GOLD STANDARDS

INTRODUCTION & DEFINITION:

Gold is thought to be one of the first known metals. The word “gold” came
from an old English word geolo, meaning yellow. Because of gold’s versatility, it
can be used in many applications. It’s most well-known use as Money as a
medium of exchange. Money used to actually be made out of gold. Gold coins
were traded for goods and services.

The phrase “gold standard” is defined as the use of gold as the standard value for
the money of a country. gold standard is "a commitment by participating
countries to fix the prices of their domestic currencies in terms of a specified
amount of gold. National money and other forms of money (bank deposits and
notes) were freely converted into gold at the fixed price." A county under the gold
standard would set a price for gold, say $100 an ounce and would buy and sell
gold at that price. This effectively sets a value for the currency;

The gold standard is when the value of a country's money is tied to the amount of
gold the country possesses. Anyone holding that country's paper money could
present it to the government and receive an agreed upon value (par value) from
that country's gold reserves.

ADVANTAGES:

The benefit of a gold standard is that money is backed by a fixed asset. It provides
a self-regulating and stabilizing effect on the economy.

The government can only print as much money as its country has in gold. This
discourages inflation, which is too much money chasing too few goods. It also
discourages government budget deficits and debt, which can't exceed the supply
of gold.

In addition, more productive nations are directly rewarded. As they export more
goods, they can accumulate more gold. They can then print more money, which
can be used for investing in and increasing these profitable businesses.
The gold standard discourages government debt and budget deficits, as well as
trade deficits. Countries with any deficit lost gold from their reserves in order to
pay their creditors.

The gold standard has also spurred exploration. It is why Spain and other
European countries discovered the New World in the 1500's - to get more gold
and increase the country's prosperity. It also inspired the Gold Rush in California
and Alaska during the 1800's.

DISADVANTAGES:

One disadvantage of a gold standard that the size and health of a country's
economy is dependent upon its supply of gold, not the resourcefulness of its
people and businesses. Countries without any gold are at a competitive
disadvantage.

However, this is an advantage to the U.S., which is the world's second largest gold
mining country behind South Africa. Most U.S. gold mining occurs on federally
owned lands in twelve western states, with Nevada being the primary source.
Australia, Canada and many developing countries also are major gold producers.
(Source: National Mining Association)

The gold standard causes countries to become obsessed with keeping their gold,
rather than improving the business climate. For example, during the Great
Depression, the Federal Reserve raised interest rates to make dollars more
valuable and prevent people from demanding gold. However, the Fed should have
been lowering rates to stimulate the economy. (Source: Econlib, The Great
Depression)

Government actions to protect their gold reserves caused large fluctuations in the
economy. In fact, between 1890 and 1905, when the U.S. was on the gold
standard, the economy suffered five major recessions for this reason. (Source:
Federal Reserve, Remarks by Governor Edward M. Gramlich,, 24th Annual
Conference of the Eastern Economic Association, February 27, 1998)

THREE TYPES OF GOLD STANDARDS:

1. THE GOLD SPICE STANDARD.

2. THE GOLD EXCHANGE STANDARD

3. THE GOLD BULLION STANDARD.

The gold specie standard

A gold specie standard existed in some of the great empires of earlier times, such
as in the case of the Byzantine Empire which used a gold coin known as the
Byzant. But with the ending of the Byzantine Empire, the civilized world tended to
use the silver standard, such as in the case of the silver pennies that became the
staple coin of Britain around the time of King Offa in the year 796 AD. The Spanish
discovery of the great silver deposits at Potosi in the 16th century, led to an
international silver standard in conjunction with the famous pieces of eight, which
carried on in earnest until the nineteenth century. In modern times the British
West Indies was one of the first regions to adopt a gold specie standard. The gold
standard in the British West Indies, that followed from Queen Anne's
proclamation of 1704, was a 'de facto' gold standard based on the Spanish gold
doubloon coin. In the year 1717, Sir Isaac Newton, who was master of the Royal
Mint, established a new mint ratio as between silver and gold that had the effect
of driving silver out of circulation and putting Britain on a gold standard. But it
wasn't until the year 1821, following the introduction of the gold sovereign coin
by the new Royal Mint at Tower Hill in the year 1816, that the United Kingdom
was formally put on a gold specie standard. The United Kingdom was the first of
the great industrial powers to switch from the silver standard to a gold specie
standard. Soon to follow was Canada in 1853, Newfoundland in 1865, and the
USA and Germany 'de jure' in 1873. The USA used the American Gold Eagle as
their unit, and Germany introduced the new gold mark, while Canada adopted a
dual system based on both the American Gold Eagle and the British Gold
Sovereign. Australia and New Zealand adopted the British gold standard, as did
the British West Indies, while Newfoundland was the only British Empire territory
to introduce its own gold coin as a standard. Royal Mint branches were
established in Sydney, New South Wales, Melbourne, Victoria, and Perth,
Western Australia for the purposes of minting gold sovereigns from Australia's
rich gold deposits.

The gold exchange standard

Towards the end of the nineteenth century some of the remaining silver standard
countries began to peg their silver coin units to the gold standards of the United
Kingdom or the USA. In 1898, British India pegged the silver rupee to the pound
sterling at a fixed rate of 1s 4d, while in 1906, the Straits Settlements adopted a
gold exchange standard against the pound sterling with the silver Straits dollar
being fixed at 2s 4d. Meanwhile at the turn of the century, the Philippines pegged
the silver Peso/dollar to the US dollar at 50 cents. A similar pegging at 50 cents
occurred at around the same time with the silver Peso of Mexico and the silver
Yen of Japan. When Siam adopted a gold exchange standard in 1908, this left only
China and Hong Kong on the silver standard.

The gold bullion standard

The gold specie standard ended in the United Kingdom and the rest of the British
Empire at the outbreak of World War I. Treasury notes replaced the circulation of
the gold sovereigns and gold half sovereigns. However, legally the gold specie
standard was not repealed. The end of the gold standard was successfully
effected by appeals to patriotism when somebody would request the Bank of
England to redeem their paper money for gold specie. It was only in the year 1925
when Britain returned to the gold standard in conjunction with Australia and
South Africa, that the gold specie standard was officially ended. The British act of
parliament that introduced the gold bullion standard in 1925 simultaneously
repealed the gold specie standard. The new gold bullion standard did not
envisage any return to the circulation of gold specie coins. Instead, the law
compelled the authorities to sell gold bullion on demand at a fixed price. This gold
bullion standard lasted until 1931. In 1931, the United Kingdom was forced to
suspend the gold bullion standard due to large outflows of gold across the
Atlantic Ocean. Australia and New Zealand had already been forced off the gold
standard by the same pressures connected with the Great Depression, and
Canada quickly followed suit with the United Kingdom.

Suspension of the gold standard

Governments faced with the need to fund high levels of expenditure, but with limited sources of
tax revenue, suspended convertibility of currency into gold on a number of occasions in the 19th
century. The British government suspended convertibility during the Napoleonic wars and the
US government during the US Civil War. In both cases, convertibility was resumed after the war.
Gold standard from peak to crisis (1901–1932)

Suspending gold payments to fund the war

As in previous major wars under the gold standard, the British government
suspended the convertibility of Bank of England notes to gold in 1914 to fund
military operations during World War I. By the end of the war Britain was on a
series of fiat currency regulations, which monetized Postal Money Orders and
Treasury Notes. The government later called these notes banknotes, which are
different from US Treasury notes. The United States government took similar
measures. After the war, Germany, having lost much of its gold in reparations,
could no longer produce gold Reichsmarks, and was forced to issue unbacked
paper money, leading to hyperinflation.

Following Germany's example after the Franco-Prussian War of extracting

reparations to facilitate a move to the gold standard, Japan gained the needed
reserves after the Sino-Japanese War of 1894-1895. Whether the gold standard
provided a government sufficient bona fides when it sought to borrow abroad is
debated.

For Japan, moving to gold was considered vital to gain access to Western capital
markets.

Great Britain, Japan, and the Scandinavian countries left the gold standard in
1931.

Depression and World War II

Prolongation of the Great Depression

Economic historians, such as UC Berkeley professor Barry Eichengreen, blame the

gold standard of the 1920s for prolonging the Great Depression.The gold standard
limited the control of central banks over monetary policy. As a result, central
banks could not lower interest rates in order to expand demand and stimulate the
economy, deepening and prolonging the Great Depression.

For example, in the early 1930s, the Federal Reserve ("the Fed")' defended the
fixed price of dollars in respect to the gold standard by raising interest rates,
trying to increase the demand for dollars. Higher interest rates intensified the
deflationary pressure on the dollar and reduced investment in U.S. banks. The
banks also converted dollar assets to gold in 1931, reducing the Federal Reserve's
gold reserves. This speculative attack on the dollar created a panic in the U.S.
banking system. Fearing imminent devaluation of the dollar, many foreign and
domestic depositors withdrew funds from U.S. banks to convert them into gold or
other assets.Recovery in the United States was slower than in Britain, in part due
to the Federal Reserve's reluctance to abandon the gold standard and float the
U.S. currency as Britain had done. It was not until 1933 when the United States
finally decided to abandon the gold standard that the economy began to improve.

British hesitate to return to gold standard

During the 1939–1942 period, the UK depleted much of its gold stock in purchases
of munitions and weaponry on a "cash and carry" basis from the U.S. and other
nations. This depletion of the UK's reserve convinced Winston Churchill of the
impracticality of returning to a pre-war style gold standard. To put it simply the
war had bankrupted Britain. John Maynard Keynes, who had argued against such
a gold standard, proposed to put the power to print money in the hands of the
privately owned Bank of England. Keynes, in warning about the menaces of
inflation, said "By a continuous process of inflation, governments can confiscate,
secretly and unobserved, an important part of the wealth of their citizens. By this
method, they not only confiscate, but they confiscate arbitrarily; and while the
process impoverishes many, it actually enriches some".Quite possibly because of
this, the 1944 Bretton Woods Agreement established the International Monetary
Fund and an international monetary system based on convertibility of the various
national currencies into a U.S. dollar that was in turn convertible into gold. It also
prevented countries from manipulating their currency's value to gain an edge in
international trade.

Post-war international gold-dollar standard (1946–1971)

Main article: Bretton Woods system

After the Second World War, a system similar to a Gold Standard was established
by the Bretton Woods Agreements. Under this system, many countries fixed their
exchange rates relative to the U.S. dollar. The U.S. promised to fix the price of
gold at $35 per ounce. Implicitly, then, all currencies pegged to the dollar also had
a fixed value in terms of gold. Under the regime of the French President Charles
de Gaulle up to 1970, France reduced its dollar reserves, trading them for gold
from the U.S. government, thereby reducing U.S. economic influence abroad.
This, along with the fiscal strain of federal expenditures for the Vietnam War, led
President Richard Nixon to end the direct convertibility of the dollar to gold in
1971, resulting in the system's breakdown, commonly known as the Nixon Shock.

Gold as a reserve today: