Gold Exchange Standard

10 Key excerpts on "Gold Exchange Standard"

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  eBook - ePub

  Principles of International Finance

  • Daniel R. Kane(Author)
  • 2018(Publication Date)
  • Taylor & Francis

    (Publisher)

  Part Two

  Exchange Rate Systems

  Exchange rate systems establish the structural framework within which foreign exchange transactions are conducted.

  Systems are essentially either inflexible, in which case the exchange rate is stabilised within predetermined limits, or flexible, in which case the exchange rate is free to respond to changes in market forces.

  Various exchange rate systems have been resorted to (at times through default) in different periods. Each has met with varying degrees of success, prompted in part by the advantages and disadvantages inherent in each system and in part by the prevailing economic climate. Chapters 4 to 7 examine these systems within a chronological framework which reflects the changing nature of these economic conditions.

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  4

  The Gold Standard

  The golden era of the gold standard was 1880–1914, when it was recognised and subscribed to by most of the industrialised world. The system was centred on the UK which was the dominant industrial and trading power of the time and which had operated a gold standard since the early nineteenth century. The outbreak of the First World War in 1914 brought the system to an end, but its perceived successes fostered attempts in the immediate post-war period to restore it to its former prominence. The subsequent return to the gold standard by the UK in 1925, and by most other countries by 1927, proved short-lived, however, not least because of the problems of misaligned exchange rates and the less than propitious international financial climate. This, together with a succession of financial crises, prompted the UK to abrogate the gold standard in 1931. The US followed in 1933 and France in 1936, so that by the end of the decade the gold standard had been abandoned and consigned to the annals of economic history.

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  A Critique of the Gold Standard

  • H. L. Puxley(Author)
  • 2017(Publication Date)
  • Taylor & Francis

    (Publisher)

  The Gold Standard and its Future, London, 1932, p. 9. With stable exchange rates, an American trader can deal in goods priced in sterling as simply as in goods priced in dollars.

  1 “The quantity of circulating credit tends to hold a definite relation to the quantity of money in circulation.”—Irving Fisher, Purchasing Power of Money, p. 50. The quantity of money in circulation, in turn, was supposed to be closely linked to the size of the country’s gold holdings.

  1 “Any fall in the value of gold in one country (indicated by a rise in prices in that country) relative to the value of gold in other gold-standard countries would generate a movement of gold out of that country into those other countries where its values are greater. Inflow to those countries would tend to lower its value there, i.e. to raise prices; and the efflux from the country which lost some of its gold would tend to raise its value in that country, i.e. to lower prices. And these two sets of forces would continue to be effective until equilibrium was restored…. In short, the operation of the gold standard … tended to establish a price-stability between countries.”—D. T. Jack, Economics of the Gold Standard, London, 1925, p. 25.

  1 “The Territorial Distribution of money is effected through the agency of Prices. If the stock of money in any country becomes so large that, its rate of movement being what itis, goods offered in the market for money can be exchanged as often as required, and yet a higher level of prices be maintained than in other countries, that country becomes a good country to sell to, because prices there are high, and, for the same reason, becomes a bad country to buy from. The immediate consequence is that exports of domestic products from a country having such a scale of prices are diminished, while its imports of foreign merchandise are increased. If, then, the money of that country is such as has equal acceptance in foreign countries, a movement for its exportation to settle the disturbed balance of exchange at once begins.”—F. A. Walker, Money, Trade and Industry

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  Financial Questions in United States Foreign Policy

  • James W. Gantenbein(Author)
  • 2019(Publication Date)
  • Columbia University Press

    (Publisher)

  The matter of the stabilizing of prices, as contrasted with for-eign exchange or monetary units, forms quite another subject, F O R E I G N -E X C H A N G E I N S T A B I L I T Y although exchange-rate fluctuations and gold shipments some-times tend to affect prices. 1 EXCHANGE STABILITY BEFORE 1 9 3 1 1. TYPES OF GOLD STANDARD BEFORE THE POST-WAR PERIOD At the time of the outbreak of the World War, in 1914, most of the leading countries of the world had for a number of years been on some kind of gold standard. Such a standard has usually been assumed, at least until a few years ago, to have three im-portant characteristics; namely, that legal tender money would be convertible upon demand of the holder into some form of gold, that the government or central bank would buy at a fixed price all gold offered, and that the metal would be used freely to settle international balances (that is, that restrictions would not be placed upon imports and exports of gold). The dis-1 According to the classical theory of the gold standard, if a country ships gold, the loss of gold will increase the purchasing power of the remaining gold, and prices will decline, with a resultant tendency toward increased exports and de-creased imports and a return of the gold previously lost. (See League of Nations, Report of the Gold Delegation of the Financial Committee, 1932, p. 10.) Another influence of gold movements that is corrective if permitted to exert itself, is that of interest rates. If gold flows out of a country, credit resources become diminished and interest rates tend to advance. This means that foreign investors may find it profitable to lend their money in the country with the higher interest rates, while investors within that country will tend to recall some of their funds abroad and to take advantage of the higher rates at home. This influence will tend to stop the export of gold and to start a new gold inflow.

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  Exchange Rates and International Financial Economics

  History, Theories, and Practices

  • J. Kallianiotis(Author)
  • 2013(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The above exchange rate regime, which was negotiated at Bretton Woods and monitored by the IMF worked relatively well during the post-World War II period of reconstruction and rapid growth in world trade and in domestic economies. Of course, differences existing in national monetary, fiscal, and trade policies, as well as in inflation and unemployment rates among countries, and many external shocks (wars, oil prices, etc.) led the system to its demise. Actually, it was a rigid monetary system, which caused serious problems mostly to small economies. The US dollar was the main reserve currency held by central banks, but it had many problems because the United States ran persistent and growing deficits in its trade accounts. An enormous capital outflow of dollars to finance the deficits and the demand for dollars resulted in a lack of confidence by foreigners toward the ability of the United States to meet its commitment, which was to offer gold and keep the exchange rate fixed. The United States lost a tremendous amount of gold until the suspension of the official sales of gold in 1971. The dollar was devalued until March 1973, when the major foreign exchange markets closed for a few weeks, and when they reopened, currencies were allowed to float depending on the market conditions.

  A country on the “gold standard” and on the “Gold Exchange Standard” allowed its residents and its businesses to ship gold abroad to finance their payment deficits. The central banks also were buying or selling gold by accepting their own currencies. Gold was serving as the principal reserve asset up to 1971, when President Nixon abandoned the sale of gold from the Federal Reserve System. In the late years of the gold standard system, some countries began holding reserves in the form of currencies (mainly pound sterlings; later dollars; and now dollars, euros, and other hard currencies). The gold standard was imposing adjustment obligations and was also providing an adjustment mechanism (through the price-specie-flow mechanism, interest rate effects on capital flows, income effects, and terms of trade effects). Loss of gold signified the obligation to accept monetary contraction and a gain of gold implied an obligation to expand money supply. Gold was provided as the world’s monetary base during that period, “the golden age” period. There was a period of thriving international capital market intermediating funds mainly from United Kingdom and France to investors in the lands of recent settlement and elsewhere (in regions that nations were financing their wars of independence). But, the inflexibility of these systems caused serious balance-of-payments problems and consequently, employment and welfare reductions.

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  Balance of Payments

  Theory and Economic Policy

  • Robert Stern(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  This brief historical survey revealed a number of important differences between the idealized version and observed operation of the gold standard. In short, the gold standard was in actuality far more complex and functioned much less automatically than the idealized version of it implies. The special historical circumstances of economic growth in the pre-1914 period also cannot be overlooked. We had occasion thereafter to examine the abortive attempts to reinstitute the gold standard during the interwar period, and to consider the implications of adapting the present-day international financial system along gold-standard lines. The important question here was whether countries would willingly expose themselves to domestic instability in order to maintain exchange-rate stability. We stepped finally outside of the gold standard and examined in more general terms the case to be made for a system of fixed exchange rates and the special conditions that would have to be met for such a system to function effectively. Having treated the major considerations involved in freely fluctuating and fixed exchange-rate systems, we can turn in the next chapter to the present-day system of the adjustable peg. The issue here is whether the present-day system represents the better or the worse of both possible exchange-rate worlds. 1 This account of the adjustment mechanism under the gold standard is very much oversimplified. In particular, we have not spelled out the relationships between the demand for goods and for money and between national income and expenditure that make the system operative and lead to equilibrium when a disturbance occurs

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  The Global Gold Market and the International Monetary System from the late 19th Century to the Present

  Actors, Networks, Power

  • S. Bott(Author)
  • 2013(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  laissez faire Liberalism was beginning to hold sway, especially at the centre of the world economy in London. The gold standard appeared as essential for what Karl Polanyi called ‘the Great Transformation’, and Christopher Bailey ’the Great Acceleration’, of international trade and finance since it was supposed to force governments to abide by the laws of supply and demand rather than be pushed by temporary political exigencies (Polanyi 1944; Bayley 2004, p 472). The gold standard also allowed the City of London to become the nerve centre of not only the British Empire but the entire world economy. London’s financial supremacy assured sufficient British earnings on ‘invisibles’ to allow it to enjoy balance of payments surpluses even while its trade balances were negative. That, in turn, stimulated the globalization of the world economy, as Britain’s profits from finance, transport, and commerce allowed the islanders to be the world’s largest consumers of many of the most important internationally traded commodities (Topik and Wells 2012, pp. 593–812).

  The gold standard also played a political/ideological role: the money supply and exchange rates were supposed to be governed mechanically by international balances of payment, that is by the market rather than by the caprice of politicians. This was the first step in what today is sometimes called ‘the imperialism of economics’ – the notion that the economic trumps the political because it is more scientific, unbiased, predictable and efficient. Adoptions of the gold standard in both Brazil and Mexico were early day manifestations of ‘structural readjustment’ before the term itself was coined. In both countries men considering themselves economic scientists (they adopted the label cientifico in Mexico), pushed for the gold standard (María y Campos 1979, 157–87; Casasús 1905; Murtinho 1899).

  A common notion holds that the gold standard was almost natural, long-standing and widely recognized, as if all state leaders had studied the same economics text book and diligently applied its principles. In fact, the gold standard only came to dominate in Europe after 1870, and particularly in the early 20th century. Gold, silver, and bimetal systems, both convertible and inconvertible, finally converged with the unprecedented boom in the world economy in the last quarter of the 19th century.

  But this convergence did not merely reflect the internal logic of capitalist accumulation. It arose from a number of different directions, at different periods, because of diverse internal and external reasons. Some of the greater agreement about value came from broad changes that Kevin O’Rourke and Jeffrey Williamson point to as the beginning of modern globalization; they argue that a transportation revolution, large-scale immigration and lowered transaction costs brought about price and factor convergence in the years between 1870 and 1930 (O’Rourke and Williamson 1999; also see Schwartz 1994). By helping lower transaction costs because of greater trust in the value of money and at the same time spreading and speeding commercial relations across national borders, the gold standard can be seen as both a cause and

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  The Golden Age of the Quantity Theory

  • David E.W. Laidler(Author)
  • 2014(Publication Date)
  • Princeton University Press

    (Publisher)

  Thereafter '[b]y withholding new issues of currency, the government . . . succeeded by 1899 in raising the gold value of the rupee to Is Ad, at INTERNATIONAL DIMENSION 169 which figure it . . . remained without sensible variation' (Keynes, 1912, page 1). This exchange rate was prevented from rising further by making sterling legal tender in India and convertible into rupees at this price, and prevented from falling by an administrative practice, backed by no legal requirement, but nevertheless always adhered to, whereby 'the government will sell in Calcutta, in return for rupees tendered there, bills payable in London in sterling at a rate not more unfavourable than Ii 29/32rfper rupee' (page 5). The latter practice rendered India's system a Gold Exchange Standard rather than a gold standard proper, for it involved the Indian monetary authorities holding their foreign exchange reserves not in gold, but in interest-bearing assets denominated in a gold-backed currency. Keynes described the generic properties of the Gold Exchange Standard as follows: The gold-exchange standard may be said to exist when gold does not circulate in a country to an appreciable extent, when the local currency is not necessarily redeemable in gold, but when the government or central bank makes arrangements for the provision of foreign remittances in gold at a fixed maximum rate in terms of the local currency, the reserves necessary to provide these remittances being kept to a considerable extent abroad (pages 21-2). Thus defined, the Gold Exchange Standard was in no way a uniquely Indian phenomenon. In Europe, Austro-Hungary and to a lesser degree Germany, had all adopted it by 1912, thereby achieving considerable economies relative to holding non-interest- bearing gold, and also, according to Keynes, obtaining a higher degree of flexibility and speed in managing their exchanges than would have been possible had they, as debtor nations, relied solely on bank rate and bullion shipments.

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  International Macroeconomics

  • Peter J. Montiel(Author)
  • 2015(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  We begin the chapter with some historical background that will help us understand how the gold standard evolved. We then turn to exploring central bank behavior under the gold standard. In the next chapter we will turn to ‘‘hard peg’’ macroeconomics. 5.1 Evolution of the International Gold Standard In this section, we will review how the gold standard arose. Tracing the evolution of the gold standard provides a useful insight into what made this exchange rate regime a ‘‘hard’’ peg – specifically, why the official price of gold (which, as we will see, determined the official exchange rate under the gold standard) was not regarded by central banks as a policy variable to be adjusted at their discretion. Precious Metals as Money In ancient times, countries and city-states generally operated on what economists refer to as a specie commodity standard, consisting of the use of precious metals as money. In the West, the use of precious metals as money can be dated back to the 24th century bce in Mesopotamia. The innovation of money in the form of a generally acceptable medium of exchange yielded important social benefits over simple barter, because it avoided wastage of resources in the form of the transaction costs incurred in seeking out a ‘‘double coincidence of wants’’ in trade. But why use precious metals in particular – instead of something else – as money? 116 Fixed Exchange Rates In fact, many different types of commodities have functioned as money across human history. These include cloth, grain, silk, cows, cowrie shells, wampum (beads on string), tobacco, cigarettes, and more exotic items such as massive stones and even human skulls! But precious metals have been used most commonly. Precious metals are attractive as money because they have intrinsic value, that is, their value makes it likely that others will accept them in exchange, which makes people more likely to accept them as means of payment.

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  Contradictions

  Finance, Greed, and Labor Unequally Paid

  • Paul Zarembka(Author)
  • 2013(Publication Date)
  • Emerald Group Publishing Limited

    (Publisher)

  One must remember that the suppression of the link between gold and the US dollar caused the phenomenal expansion of derivatives whose role was to counterbalance risk generated by uncertainty in the store of value function of international currency. Also the volatility of financial markets cannot be reduced unless there is a major change in the international monetary system. Mr. Zhou seems to share the same viewpoint when he said, The centralized management of part of the global reserve by a trustworthy international institution with a reasonable return to encourage participation will be more effective in deterring speculation and stabilizing financial markets y With its universal membership, its unique mandate of maintaining monetary and financial stability, and as an international ‘supervisor’ on the macroeconomic policy of its member countries, the IMF, equipped with its expertise, is endowed with a natural advantage to act as the manager of its member countries reserves . ( Zhou Xiaochuan, 2009, p. 4 ) NUME ´ RAIRE AND VARIABLE STANDARD OF VALUE Dimensional Analysis Some economists admit that a significant link can be observed empirically between the price of gold measured in dollars and the value of money of other countries also measured with respect to the dollar (weighted exchange rates). They consider that such an empirical link is tautological or redundant because the dollar is present on both sides of the equation. A dimensional analysis of the variables will help to clarify the dimension of the b coefficient. If a homogenous relation exists between the two sides of the equation, then one would expect b =[1] which is a dimensionless or abstract number with both sides of the equation being of the same dimension. Did Gold Remain Relevant in the Post-1971 International Monetary System? 63 In physics, dimensional analysis is applied to heat and its thermal unit is British Thermal Unit (BTU).

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  Modern Money Theory

  A Primer on Macroeconomics for Sovereign Monetary Systems

  • L. Randall Wray(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  An example of a fixed exchange rate is a promise to convert thirty-five US Dollars to one ounce of gold. For many years, this was indeed the official US exchange rate. Other nations also adopted fixed exchange rates, pegging the value of their currency either to gold or, after WWII, to the US Dollar. For example, the official exchange rate for the UK Pound was $2.80 US. In other words, the government of the United Kingdom would provide $2.80 (US currency) for each UK Pound presented for conversion. With an international fixed exchange rate system, each currency will be fixed in value relative to all other currencies in the system. In order to make good on its promises to convert its currency at fixed exchange rates, the UK had to keep a reserve of foreign curren- cies (and/or gold). If a lot of UK Pounds were presented for conver- sion, the UK’s reserves of foreign currency could be depleted rapidly. There were a number of actions that could be taken by the UK gov- ernment to avoid running out of foreign currency reserves, but none of them was very pleasant. The choice mostly boiled down to three types of actions: a) depreciate the Pound; b) borrow foreign currency reserves; or c) deflate the economy. In the first case, the government changes the conversion ratio to, say, $1.40 (US currency) per UK Pound. In this manner it effectively doubles its reserve because it only has to provide half as much for- eign currency (or gold) in exchange for the Pound. Unfortunately, such a move by the UK government could reduce confidence in the UK government and in its currency, which could actually increase the demands for redemption of Pounds. In the second case, the government borrows foreign currencies to meet demanded conversions. This requires willing lenders, and puts the UK into debt on which interest has to be paid. For example, it could borrow US Dollars but then it would be committed to paying interest in Dollars – a currency it cannot issue.

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