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The Gold Standard

The gold standard, a monetary system affixing a standard economic unit in an account to the weight of gold, comes in different forms. The gold specie standard, a system using actual gold coins in circulation or gold mixed in conjuction with a lesser valuable metal, oft refers to the ancient system of purchasing power.

What is the Gold Standard?

The gold exchange standard involves the circulation of silver or lesser valued metals that obtain a fixed exchange rate with other particpating countries using the gold standard. The latter method evolves into a de facto gold standard, where the value of silver coins has an affixed external value that can be exchanged for the independent value of gold. The gold bullion standard, however, does not implement the circulation of gold coinage, but grants authorities the right to sell gold bullion on demand at an agreed, fixed price in exchange for a circulating currency.

  • What is the Gold Standard?: A thorough explanation of the gold standard, its derivatives, and the pros and cons involved with an economy based on this form of monetary system.
  • Library Economics and Liberty: A comprehensive resource explaining the formalities, performance outcomes, and the preferential over non-preferential factors involved in using the gold standard as an economic premise.
  • Lecture Notes on the Gold Standard: What is the Gold Standard?

History of the Gold Standard

The gold specie standard was accepted as a universal currency, unlike other methods of the gold standard, which were implemented into effect by authorities. The Byzantine Empire used gold coinage known as the Byzant. Silver became another form of currency over time due to its abundance. The British West Indies was one of the first regions to implement a gold specie standard in regards to modern times. The British West Indies would continue the gold specie standard until Queen Anne's proclamation of 1704 forced a de facto gold standard with the Spanish gold coin.

In the United States, the Gold Eagle coin was used as a single unit. Germany introduced a gold mark, while Canada enforced a dual system modeled after the American Gold Eagle and the British Gold Sovereign. Australia and New Zealand and the British West Indies adopted the British gold standard with the Royal Mint branches stemming from Sydney, New South Wales, Victoria, Perth, Western Australia and Melbourne.

Wars and trade with China drained Western Europe and the United States of silver coinage, which prompted a proliferation of band and stock notes as currency. In 1785, the United States adopted a silver standard modeled after the Spanish milled dollar. The 1792 Mind and Coinage Act granted the Bank of the United States to hold its reserves and create a fixed gold ratio to every U.S. dollar. This create a derivative silver standard, which did not require the banks to back the currency with physical silver. The Independent Treasury Act of 1848 removed the legal stipulations of the Federal Government and the banking system, which in turn led to the overvaluation of silver. This prompted a search for gold, also known as the California Gold Rush of 1849, since silver was the favored currency of the time. The United States eventually removed silver as legal tender in 1857 after reducing the value in 1853.

The United States sent a shock-wave through the international financing sector as it ended its payment in silver. This collapse contributed to the summation of American Civil War in 1861. Other international events led to a culimination of events that would eventually lead to a fiant currency system. The World Wars triggered high inflation for most countries that decided to go off of the gold standard, then returned to varied levels after the standard was reinstated.

The Federal Reserved defended the fixed price of dollars by raising interest rates in direct respect of the derivative gold standard. This decisive mode led to a reluctancy to expand the money supply. Higher interest rates helped attraction international investors who bought foreign assets with gold; however, the higher interest rates intensified the deflationary spiral, which reduced vested interest in U.S. banks. Private banks also converted the Federal Reserve Notes to gold in 1931, which further reduced the Federal Reserve's gold reserves. The reduction in gold led to a decrease in Federal Notes in circulation, which created an all-out panic attack in the U.S. banking sector. The slow recovery was partially blamed on Congressional refusal to abandon the gold standard.

The Bretton Woods system was established after the Second World War as a "gold exchange standard." In essence, many countries fixed their exchange rates in accordance to the value of the U.S. dollar. In return, the U.S. vowed to fix their price of gold at around thirty-five dollars per ounce. However, French President Charles de Gaulle decided to reduce its dollar reserve and exchange them for gold. As a direct result, the U.S. gold reserves started to drain and coupled with the strenuous economic woes of the Vietnam War implicitly forced President Nixon to withdraw the U.S. from the gold standard altogether in 1971.

Arguments for the Gold Standard:

The advantages of the Gold Standard, otherwise known as a gold-backed currency, include a long-term price stability by placing a hedge against inflation. Hyperinflation never happens under a gold standard monetary policy because the money supply can only grow at the rate the gold supply increases. Price increases caused by money expansion and currency chasing goods rarely happens as the available gold for monetary use can only happen for those minted into coinage. High inflation under a gold standard usually only happens when engaged in war, which reduces the production of goods or if the gold supply increases drastically, such as during the World War One era when the California Gold Rush ensued. The gold standard also limits governmental power to inflate prices by printing out more money. It fixes the international exchange rates between countries that have implemented it, thus solidfifying international trade relations. Prices levels between different countries would automatically adjust according to an automatic adjustment mechanism known as the price specie flow. The gold standard also limits the governmental spending, which keeps the deficit in check because the debt can not be inflated away. A central bank can not buy unlimited assets as a last resort to government debt, and it can not create unlimited amounts of quantites of money with a limited supply of gold.

Arguments against the Gold Standard:

The disadvantages of the gold standard includes a limited amount of resources, which includes a unmined world-supply of 142 thousand metric tons. Deflation also rewards those who save while punishing those in debt. In turn, real debt rise, which causes borrowers to cut spending to pay off their current debts or simply default. This disproportionately makes lenders wealthier, but may actually cause lenders to save instead. Deflation also prevents central banks from stimulating spending. Mainstream economists think that economic downturns can be brought out by increasing the overall money supply. A gold standard would not make this option possible. Mined gold could fluctuate, which could inevitably cause inflation in the event of an increase. A country would need to produce sharper changes if it needed to devalue the currency.

Proponents of the Gold Standard:

Advocates of a new Gold Standard supported by many followers of the Ausrtian School of Economics, constitutionalists, objectivists and free-market libertarians, object to the government's role to intervene by issuing a fiat currency through the central banking "cartel." A significant proportion of gold standard advocates also want a mandated end to the fractional-reserve system. However, few politicians agree that implementing the gold standard will rectify the current economic woes. Some promiennt economists have supported the return to a gold-backed currency, including former United States Federal Reserve Chairman, Alan Greenspan, macro-economist Robert Barro, and U.S. Congressman Ron Paul. Peter Schiff, another prominent Austrian economist, has garnered recognition for his controversial predictions that led to the Great Recession. Schiff also supports a gold-backed currency and refutes the quantitative easing policies permeating the monetary policy under U.S. Federal Reserve Chairman, Ben Beranke.

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