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The gold standard
- 1. THE GOLD STANDARD Positive Money Hackney 13.04.2015 CONS
- 2. Why Gold The idea of the Gold Standard is to fix the quantity of money by pegging its issue to a scarce resource – gold. Scarce resource relatively rare With a known mine supply ± stable behaviour in the market Malleable Heavy Difficult to counterfeit Difficult to destroy
- 3. The Gold Standard’s Classical Gold Standard 1815-1914 What most people may think the gold standard is? Gold-Exchange Standard 1926-1931 {gold $} {$ £} {£ European currencies ) New Gold-Exchange Standard 1945-1968 Bretton Woods Agreement 1945 $ is the only key currency
- 4. Classical Gold Standard Currency weight of gold 1$ = 1/20 oz 1£ 1/4 oz The price of gold was fix exchange rates between currencies were fix
- 6. Gold-Exchange Standard 1926- 1931 Gold $ = gold £ = $ Eu currencies = £ The $ was redeemable in gold The £ was redeemable for gold (bars) only for international transactions Also the £ was redeemable by $ Other currencies were redeemable in £ Does it means that the amount of money in other countries is link to the amount of dollars? This blocks European citizens from gold And allows paper and bank inflation 1929: was the amount of Dollars really link to the amount of gold?
- 8. 1929 consequences for the Gold Standard 1931 Britain and other European countries leave the Gold Standard 1933-1934 US went out of the classical gold Standard United States remained, after 1934, on a peculiar new form of gold standard, in which the dollar, now redefined to 1/35 of a gold ounce, was redeemable in gold to foreign governments and central banks. A lingering tie to gold remained. Furthermore, the monetary chaos in Europe led to gold flowing into the only relatively safe monetary haven, the United States. (?)
- 9. New Gold-Exchange Standard 1945-1968 Bretton Woods Agreement Dollar $ being the only Key Currency World's currencies returned to the new system at their pre-World War II pars (exchange rates) But after the war this rates were overvalued and the $ artificially undervalued (US exportations ) US government policies after WWII were inflationary By the early 1950s, the increasing American inflation began to turn the tide of international trade (US exportations ) Gold $ = gold Other Currencies =$
- 10. How it works? Classical Gold Standard Country situation: A country decides to print more paper money Inflation imports exports deficit in the balance of payments with other countries Payments between countries are settle in gold outflow of gold for this country Will force them to correct the situation to stop the loss of gold Bank situation: A bank issues to many deposits (loans) All the above happens Foreigners (banks or gov’s? costumers?) call upon to redeem their deposits BANKRUPTCY The fear of bankruptcy will make them behave
- 11. Money functions in the economy 1 - As a means of exchange / deference of payment 2 - As a store of value 3 - As a unit of account
- 12. Pros Very good store of value Controls inflation Compare to “paper money” that is inflationary Deflation Same amount of money buys more goods Controls deficit as governments will try to avoid outflow of gold Force bankers to be more carful about the risks they take to avoid bankrupcy Stabilize the money supply
- 13. Cons Deflationary crash Favours the function “store of value” over “means of exchange Does not allow demurrage of inflation (because it does not degrade) Works against producers of goods and services Creates inequality: it tends to increase even further the privileges of those with money, allowing them to accumulate for themselves even more excessive wealth
- 14. Deflationary crash If Gold Standard was suddenly brought back: In today’s economy there is lots of debt (almost all money is debt). Because debt is fixed, deflation would make debts harder to pay, debtors would need more goods and services to pay their debts. meaning if the Gold Standard were implemented wholesale tomorrow, it would probably cause a gigantic debt deflationary crash! So just as with the Positive Money system, anyone advocating the Gold Standard should have a gradual, stable transition to a largely debt-free economy in mind.
- 15. Conflict between store of value and means of exchange Gold does not degrade over time (no devaluation) Other goods do (clothes, food...) Favours the user of goods against the producer of them When money does not rust, those with money have a store of value immune to deterioration, while those holding goods do not. Hence those with money will have superior bargaining power to those with goods. Making money (gold) preferable to goods, will favour people tendency to keep it (store of value) instead of use it (exchange of means) Making money and end instead of a tool Gold gives money intrinsic value As a mean of exchange, value is subjective
- 16. Gessel Must money, as a commodity, be superior to the commodities which, as medium of exchange, it is meant to serve ? ... Let us, then, make an end of the privileges of money. Nobody, not even savers, speculators, or capitalists, must find money, as a commodity, preferable to the contents of the markets, shops, and warehouses. If money is not to hold sway over goods, it must deteriorate, as they do.
- 17. Should we go back to it? My questions Which Gold Standard? Classical Gold Standard Would that be fair for countries with no gold? What price will have? How it would affect market price? Would it not benefit people owning big amount of gold (meaning the already rich becoming richer?) What about undeveloped countries with gold? Would they suffer wars, as oil wars in order for western countries to control the supply? Gold-Exchange and New Gold-Exchange Standards? Definitely NOT! Why should $ be the only Key Currency related to gold? With FRACTIONAL RESERVE LENDING policies, would that really work?
- 18. Conclusions With proper checks and balances in place the benefits of ‘paper money’ over gold outweigh the risks. As Positive Money advocates via the Monetary Policy Committee – manipulation of currency and conflicts of interest can be held in check. In conclusion then, ‘fiat’ money can accomplish the aims of the Gold Standard (stabilising the money supply) without its drawbacks, providing it is made accountable to the public.
- 19. Quote: https://www.youtube.com/watch?v=a7GJb0kufQI Friedman on gold standard https://www.youtube.com/watch?v=MvBCDS-y8vc Bill Still https://www.youtube.com/watch?v=Qz8Kh3FtuCY Why the U.S. Left the Gold Standard: Origins, Benefits, Drawbacks (2012) https://www.youtube.com/watch?v=JEPBbaK8sVI http://www.positivemoney.org/2012/03/fiat-money-or-gold- standard/
Editor's Notes
- ‘paper money’ (all notes, coins and digital bank deposits which are not backed by any commodity)