The Gold Standard

Question 1

How The Gold Standard works

Answer 1

• Gold inflows and outflows increase or decrease the money supply, which affects the domestic price level. An inflow of gold inflates prices whilst an outflow of gold deflates prices.
• Central banks sell domestic asses to acquire money when gold LEFT/ENTERED the country as payments for IMPORTS/EXPORTS. This DECREASED/INCREASED money supply and INCREASED/DECREASED interest rates, attracting financial INFLOWS/OUTFLOWS to match a current account DEFICIT/SURPLUS reducing gold OUTFLOWS/INFLOWS

Question 2

Definition of The Gold Standard

Answer 2

When monetary unit is defined by a certain number of gold.
Why gold?
Finite supply, very malleable so easy to store. Unique, hard to forge

Question 3

Classical Gold Standard

Answer 3

• 1818 British Gov Resumption Act meant notes were exchanged for gold on demand.
• All currencies tied to ga of and official reserves held in gold.
• Free movement of gold across borders; all currencies convertible
• Each government fixes price of currencies in terms of gold
• Each central bank us preserve the iffy all parity

Question 4

Advantages of Gold Standard

Answer 4

-Price Stability
This makes it hard for the government to inflate prices through expanding the money supply. Means that no country occupies a privileged position in the system if there’s a rough equality (in practice this relies on key currencies)

-Predictability
Provides fixed international exchange rates thus reducing uncertainty in trade

-Rare Inflation
Hyperinflation impossible as money supply can only grow at a rate that gold increases. This inspires confidence

-Self regulating mechanism
(David Hume) Ina,an estimated corrected through flows of gold REDUCING/INCREASING money supply thus in theory REDUCING/INCREASING PRICE/WAGES

Question 5

Disadvantages of Gold Standard

Answer 5

• unequal distribution
  favours countries that produce gold
• limits economic growth (David Mayer)
  as an economy’s productive capacity grows, then should the money supply, but a gold standard requires money be backed in the metal, hence the scarcity of the metal constrains the ability of the economy to produce more capital and grow

- monetary policy can not be used to stabilise economy 
mainstream economists (Mankiw ) believe economic recessions can be largely mitigated (lessened) by increasing the money supply during economic downturn. G.S means money supply would be determined by gold supply. E.G : G.S blamed for prolonging Great Depression as banks could not expand credit fast enough to offset deflationary force

• high short-term price volatility (Shwartz)
  This can lead to financial instability and lenders and borrowers become uncertain about debt
• deflation punishes debtors
  as real debt burdens increase causing borrowers to cut spending to service their debt. Although lenders become wealthier, they may choose to save thus reducing GDP.
• susceptible to speculations ( Hamilton) when gov financial status weak
  This discourages gov to engage in risk policy. E.g USA forced to contract money supply and raise interest rates Sept 1932 to defend dollar after speculators forced U.K. Out of GS

Question 6

British Hegemony and the Gold Standard

Answer 6

• C.19th Britain had family well functioning international economic and financial system, based on stable currency, based on gold standard
• This is not the case during post WW1 period. New industrialised nations begin to emerge, so Britain goes into relative economic decline. US as a dominant world power.
• London (old global economic and financial centre) was shaken and could not be restored. No new stable system of finance and economic regulation emerging.
• Interwar period therefore, punctuated by servers economic and political , crises: worst inflation and depressions ever seen up to that point.

Question 7

What is the gold specie standard and the gold bullion standard

Answer 7

This is

Question 8

Return to Gold

Answer 8

• After gold specie standard ended at the outbreak of WW1, the gold bullion Standard was introduced (1925). The law required authorities to sell gold bullion on demand at fixed price.
• By 1931 there were speculative attacks on pound. US/France make loans to GB but GB reserves quickly exhausted. Causes large outflows of gold to US.
• Interwar partially proved G.S unstable because of the conflict between :
  1) expanding pound and dollar liabilities to other countries.
  2) consequent deterioration in the reserve ratio of the Bank of England and US Treasury and Federal Reserve Banks

Question 9

USA’s economic position after WW1

Answer 9

• US experienced export led boom, supplying raw materials and agriculture productions.
• Britain dependent on US banks which moved USA from a debtor to a creditor