Restoration Of An Internal Gold Standard example essay topic

Traditionally, the gold standard was not limited to one or two countries; it was an international system. With gold as money, international trade was conducted much more smoothly than it is now. With a gold standard, or indeed, with any money based on specie, traders and travellers need not constantly be concerned with losses they may suffer from exchange rate fluctuations. This also means that in a worldwide gold or specie standard, poor countries are not at the whim of international currency speculation. Those living in poor countries can instead depend, from year to year, on the value of their exports, the cost of their imports, and interest on their debts. With a specie or gold standard, poor countries are not at the whim of the currency manipulation of governments of more wealthy nations (Thompson, 102).

The reign of the full gold standard was short, lasting only from the 1870's to the outbreak of World War I. In the post-World War I period, banknotes were issued fractionally backed by gold (i.e. gold reserves were a fixed proportion of the value of the notes in circulation). By 1928, however, both the internal and international gold standards had been virtually re-established, although gold coins were no longer in general circulation in most countries, and more extensive use was made of the gold exchange standard than before 1914. The gold standard collapsed again during the Great Depression of the 1930's. By 1937 not a single country remained on the gold standard (Snyder, 143). The post-World War II system agreed on at Bretton Woods was one in which most exchange rates were pegged either to the dollar or to gold. In 1958 a type of gold standard was re-established in which the major European countries provided for the free convertibility of their currencies into gold and dollars for international payments.

There was no restoration of an internal gold standard (Timmermans, 59). In an international gold-standard system, gold or a currency that is convertible into gold at a fixed price is used as a medium of international payments. Under such a system, exchange rates between countries are fixed; if 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 gold inflows or outflows occur until the rates return to the official level. These "trigger" prices are known as gold points (Moure, 97). The advantages of the gold standard are that (1) it limits the power of governments or banks to cause price inflation by excessive issue of paper currency, although there is evidence that even before World War I monetary authorities did not contract the supply of money when the country incurred a gold outflow; and (2) it creates certainty in international trade by providing a fixed pattern of exchange rates (Rockwell, 12). The disadvantages are that (1) 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; (2) a country may not be able to isolate its economy from depression or inflation in the rest of the world; and (3) the process of adjustment for a country with a payments deficit can be long and painful whenever an increase in unemployment or a decline in the rate of economic expansion occurs (Snyder, 146).

In conclusion I would like to note that Today gold is often kept as a hedge against the US dollar or other G 8 "hard currencies" (Ferdinand, 23). In addition to other precious metals, it has three major competitors as a store of value: the US dollar itself, the Chinese yuan which is not (as of 2003) traded on markets and has similar self-sufficiency advantages as the USA did in '75, and real estate (which of course is dependent on property rights recognized in a country). None of these has the stability of gold had, thus there are occasionally calls to restore the gold standard, or to move to a new standard based on ecological yield of natural capital, e.g. Global Resource Banking. Given the difficulty of assessing such standards as compared to the simple weighing of gold, it seems not likely they can really take hold. Some privately issued modern currencies (such as e-gold) are backed by gold bullion. Tantalum is also suggested as an alternative money supply standard, since even in an economy based on molecular engineering it would remain extremely difficult to forge - and remain quite easy to hide.

Bibliography

Thompson, Earl, Ideology and the Evolution of Vital Economic Institutions: Guilds, the Gold Standard, and Modern International Cooperation, McGraw Hill, 2002.
Snyder, Stephen, The Brewmaster's Bible: Gold Standard for Home Brewers, The, Prentice Hall, 2001.
Moure, Kenneth, The Gold Standard Illusion: France, the Bank of France, and the International Gold Standard, 1914-1939, NY: Random House, 2001.
Timmermans, Steven, The Gold Standard: The Challenge of Evidence-Based Medicine and Standardization in Health Care, 2000.
Michaels, Walter, The Gold Standard and the Logic of Naturalism: American Literature at the Turn of the Century, Penguin books, 2000.
Rockwell, Llewellyn, The Gold Standard: An Austrian Perspective, McGraw Hill, 2002.
Ferdinand, Brett, Peterson's Gold Standard McAt (Gold Standard McAt, 3rd Ed), NY: Random House, 2001.
A cena, Pablo Martin, Monetary Standards in the Periphery: Paper, Silver and Gold, 1854-1933, McGraw Hill, 2000.
Kammerer, Edwin, Gold and the Gold Standard (International Finance), Penguin books, 2001.