Gold standard

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A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold.

"What is the meaning of a gold standard and a redeemable currency? It represents integrity. It insures the people’s control over the government’s use of the public purse. It is the best guarantee against the socialization of a nation. It enables a people to keep the government and banks in check. It prevents currency expansion from getting ever farther out of bounds until it becomes worthless. It tends to force standards of honesty on government and bank officials. It is the symbol of a free society and an honorable government. It is a necessary prerequisite to economic health. It is the first economic bulwark of free men." - [E. Spahr], Chair and Professor of economics at New York University from 1928 to 1956

Long-term price stability has been described as the great virtue of the gold standard.[1] The gold standard makes it difficult for governments to inflate prices through expanding the money supply. Under the gold standard, significant inflation is rare, and hyperinflation is essentially impossible because the money supply can only grow at the rate that the gold supply increases. High inflation under a gold standard is seen only when warfare destroys a large part of an economy, reducing the production of goods, or when a major new gold source becomes available. [2]

As of 2013 no country used a gold standard as the basis of its monetary system, although some hold substantial gold reserves. The United States adopted a silver standard based on the Spanish milled dollar in 1785. Towards the end of the 19th century, some silver standard countries began to peg their silver coin units to the gold standards of the United Kingdom or the United States of America

Congress passed the Gold Reserve Act on 30 January 1934; the measure nationalized all gold by ordering Federal Reserve banks to turn over their supply to the U.S. Treasury. In return the banks received gold certificates to be used as reserves against deposits and Federal Reserve notes. The act also authorized the president to devalue the gold dollar. Under this authority the President Franklin D. Roosevelt, on 31 January 1934, changed the value of the dollar from $20.67 to the troy ounce to $35 to the troy ounce, a devaluation of over 40%.

After the Second World War, a system similar to a gold standard and sometimes described as a "gold exchange standard" was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the U.S. dollar and central banks could exchange dollar holdings into gold at the official exchange rate of $35 per ounce; this option was not available to firms or individuals. All currencies pegged to the dollar thereby had a fixed value in terms of gold.[3]

Starting in the 1959-1969 administration of French President Charles de Gaulle and continuing until 1970, France reduced its dollar reserves, exchanging them for gold at the official exchange rate, reducing US economic influence. This, along with the fiscal strain of federal expenditures for the Vietnam War and persistent balance of payments deficits, led US President Richard Nixon to end international convertibility of the dollar to gold on August 15, 1971 (the "Nixon Shock"). However, gold convertibility did not resume. In October 1976, the government officially changed the definition of the dollar; references to gold were removed from statutes. From this point, the international monetary system was made of pure fiat money. [4]

See Also

References

  1. Bordo, Michael D. (2008). "Gold Standard". In David R. Henderson. Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267
  2. "Advantages of the Gold Standard". The Gold Standard: Perspectives in the Austrian School. The Ludwig von Mises Institute. http://mises.org/books/goldstandard.pdf Retrieved 21 January 2014.
  3. Lipsey, Richard G. (1975). An introduction to positive economics (fourth ed.). Weidenfeld & Nicolson. pp. 683–702. ISBN 0-297-76899-9. pp. 683-702.
  4. https://en.wikipedia.org/wiki/Gold_standard accessed January 21, 2014

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