Gold Standard
The Gold Standard In The Market
During the years preceding the Second World War, the gold exchange standard was the primary means of determining the value of global currencies. The money (ie paper money that can be redeemed against goods from intrinsic value such as gold or silver) was already used in the 9th century by the Chinese. Moreover, it is this paper money in China that Marco Polo is the most impressed when his travels led him to discover the country in the thirteenth century. “All these pieces of paper are issued with as much solemnity and authority as if they were made of pure gold or silver,” he says. “Any person found to produce them may face the death penalty.”
The money was used as an indicative value of paper currency for centuries but from the years 1860 and 1870, European nations are beginning to abandon the silver standard or bimetallism (gold and silver standard) in favor of the gold standard only . The United States adopted the gold exchange standard in 1900.
The widespread adoption of the gold standard created an automatic balancing mechanism: if a central bank or Treasury had to issue too many banknotes over its gold reserves, or if the trade deficit if proved too large, gold reserves were declining when citizens or foreigners coming to redeem these tickets against another currency. While this mechanism stabilizes the international economic system, it creates cycles of inflation and deflation. For example, when a country’s economy grows, imports increase, spreading the money abroad. When it is exchanged against the gold, the gold reserves of the country are decreasing, as well as its money supply, while interest rates rise and economic activity slows. This results in a deflation that attracts buyers from foreign countries interested in the goods at low prices. Their currency is exchanged for or against, thus increasing the money supply in the country of departure and by allowing him the same opportunity to enter into a new period of economic growth temporarily.
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The Gold Standard in Theory and Myth (by Joseph Salerno)
