold Standard in the United Kingdom.Establishment of UK Gold Standard Act.1931The United Kingdom abandoned Gold Standard.1933Suspend of the United States convertibility.Prohibition of exports, transactions, and holding of gold.1934Presidential Proclamation of making dollar convertible to gol d again.1936Establishment of Tripartite Agreement (Countries involved U.S., UK, and France)1939Close of London gold market due to the outbreak of war.1944Establishment of Gold Exchange Standard as a result of Bretton Woods Conference.1945International Monetary Fund (IMF) Articles of Agreement became effective.1954Reopen of London gold market after World War II.1961Establishment of Gold Pool (Members Belgium, France, Germany, Italy, Netherlands, Switzerland, UK and Federal Reserve Bank of New York)1967Buying of gold increase due to the devaluation of sterling.1968Close of London market.Abolishment of Gold Pool and establishment of 2-tier market.Establishment of Special potation Right (SDR).1971Suspend of U.S. convertibility to gold.Establishment of Smithsonian Agreement.1972Devaluation of the United States dollar.1973Suspend of dealing in foreign exchange markets by most of the central banks.Adoption of floating exchange rate regime.Abandonment of 2-tier gold market.1975Abolishment of confinement on citizen buying, selling or owning gold by U.S.First U.S. gold auctioneer on January.Establishment of agreement between G10 countries and Switzerland on no attempt to peg the gold price.1976First gold auction by IMF on June.1978Disappear of formal role of gold in International Monetary System.1979Establishment of European Monetary System.Final U.S. gold auction on November.1980Last 45 IMF gold auctions on May.1982The United States Gold Commission reported to Congress.1985Establishment of Plaza Agreement on currencies.1987Establishment of quintet Accord on currencies.1992Sign of treaty on European Union at Maastricht.1998Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain joined Economic and Monetary Union (EMU).1999Began of EMU.Announcement of Central Bank Gold Agreement (CBGA).2004Announcement of Second Central Bank Gold Agreement.2.2.2 Gold Standard Went International*The picture above the gold and silver coins that available around the world during 19th century.From the chronology above, we know that most of the countries (except China) had abandoned their silver or bimetallic standard and went for a full gold standard between the years of 1871 to 1900. There is always a reason. German asked for war indemnity to be paid in gold by France right after the Franco-German War. German used this gold to finance a new gold standard in their home country. This had lead to an increase in the demand of gold and there was unload of tons of silver on the close nations. Due to the fear towards silver inflation, the neighboring countries decided to follow German.The list below is the date of first gold standard1871German1873Belgium1873Italy1873Switzerland1874Scandinavia1875Denmark1875Norway1875Sweden1875Holland1876France1876Spain1879Austria1893Russia1898India1900USAInternational Gold Standard existed when the following condition being fulfilledGold alone is assured of unrestricted coinage.There were t wo means of convertibility between gold and national currencies at a fixed ratio.Gold may be freely imported and exported.