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The Gold Standard

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Introduction The gold standard is a special form of monetary system whereby the standard unit economic account relies upon a fixed mass of gold (Mayer 76). With respect to this definition, the gold standard is thus a monetary system whereby the value of currency of a given country is determined by a fixed mass of gold. In addition, the domestic currency of such a country can easily be converted into gold. To ensure that the domestic currency of a country can easily be converted to gold, the amount of money that is in circulation is normally equivalent to the gold reserves that that a specific country has. In addition, countries that use the gold standard usually make their international payments in gold. The exchange rates between countries normally remains constant. This is due to the fact that their currencies are valued using their gold reserves that are based on the specific gold weights. As a result, no country can take advantage of the other in the course of international trade. Ever since the days of early civilization, precious metals and stones have been used as a medium of exchange. In ancient Egypt, Rome, Greece, China and India, precious metals and stones have been used as a medium of exchange for goods and services in both domestic and international trade. Gold, silver and bronze were perhaps the most widely used metals during those times. This is because they held desirable properties that made them fit for these purposes. They were portable, rare, difficult to forge and their authenticity could be determined easily. It is due to these facts that they gained valued hence were used as a medium of exchange. It is in the 19th century that paper money started to circulate. The value of this money relied on the issuer. Due to the difficulty of determining this value, the early banks (which issued these notes) faced many problems. This led to the establishment of the central banks that issued domestic notes with regards to the amount of gold reserves that they had (Wolf 118). This finally led to the development of the International Monetary System that was exclusively reliant on gold. The gold standard thus became functional in 1870 and lasted up to the end of the First World War (Wolf 129). The system was revived between the interwar period. However, the Great Depression that occurred in the 1930 led to the permanent end of the system.
Advantages of the Gold Standard The most commonly discussed issue in the economy that we are currently living in is the increase in the prices of goods and services. This has come about as a result of high lending and interest rates. These problems arise due to the current monetary system that we have in place. Perhaps going back to the gold standard may be the best way to solve these problems and stabilize our economies. This is due to the fact that through its operations, the gold standard is the best monetary policy that can be applied to check inflation. The gold standard is a credible monetary system that can be used to control the monetary policies and actions of individuals, firms and governments. Through its operations, it can check the policies that the various governments try to implement with regards to volatility and exchange rates. The member states that have agreed upon adopting the gold standard are bound by the set rules and regulations of the system. With this respect therefore, they are expected to act in accordance to them. For instance, the value of currency that is released by member states on a given date is expected to match the value of the gold reserves that such a country has. In addition, the relative currency of a country is determined by the amount of gold reserves that it holds. This therefore states that member countries normally maintain a fixed exchange rate. It will therefore be difficult for a specific country to alter the value of its currency hence manipulate the exchange rate to its advantage. This is because the value of their currency is dependent on the balance of payments. The gold standard also helps to maintain a steady exchange rate among member states. As stated earlier, the currency value of a specific country is determines by its balance of payments. In a gold standard economy, international payments are made with gold. Therefore, when a country runs into a deficit as a result of international trade, it has to pay its debts in terms of gold. On the other hand, if a country runs into a surplus as a result of international trade, it receives payment in gold. This mechanism is reliable and stable since the exchange rate between these countries if fixed and is determined by the gold index that in most occasions remains constant. As a result, the gold standard is a good tool to promote and sustain international trade between member states. The gold standard also controls the amount of money that is in circulation in a given money. As stated earlier, the amount of money that should be in circulation in this monetary system should be equivalent to the amount of gold reserves that a country has. These gold reserves in turn determine the wealth of a nation and hence the value of its currency. As a result, the government, through its central bank, cannot have more money to circulate in the economy. The current monetary systems that we have in place at the present moment allows the increase of circulation of money into the market. The increase in the amount of money in the market that is not coupled with an increase in the supply of goods and services leads to a decrease in the value of currency. This is what leads to inflation. The gold standard therefore prevents the occurrence of such events.
Disadvantages of the Gold Standard At the present moment, the adoption of the gold standard will be impossible. This is due to the fact that the amount of gold reserve that is currently available does not match with the monetary value of the world`s economy. The amount of gold that has been mined since time immemorial is approximated to be around 142,000 metric tonnes (Wolf 136). If all this gold is quantified in monetary terms, it will not be equal to the amount of money that is in circulation or deposited in the United States alone. This therefore means that the adoption of the gold standard at the present moment will result to an increase in the value of gold in order for the gold reserves to be equivalent to the amount of money in circulation. This will in turn increase the cost of current transactions. These are the transactions that are carried on a daily basis. It will therefore mean that the cost of normal goods and services will increase. This will also lead to an increase in the cost of living. The gold standard will also make it impossible for individuals to pay their debts during the contraction period. The contraction period is the time when the economy of a given country has a deficit on its gold reserves. To balance the economy, such a country would be forced to deflate its currency. This in turn increases the burden of debtors who have to reduce their expenditure in order to meet their debts. In addition, contraction of the economy results to reduced rates of production and employment. This in turn leads to the development of a poor economy. The literature that is present with regards to the Great Depression of the 1930s state that it is the countries that remained in the gold system who suffered a lot (Roy 98). This was because they had decreased their employment rates and production level. The application of the gold standard will also be impossible on the current economy that the world is currently in. This is because the increase in the total supply of gold that should be equivalent with the amount of money in circulation cannot match the GDP growth rates of many nations. As a result, the system will normally tend to have a downward pull on the economy by reducing the pulling down the prices of goods and services in order to keep the economy stable.
The gold standard is a good monetary system. It is the system that has been credited for the growth and development of international trade that led u to the opening of new regions and markets of the world. In addition, it is through this system that paper money gained value and the banking system found it base. However, application of the gold standard at the present moment will be difficult. This is because the market and social institutions operate differently as they used to during the 18th and 19th century.

Works Cited Mayer, David. The Everything Economics Book: From Theory to Practice, Your Complete Guide to Understanding Economics Today. New York: Adams Media, 2010 Roy, Lawrence. Principles of money, credit, and banking. California: Macmillan, 1934 Wolf, Herbert. Periodontology. London: Thieme, 2005

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