The Gold Standard

Question 1

International Monetary Systems/ Exchange Rate Regimes

Answer 1

• Good International Monetary System assist exchange of goods and services across the borders
• IMS = mechanism for exchanging currencies
• All foreign trade requires foreign currency
• Relative value of currency relates to exchange rate regime
• Floating Regime = currencies float against each other
• Fixed Regime = fix currencies to weight of gold - gold held as reserves in central banks

Question 2

Classical Gold Standard

Answer 2

-1819: British Resumption Act - exchange gold for notes on demand
-1900: US formally join via Gold Standard Act
-Gold gives money its value
-All currencies soon tied to gold
(declare currencies worth in gold and willing to exchange for gold)
-Free movement of gold across borders
-All currencies convertible through gold
-If pay less for gold - currency stronger
-Currencies able to change value in relation to each other while staying fixed to gold

Question 3

Practical Example (French)

Answer 3

• Fixed exchange rate; France 1oz gold = 10e, £10
• Stable exchange rate - facilitates rough equilibrium in imports/exports
• Brits want to import more wine - higher Euro demand
• French no increased demand for the £
• French encouraged to sell euros by changing £15 for 10e
• New exchange rate = 1oz gold =10e = £15 =1.5oz gold
• If cont. Gold drain from UK to France
• Rectify = increase interest rate so encouraged to save
• Cools economy (buy less wine)
• Demand for Euro reverts

Question 4

Advantages if Gold Standard

Answer 4

• Exchange rate relatively stable between countries
• Predictable - merchant knows price of import/export
• Value of currency stay roughly the same
• Can calculate how much can buy things elsewhere
• Facilitate establishment of long term trade relationships
• Anti-inflationary - no incentive to print money - exchange for gold and deplete reserves

Question 5

Gold Standard in Britain…The Beginning

Answer 5

• Post-1815: London financial centre of the world
• Banks draw British money and invest where profitable
• Nation state and society must be willing to accept automatic deflation
• Politically inert population - lower classes shut out of decision making
• Political and economic elite favour Gold Standard
• Working class resist - bore cost of deflation and unemployment
• British money helped US industrialise; Japan modernize via loans
• 1870-1914 high point - most countries join Gold Standard, Britain powerful

Question 6

Slowdown of Gold Standard in Britain

Answer 6

• Lenin saw flows of money leading to imperialism and war
• Wealthy investors lobby Gov for peace - stake in prosperity
• Gold Standard shattered after WW1
• Countries come off - states struggle to revive economies
• Less trading/ isolationism
• Currency values float freely
• Backlash against liberal policies
• Largest power in system not committed to make sacrifices (US)
• US return to Gold Standard 1919
• UK return 1925

Question 7

Return to Gold Standard

Answer 7

• UK economy in poor state - bad technology compared to US
• Still fix GS rates to same as pre-war: exports expensive
• Better goods from more modernised US SO exports fell - should have chosen weaker parity)
• Reduced wages, adopt more efficient production methods (modernisation to increase competitiveness)
• BUT rising unemployment, exporters lost business)
• States eager to return to security of GS because confidence in value of currency and facilitate international trade so committed
• Disregard harm to International economies

Question 8

Retreat

Answer 8

• From international economy to regional economies 1932-1939
• States attempt to deal with economic problems
• Concentrate on improving domestic economies
• British concentrate trade within Empire in sterling area
• Americans operate in dollar zone
• States restrict economic relations with each other
• World tumble into recession

Question 9

Keynes Critique

Answer 9

• GS always seen as deflationary - little money movement - exacerbate unemployment
• Believed would exacerbate class conflict
• Workers resist low wages through strikes (General Strike 1926)
• Gold Standard didn’t consider domestic nature of economy
• Instead if rich get taste for wine - leads to higher interest rates, working class suffer unemployment (on whims of upper classes)

Question 10

Big Economic Consequences 1925-1931

Answer 10

Prices fall 30%
Wages drop 4% 
Exports drop 25% 
Unemployment double 
No modernization 
BUT avoid hyper inflation