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Gold standard

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   The gold standard is a monetary system in which the standard economic
   unit of account is a fixed weight of gold and all currency issuance is
   to one degree or another regulated by the gold supply.

   Under the gold standard, currency is either in coins struck with a
   known amount of gold or in notes that the issuers guarantee to redeem
   in gold, ideally for an amount fixed in advance. Gold standard
   currencies can be internal, which means that domestic holders of notes
   may redeem them for specie, or international only, where only a limited
   number of entities, for example central banks, have the right to demand
   conversion to gold. Currencies that are backed by fixed amounts of gold
   have a constant exchange rate between each other. The purposes of a
   gold standard are to prevent inflationary expansion of the money
   supply, to maintain a fixed value against which other prices can be
   measured, and to allow wider circulation, including clearing of
   transactions, with a greater degree of trust in both the stability of
   the quantity and quality of money.

   Gold standards of various kinds have been used in both national and
   international forms, and gold standard currencies have often been used
   as the monetary unit against which currencies with a less fixed value
   have been measured. Gold standard currencies of the past have included
   the Venetian ducat and the British pound sterling in the late 19th
   century. Gold was the basis for the Bretton Woods Agreements, which
   collapsed in 1971-1972.

   In modern mainstream economic thought, a gold standard is considered
   undesirable because it is associated with the collapse of the world
   economy in the late 1920's, and that aggregate supply and demand is a
   far better means of regulating interest rates, money supply and
   monetary basis. However, many other theories have been advanced for the
   turbulent economic conditions that existed at this time. While the gold
   standard is not currently in use, it has advocates for its resurrection
   and forms part of a basic theory of monetary policy as a standard for
   comparison for other monetary systems. Advocates of a variety of gold
   standards argue that gold is the only universal measure of value, that
   gold standards prevent inflation by preventing the creation of
   unlimited money supply in a fiat currency, and that it provides the
   soundest theoretical basis for a monetary system.

Why gold?

   Due to its rarity, durability, and the general ease of identification
   through its unique colour, weight, ductility and acoustic properties,
   gold is a commodity that merchants and traders came to select as a
   common unit of account - thus it has long been used as a form of money
   and store of wealth. The exact nature of the evolution of money varies
   significantly across time and place, though it is believed by
   historians that gold's high value for its beauty, density, resistance
   to corrosion, uniformity, and easy divisibility made it useful both as
   a store of value and as a unit of account for stored value of other
   kinds — in Babylon, a bushel of wheat was the unit of account, with a
   weight in gold used as the token to transport value. Early monetary
   systems based on grain used gold to represent the stored value. Banking
   began when gold deposited in a bank could be transferred from one
   account to another by a giro system, or lent at interest.

   When used as part of a commodity money system, the function of paper
   currency is to reduce the danger of transporting gold, reduce the
   possibility of debasement of coins, and avoid the reduction in
   circulating medium to hoarding and losses. The early development of
   paper money was spurred originally by the unreliability of
   transportation and the dangers of long voyages, as well as by the
   desire of governments to control or regulate the flow of commerce
   within their dominion. Money backed by a specie sometimes is called
   representative money, and the notes issued often are called
   certificates, to differentiate them from other forms of paper money.

   Through most of human history, however, silver was the primary
   circulating medium and major monetary metal. Gold was used as an
   ultimate store of value, and as means of payment when portability was
   at a premium, particularly for payment of armies. Gold would supplant
   silver as the basic unit of international trade at various times,
   including the Islamic Golden Age, the peak of the Italian trading
   states during the Renaissance, and most prominently during the 19th
   century. Gold would remain the metal of monetary reserve accounting
   until the collapse of the Bretton Woods agreement in 1971, and it
   remains an important hedge against the actions of central banks and
   governments, a means of maintaining general liquidity, and as a store
   of value.

Early coinage

   The first metal used as a currency was silver more than 4,000 years
   ago, when silver ingots were used in trade. Gold coins first were used
   from 600 B.C. However, long before this time, gold, as per silver, was
   used as a store of wealth and the basis for trade contracts in Akkadia,
   and later in Egypt. Silver remained the most common monetary metal used
   in ordinary transactions until the 20th century. It still circulates in
   certain bi-metallic coins, such as the Mexican 20-peso coin circa 2005.

   The Persian Empire collected taxes in gold, and when Alexander the
   Great conquered it, this gold became the basis for the gold coinage of
   Alexander's empire. The paying of mercenaries and armies in gold
   solidified its importance: gold became synonymous with paying for
   military operations, as mentioned by Niccolò Machiavelli in The Prince
   2,000 years later. The Roman Empire minted two important gold coins:
   the aureus, which was approximately 7 grams of gold alloyed with
   silver, and the smaller solidus, which weighed 4.4 grams, of which 4.2
   was gold. The Roman mints were fantastically active — the Romans minted
   and circulated millions of coins during the course of the Republic and
   the Empire.

   After the collapse of the Western Roman Empire and the exhaustion of
   the gold mines in Europe, the Byzantine Empire minted successor coins
   to the solidus called the nomisma or bezant. These were of the same
   weight and high purity as their Western Empire counterparts and still
   are considered to be solidii. Unfortunately, the Byzantine empire
   gradually degraded the purity of the coin from about the 1030s until,
   by the turn of the 11th century, the coinage in circulation was only
   15% gold by weight. This represented a tremendous drop in real value
   from the old 95% to 98% gold Roman coins.

   From the late seventh century, trade was increasingly conducted in the
   dinar. The dinar was a gold coin modeled on the original Roman solidus,
   having similar size and weight to the Byzantine solidus but produced by
   the Arab Empire. The Byzantine solidus and the Arab dinar circulated
   alongside one another for about 350 years before the solidus began its
   decline.

   The dinar and dirham were gold and silver coins, respectively,
   originally minted by the Persians. The Caliphates in the Islamic world
   adopted these coins, but it is with Caliph Abd al-Malik (685–705) who
   reformed the currency (685–705) that the history of the dinar usually
   is thought to begin. He removed depictions from coins, established
   standard references to Allah on the coins and fixed ratios of silver to
   gold. The growth of Islamic power and trade made the dinar the dominant
   coin from the Western coast of Africa to northern India until the late
   1200s, and it continued to be one of the predominant coins for hundreds
   of years afterward. In this way the solidus size, purity and weight of
   coin - whether it was called the dinar, the bezant, or the solidus
   itself - was a desired unit of account for more than 1,300 years and
   outlived three global empires.

   In 1284, the Republic of Venice coined its first solid gold coin, the
   ducat, which was to become the standard of European coinage for the
   next 600 years. Other coins, the florin, noble, grosh, złoty, and
   guinea, also were introduced at this time by other European states to
   facilitate growing trade. The ducat, because of Venice's pre-eminent
   role in trade with the Islamic world and its ability to secure fresh
   stocks of gold, would remain the standard against which other coins
   were measured.

   Beginning with the conquest of the Aztec and Inca empires, Spain had
   access to stocks of new gold for coinage in addition to silver. The
   primary Spanish gold unit of account was the escudo, and the basic coin
   the 8 "escudos" piece, or "doblón", which originally was set at 27.4680
   grams of 22 carat (92%) gold, using current measures, and was valued at
   16 times the equivalent weight of silver. The wide availability of
   milled and cob gold coins made it possible for the West Indies to make
   gold the only legal tender in 1704. The circulation of Spanish coins
   would create the unit of account for the United States, the "dollar"
   based on the Spanish silver real, and Philadelphia's currency market
   would trade in Spanish colonial coins.

History of the modern gold standard

   The adoption of gold standards proceeded gradually. This has led to
   conflicts between different economic historians as to when the "real"
   gold standard began. Sir Isaac Newton included a ratio of gold to
   silver in his assay of coinage in 1717 that created a relationship
   between gold coins and the silver penny, which was to be the standard
   unit of account in the Law of Queen Anne; for some historians this
   marks the beginning of the "gold standard" in England. However, more
   generally accepted is that a full gold standard requires that there be
   one source of notes and legal tender, and that this source be backed by
   convertibility to gold. Since this was not the case throughout the 18th
   century, the generally accepted view is that England was not on a gold
   standard at this time.

International gold standard and the first age of globalization (1871-1901)

   Germany was created as a unified country following the Franco-Prussian
   War; it established the Reichsmark, went on to a strict gold standard,
   and used gold mined in South Africa to expand the money supply. Rapidly
   most other nations followed suit, since gold became a transportable,
   universal and increasingly stable unit of valuation. See Globalization.

   Dates of adoption of a gold standard:
     * 1871: Germany
     * 1873: Latin Monetary Union (Belgium, Italy, Switzerland, France)
     * 1873: United States de facto
     * 1875: Scandinavia by monetary Union: Denmark, Norway and Sweden
     * 1875: Netherlands
     * 1876: France internally
     * 1876: Spain
     * 1879: Austria
     * 1897: Russia
     * 1897: Japan
     * 1898: India
     * 1900: United States de jure.

   Throughout the decade of the 1870s, deflationary and depressionary
   economics created periodic demands for silver currency. However, such
   attempts generally failed, and continued the general pressure towards a
   gold standard. By 1879, only gold coins were accepted through the Latin
   Monetary Union, composed of France, Italy, Belgium, Switzerland and
   later Greece, even though silver was, in theory, a circulating medium.

   The period from 1880 to 1913 is often called the "classical gold
   standard." It featured a core of nations, centered on the Bank of
   England, that adhered to a fixed gold price and continuous
   convertibility, with other nations which were less strict in their
   adherence to convertibility at a fixed amount of gold paying higher
   interest rates in gold denominated currencies. Central banks were
   supposed, according to what have been called "the rules of the game,"
   to adjust interest rates to maintain the fixed exchange rate between
   the domestic currency and gold. Gold was used to settle accounts
   between nations. The price when it became profitable to export or
   import gold from a country was the "gold point" and nations which
   traded above or below the "gold point" saw inflows or outflows of gold,
   and usually took action to stem outflows of gold, or to convert inflows
   of gold into a stable form to prevent inflation.

   The gold standard of this period was not perfectly fixed; instead,
   central banks had varying degrees of coöperation and competition. On
   one side of the spectrum were true monetary unions where the currencies
   were tightly interlocked, through loose monetary unions, to nations
   whose participation in the gold standard was a matter of international
   payments only. The purest monetary union was the Austro-Hungarian
   Empire, which had the labor flexibility and interconnectedness to
   support an almost fixed rate of exchange. The Latin and Scandinavian
   monetary unions allowed co-circulation of coins, had clearing
   agreements between the central banks that substituted checks for
   physical transfers, and a close band of interest rates. The main gold
   standard of Europe was maintained by a settlement system, centered on
   London. The Bank of England adjusted interest rates to maintain the
   price relationship of the pound to other major currencies. This
   discount rate was used internationally to determine the amount by which
   trade instruments would be adjusted between buyers and sellers.

   The key change in this period was the adoption of a monetary policy to
   raise interest rates in response to gold outflows, or to maintain large
   stocks of gold in the reserves of the central bank. This policy created
   a credibility of commitment to the gold standard. According to Lawrence
   Officer and Alberto Giovanni, this can be seen from the relationship
   between the Bank of England rate, and the flow between the pound and
   the dollar, mark and franc. From 1889 through 1908, the pound
   maintained a direct bank rate rule relationship with the dollar 99% of
   the time, and 92% of the time with the mark. Thus, according to the
   theory of gold standard monetary dynamics, the key to this credibility
   was the willingness of the Bank of England to make adjustments to the
   discount rate to stabilize sterling to other currencies in the gold, or
   de facto gold, standard world, during the peak period of the gold
   standard composed of 360 months, the Bank of England bank rate was
   adjusted over 200 times in response to gold flows, a rate of change
   higher than current central banks.

   At the peripheries nations such as the United States and Russia allowed
   significant internal deviations from the gold standard. The United
   States issued fixed amounts of silver backed currency. Russia printed
   paper money and minted coins, the paper money selling at rate between
   60% and 75% of specie, until 1881 when a program to put Russia on the
   gold standard internally began, including mining, exporting wheat and
   importing restrictions. Russians were allowed to write contracts in
   gold rubles in 1895, and in 1897 convertibility was established, at the
   rate of 1.5 paper rubles for each new ruble. However, the government
   reserved the right to print up to 300 million rubles not backed by gold
   that were in domestic circulation.

   During this period there were severe depressions punctuating periods of
   strong growth, as gold standard backed capital was freer to be invested
   in a wider range of nations. The confidence in convertibility would
   lead greater ability of governments to borrow funds on the world credit
   markets, as they existed at that time, and to attract long-term
   projects. A notable example of this is the building of railway networks
   by the United States and Russia, as well as industrial development
   programs. The gold standard attracted nations into it, because access
   to capital was a powerful incentive to give up at least some of the
   seignorage powers inherent in silver and paper based currencies. This
   became an economic circle - the more nations participated in the
   international gold standard, the more those who did not had greater
   difficulty selling goods and obtaining credit.

   One of the most observable effects of the spreading gold standard was a
   marked decrease in the volatility of inflation rates. Under the
   previous silver and paper systems, swift inflation could be followed by
   sharp deflation, and then back to inflation in relatively short periods
   of time. Beginning with the general adoption of the gold standard, such
   wide swings grew smaller and smaller, and deflation replaced inflation
   as the normal state of price movement. This was seen at the time as
   allowing businesses to plan investment and expenses more easily, and
   reduce the risk of building large industrial projects.

Alternate currencies

   At the same time it caused a dramatic fall in aggregate demand, and a
   series of long Depressions in the United States and the United Kingdom.
   This should not be confused with the failure to industrialize or a
   slowing of total output of goods. Thus the attempts to produce
   alternate currencies include the introduction of Postal Money Orders in
   Britain in 1881, later made legal tender during World War I, and the "
   Greenback" party in the US, which advocated the slowing of the
   retirement of paper currency not backed by gold. Many nations
   circulated limited amounts of unbacked currency, or used postal
   money--redeemable for postage rather than gold--in order to provide
   liquidity, particularly in remote agricultural areas where forfaiting
   and forward settlement of bills of trade were not available.

Effects on taxation

   By encouraging industrial specialization, industrializing countries
   grew rapidly in population, and therefore needed sources of
   agricultural goods. The need for cheap agricultural imports, in turn,
   further pressured states to reduce tariffs and other trade barriers, so
   as to be able to exchange with the industrial nations for capital
   goods, such as factory machinery, which were needed to industrialize in
   turn. Eventually this pressured taxation systems, and pushed nations
   towards income and sales taxes, and away from tariffs. It also produced
   a constant downward pressure on wages, which contributed to the "agony
   of industrialization". The role of the gold standard in this process
   remains hotly debated, with new articles being published attempting to
   trace the interconnections between monetary basis, wages, and living
   standards.

Effects on rural communities

   By the 1890s in the United States, a reaction against the gold standard
   had emerged centered in the Southwest and Great Plains. Many farmers
   began to view the scarcity of gold, especially outside the banking
   centers of the East, as an instrument to allow Eastern bankers to
   instigate credit squeezes that would force western farmers into
   widespread debt, leading to a consolidation of western property into
   the hands of the centralized banks. The formation of the Populist Party
   in Lampasas, Texas specifically centered around the use of "easy money"
   that was not backed by gold and which could flow more easily through
   regional and rural banks, providing farmers access to needed credit.
   Opposition to the gold standard during this era reached its climax with
   the presidential campaign of Democrat William Jennings Bryan of
   Nebraska. Bryan argued against the gold standard in his Cross of gold
   speech in 1896, comparing the gold standard (and specifically its
   effects on western farmers) to the Crown of Thorns worn by Jesus at his
   crucifixion. After being defeated in 1896, Bryan ran and lost again in
   1900 and 1908, each time carrying mostly Southern and Great Plains
   states. The book (and, subsequently, the movie) The Wonderful Wizard of
   Oz has been interpreted as a metaphor for the politics surrounding the
   Gold Standard with the "Yellow Brick Road" - see Political
   interpretations of The Wonderful Wizard of Oz, and which points out
   that Dorothy returned with silver (not golden) shoes.

Gold standard from peak to crisis (1901–1932)

   By 1900 the need for a lender of last resort had become clear to most
   major industrialized nations. The importance of central banking to the
   financial system was proven largely by examples such as the 1890 bail
   out of Barings Bank by the Bank of England. Barings had been threatened
   by imminent bankruptcy. Only the United States still lacked a central
   banking system.

   There had been occasional panics since the end of the depressions of
   the 1880s and 1890s which some attributed to the centralization of
   production and banking. The increased rate of industrialization and
   imperial colonization, however, had also served to push living
   standards higher. Peace and prosperity reigned through most of Europe,
   albeit with growing agitation in favour of socialism and communism
   because of the extremely harsh conditions of early industrialization.

   A major part of this increase in living standards was the increase in
   international trade volumes, aided by a sophisticated forfaiting for
   trade by the discounting of bills of sale (See Real bills doctrine). In
   this system the ability to settle a complex series of transactions
   involved in the manufacture and final sale of goods was aided by having
   a single value standard and single currency basis to value
   transactions. This trade period is often called "The First Era of
   Globalization" because of the increase in trade. This period culminated
   in 1913, to be ended by the First World War. Trade volumes would not
   reach the same percentage of GDP until well after the Second World War,
   exactly when depending on the means used to measure. Purchase of such
   bills was considered to be part of the process by which the Federal
   Reserve in the United States would regulate the money supply. London's
   centrality to this system was a key reason why the pound, rather than
   some other gold based currency, was the anchor currency of the era.

   The increase in trade expanded both industrialization and agriculture,
   and provided an incentive for more developed nations to invest in
   transportation and other infrastructure in less developed nations, in
   order to be able to gain access to raw materials. It also provided an
   incentive for the rapid development of cargo transportation by sea,
   including the construction of the Suez and Panama canals.

   The increasing political tensions of the first decade of the 20th
   century placed pressure on monetary unions, and on governments. Severe
   downturns struck most of the industrial nations at some point during
   the decade, and agitation for reform of the gold standard increased. In
   the United States anti-gold Democrat William Jennings Bryan ran for the
   Presidency three times, and a wing of the ruling Republican Party
   declared itself for silver dollars. In 1904 the Scandinavian monetary
   union was dramatically renegotiated, leading to an end of
   co-circulation and commission free checks between the central banks as
   part of a larger political crisis. These pressures were not seen then
   as leading to an end of the gold standard, but as pressure to adopt
   mechanisms to manage the shocks which industrialization produced.

   Another pressure was the beginning of armaments build up, particularly
   the new generation of battleships, which were weapons of a size and
   complexity far beyond that which had previously existed. The
   Russo-Japanese War and subsequent revolution placed pressure on both
   Russia and Japan monetarily, and the arms race between navies was a
   tremendous drain on government holdings of gold in Great Britain and
   Germany.

   However, trade volumes continued to increase, convertibility remained a
   central monetary policy of most major nations, and the gold standard
   and its economic system extended its reach farther and farther around
   the globe.

The crisis of the gold Standard (1914-1935)

   This came to an abrupt halt with the outbreak of World War I. The
   United Kingdom was almost immediately forced to take steps that would
   lead to its gradually leaving its gold standard, ending convertibility
   to Bank of England notes starting in 1914. By the end of the war
   England was on a series of fiat currency regulations, which monetized
   Postal Money Orders and Treasury Notes (later called banknotes, not to
   be confused with US Treasury notes). The need for larger and larger
   engines of war, including battleships and munitions, created inflation.
   Nations responded by printing more money than could be redeemed in
   gold, effectively betting on winning the war and redeeming out of
   reparations, as Germany had in the Franco-Prussian War. The US and the
   UK both instituted a variety of measures to control the movement of
   gold, and to reform the banking system, but both were forced to suspend
   use of the gold standard by the costs of the war. The Treaty of
   Versailles instituted punitive reparations on Germany and the defeated
   Central Powers, and France hoped to use these to rebuild her shattered
   economy, as much of the war had been fought on French soil. Germany,
   facing the prospect of yielding much of her gold in reparations, could
   no longer coin " Goldmark", and moved to paper currency.

   At the end of the war, there was a global period of sharp inflation,
   where even the winning nations faced economic dislocations. Since high
   inflation had not been experienced in almost a generation in the
   industrialized core, this period was seen as absolute proof that the
   gold standard was a defense against inflation caused by paper money. By
   1920 there was a general belief that price stability would only return
   with the reestablishment of the gold standard, a conviction that would
   remain in place until the 1930s.

   The series of arrangements to prop up the gold standard in the 1920s
   would constitute a book length study unto themselves, with the Dawes
   Plan superseded by the Young Plan. In effect the US, as the most
   persistent positive balance of trade nation, lent the money to Germany
   to pay off France, so that France could pay off the United States.
   After the war, the Weimar Republic suffered from hyperinflation and
   introduced " Rentenmark,” an asset currency, to halt it. This worked
   properly, although one more year had to pass until a new gold backed
   Reichsmark came into circulation.

   Important in the efforts to restore the gold standard were arms
   limitation talks centered around restraining building of battleships in
   particular, negotiations over trade barriers, and attempts to engage in
   deflation to return prices to their pre-war levels. This led to both
   the Bank of England and the United States Federal Reserve to
   "sterilize" gold inflows. This in turn forced nations with gold
   outflows to deflate more sharply in order to maintain price parity.
   While the United States, as both an industrial power and exporter of
   oil, which was becoming an increasingly important commodity as the
   world economy mechanized, was able to weather a series of short down
   turns during the decade, other nations experienced more and more
   economic instability.

   In 1925 Winston Churchill, then Chancellor of the Exchequer, seen as a
   stepping-stone to Number 10 Downing, attempted to return Great Britain
   to the gold standard with a series of steps, which would gradually have
   restored convertibility. However, it was also a goal to reverse the
   price increases, which required a contraction of the money supply. The
   resulting economic downturn both chased Churchill from the fast track
   to power, and created a government crisis.

   This was the leading edge of the global down turn now known as the
   Great Depression, and with it came a seeming bind for monetary policy
   and economic theory. On the one hand it seemed that suspension of the
   gold system would lead to paper money and either high inflation or
   hyper-inflation, and on the other hand, the mechanisms for maintaining
   the gold standard - government austerity, higher taxes, monetary
   contraction and higher interest rates, led directly to severe economic
   collapse, unsustainably high unemployment, and agitation for communist
   or other radical forms of government.

   John Maynard Keynes was one economist who argued against the adoption
   of the pre-war gold price believing that the rate of conversion was far
   too high and that the monetary basis would collapse. He called the gold
   standard “that barbarous relic.” This deflation reached across the
   remnants of the British Empire everywhere the Pound Sterling was still
   used as the primary unit of account. In the UK the standard was again
   abandoned in 1931. Sweden abandoned the gold standard in 1929, the US
   in 1933, and other nations were, to one degree or another, forced off
   the gold standard.

The depression and World War II (1933–1945)

The London conference

   In 1933, during the Great Depression, the London conference marked the
   death of the international gold standard as it had developed to that
   point in time. While the United Kingdom and the United States desired
   an eventual return to the Gold Standard, with President Franklin D.
   Roosevelt saying that a return to international stability “must be
   based on silver instead of gold” — neither was willing to do so
   immediately. France and Italy both sent delegations insisting on an
   immediate return to a fully convertible international gold standard. A
   proposal was floated to stabilize exchange rates between France, the
   United Kingdom and the United States based on a system of drawing
   rights, but this too collapsed.

   The central point at issue was what value the gold standard should
   take. Cordell Hull, the US Secretary of State, was instructed to
   require that reflation of prices occur before returning to the Gold
   Standard. There was also deep suspicion that the United Kingdom would
   use favorable trading arrangements in the Commonwealth to avoid fiscal
   discipline. Since the collapse of the Gold Standard was attributed, at
   the time, to the U.S. and the UK trying to maintain an artificially low
   peg to gold, agreement became impossible. Another fundamental
   disagreement was the role of tariffs in the collapse of the gold
   standard, with the liberal government of the United States taking the
   position that the actions of the previous American Administration had
   exacerbated the crisis by raising tariff barriers.

Gold restrictions

   As part of this process, many nations, including the U.S., banned
   private ownership of gold either de jure or de facto. In the United
   States Franklin Delano Roosevelt using the Trading With the Enemy Act
   for statutory authority to abrogate gold and silver clauses in U.S.
   Securities and impose fines of up to $100,000,000 on those who refused
   to do so. Over this period FDR passed two laws prohibiting U.S.
   citizens and the Federal Reserve ownership of gold, Executive Order
   6102 of 1933 and the Gold Reserve Act of 1934. Jewelry, private coin
   collections, and the like were exempt from this ban, which in any case
   seems not to have been enforced too zealously. In 1975 all restrictions
   on the right of American citizens to own gold were abolished.

   Other nations suspended convertibility, prohibited exportation of gold,
   and required taxes be paid in gold. When France went off the gold
   standard in 1936, it ordered its citizens to turn in their privately
   held gold for government notes, but attained very little compliance .

   During the period of the gold ban American citizens were allowed to
   hold legal tender only in the form of central bank notes. While this
   move was argued for under national emergency, it was controversial at
   the time. The Supreme Court upheld the Congressional action in 1934 ,
   but there are still some who regard it as a usurpation of private
   property .

   Part of the reason for these restrictions is that the theory of the
   gold standard was that nations with a net inflow of gold should allow
   inflation, which would then encourage imports automatically, while
   nations with a gold outflow should deflate, thus shifting effort to
   exporting to obtain gold. However the United States in particular had a
   policy of maintaining price stability, in response to the dramatic
   inflationary spike at the end of the First World War, and "sterilized"
   influxes of gold by contracting the money supply, what would now be
   called "M1", in order to prevent increases in the general level of
   prices. This forced nations with an outflow of gold to deflate even
   farther to adjust, and helped unravel the series of loan agreements
   that had been set up in the wake of the Treaty of Versailles.

   From 1931 through 1936 nations left the gold standard, beginning with
   Britain in 1931 after a run on the pound. France, the Netherlands and
   Switzerland finally left the gold standard in 1936. In the present the
   general agreement of monetary policy research is that there is a strong
   correlation between leaving the gold standard and economic recovery, as
   part of the monetary theory of the Great Depression. This theory is
   held by both liberal and conservative economists, but is vehemently
   disputed by most supporters of a renewed gold standard, who argue the
   reverse: that the failure to commit to gold was the cause of the Great
   Depression.

   In the years that followed, nations pursued bilateral trading
   agreements, and by 1935 the economic policies of most Western nations
   were increasingly dominated by the growing realization that a global
   conflict was highly likely, or even inevitable. During the 1920s the
   austerity measures taken to restabilize the world financial system had
   cut military expenditures drastically, but with the arming of the Axis
   powers, war in Asia, and fears of the Soviet Union exporting communist
   revolution, the priority shifted toward armament, and away from
   re-establishing a gold standard. The last gasp of the nineteenth
   century gold standard came when the attempt to balance the United
   States Budget in 1937 led to the “ Roosevelt Recession.” Even such gold
   advocates as Roosevelt’s budget director conceded that until it was
   possible to balance the budget, a gold standard would be impossible.

Did the gold standard cause the Great Depression?

   In modern macro-economic thought, the gold standard per se did not
   "cause" the Great Depression. Instead the standard theory is that the
   shock of World War I caused the "classical gold standard" to collapse,
   as nations spent freely to pay for armaments, and continued to do so
   after the war had ended. The gold standard, which would be created
   after the war, was not of the same kind as the pre-war standard, and
   the commitment to the gold standard in the face of economic shocks was
   not as strong. This cooperative gold standard also faced the problem of
   normalizing post-war prices with pre-war parities of currency.
   According to this view the inflexibility of keeping an international
   gold standard led central bankers to contract money supply in 1929, out
   of the fear of inflation or a run on currency. With the German
   hyperinflation, and the 1931 run on the Great British Pound, the fears
   that a failure to maintain the gold standard would lead to economic
   chaos seemed to be confirmed, and the "Great Contraction" of currency
   was continued as a policy. According to modern macroeconomic theory, it
   was this contraction that turned a credit bust, which was of comparable
   size to previous over extended economic expansions, into a very severe
   downturn.

   While opinions on whether the gold standard could have been maintained
   without severe contraction vary depending on which model is used, there
   is wide agreement that the failed attempts to assert and maintain the
   gold standard, and the failure to rectify structural problems in the
   banking system and find flexibility in monetary policy were the
   proximate causes of the Great Depression.

   This line of argument stems from Friedman and Schwartz' monetary
   history of the United States, as well as subsequent work by
   Eichengreen, Bernanke, Bordo and other macro-economists, many of who
   believe that the understanding of the Great Depression as a monetary
   phenomenon is the "holy grail" of macro-economics.

British hesitate to return to gold standard

   During the 1939–1942 period, the UK depleted much of its gold stock in
   purchases of munitions and weaponry on a “cash and carry” basis from
   the US and other nations. This depletion of the UK’s reserve signaled
   to Winston Churchill that returning to a pre-war style gold standard
   was impractical; instead, John Maynard Keynes, who had argued against
   such a gold standard, became increasingly influential: his proposals, a
   more wide ranging version of the “stability pact” style gold standard,
   would find expression in the Bretton Woods Agreement.

Post-war international gold standard (1946–1971)

Theory

   The essential features of the gold standard in theory rest on the idea
   that inflation is caused by an increase in the quantity of money, an
   idea advocated by David Hume, and that uncertainty over the future
   purchasing power of money depresses business confidence and leads to
   reduced trade and capital investment. The central thesis of the gold
   standard is that removing uncertainty, friction between kinds of
   currency, and possible limitations in future trading partners will
   dramatically benefit an economy, by expanding the market for its own
   goods, the solidity of its credit, and the markets from which its
   consumers may purchase goods. In much of gold standard theory, the
   benefits of enforcing monetary and fiscal discipline on the government
   are central to the benefits obtained; advocates of the gold standard
   often believe that governments are almost entirely destructive of
   economic activity, and that a gold standard, by reducing their ability
   to intervene in markets, will increase personal liberty and economic
   vitality.

Differing definitions of “gold standard”

   If the monetary authority holds sufficient gold to convert all
   circulating money, then this is known as a 100% reserve gold standard,
   or a full gold standard. In some cases it is referred to as the Gold
   Specie Standard to more easily separate it from the other forms of gold
   standard that have existed at various times.

   Some believe there is no other form of Gold Standard other than the
   100% reserve Gold Specie Standard. This is because in any partial gold
   standard there is some amount of circulating paper that is not backed
   by gold, and hence it is possible for monetary issuing authorities to
   attempt to use seigniorage, and possibly inflation. Others, such as
   some modern advocates of supply-side economics contest that so long as
   gold is the accepted unit of account then it is a true gold standard.

   In a national Gold Standard system, gold coins circulate freely as
   money, and paper money is directly convertible into gold at a market
   rate (not enforced by government fiat), reflecting the value of the
   paper money as a claim check giving the holder the right to a specified
   amount of gold coin held by the issuer of the note.

   However, where the value of paper money varies against gold, this
   indicates that the paper money is fiat money and will often devalue
   against specie. This has been the case during wars when governments
   would issue paper currency not backed by specie. Examples include
   Greenbacks issued by the Union during the American Civil War, and paper
   marks issued by Austria during the Napoleonic Wars. Such episodes have
   traditionally led to calls to restore sound money after the war—that
   is, a hard currency monetary system.

   In an international gold-standard system, which may exist in the
   absence of any internal gold standard, gold or a currency that is
   convertible into gold at a fixed price is used as a means of making
   international payments. Under such a system, when exchange rates rise
   above or fall below the fixed mint rate by more than the cost of
   shipping gold from one country to another, large inflows or outflows
   occur until the rates return to the official level. International gold
   standards often limit which entities have the right to redeem currency
   for gold. Under the Bretton Woods system, these were called "SDRs" for
   Special Drawing Rights.

Effects of gold-backed currency

   The commitment to maintain gold convertibility tightly restrains credit
   creation. Credit creation by banking entities under a gold standard
   threatens the convertibility of the notes they have issued, and
   consequently leads to undesirable gold outflows from that bank. The
   result of a failure of confidence produces a run on the specie basis,
   which is generally responded to by the bankers suspending specie
   payments. Hence, notes circulating in any “partial” gold standard will
   either be redeemed for their face value of gold (which would be higher
   than its actual value) — this constitutes a “ bank run;” or the market
   value of such notes will be viewed as less than a gold coin
   representing the same amount.

Perceived stability offered by gold standard

   The gold standard, in theory, limits the power of governments to cause
   price inflation by excessive issue of paper currency, although there is
   evidence that before World War I monetary authorities did not expand or
   contract the supply of money when the country incurred a gold outflow.
   This belief requires belief that inflation is caused by money supply
   and not some other issue. It is also supposed to create certainty in
   international trade by providing a fixed pattern of exchange rates.
   After the inflationary silver standards of the 1700s, this was regarded
   as a welcome relief, and an inducement to trade. However by the late
   nineteenth century, agitation against the gold standard drove political
   movements in most industrialized nations for some form of silver-based,
   or even paper-based, currency.

   Under the classical international gold standard, disturbances in the
   price level in one country would be wholly or partly offset by an
   automatic balance-of-payment adjustment mechanism called the
   “price-specie-flow mechanism” (“specie” refers to gold coins). The
   steps in this mechanism are first: when the price of a good drops,
   because of oversupply, capital improvement, drop in input costs or
   competition, buyers will prefer that good over others. Because the
   stabilization of currencies to gold, buyers within the gold-based
   economies will preferentially buy the lowest priced good, and gold will
   flow into the most efficient economies. This flow of gold into the more
   productive economy will then increase the money supply, and produce
   sufficient inflationary pressure to offset the original drop in prices
   in the more productive economy, and would reduce the circulating specie
   in the less productive economies, forcing prices down until equilibrium
   was restored.

   Central banks, in order to limit gold outflows, would reinforce this by
   raising interest rates, so as to bring prices back into international
   equilibrium more quickly. In theory, as long as nations remained on the
   gold standard, there would be no sustained period of either high
   inflation, or uncontrolled deflation. Since, at the time, it was
   believed that markets internally always clear (See Say’s Law), and that
   deflation would alter the price of capital first, it meant that this
   would reduce the price of capital, and allow more growth as well as
   long term price stability. However, in practice this turned out not to
   be the case: it was wages, not capital, that depreciated in price
   first.

Mundell-Fleming model

   According to modern neo-classical synthesis economics, the
   Mundell-Fleming Model describes the behaviour of currencies under a
   gold standard. Since the value of the currencies is fixed by the par
   value of each currency to gold, the remaining freedom of action is
   distributed between free movement of capital, and effective monetary
   and fiscal policy. One reason that most modern macro-economists do not
   support a return to gold is the fear that this remaining amount of
   freedom would be insufficient to combat large downturns or deflation.
   The theoretical possibility of a return to a gold standard has another
   effect, namely, the question of central bank credibility in a regime
   not based on hard currencies. Given that major prizes are still awarded
   for these questions, the gold standard eras, both the nineteenth
   century and twentieth century versions, remain a baseline against which
   the current floating currency monetary system is measured.

   Mundell argued that it would be possible to return to an international
   gold standard, or even a national one, since in an industrial economy a
   great deal of capital is immobile. This would allow, in his opinion, a
   central bank to have sufficient freedom of action to engage in limited
   counter-cyclical actions, that is, lowering interest rates at the onset
   of a downturn, raising them to prevent overheating of the economy. This
   was disputed by Friedman who argued that quantity-of-money effects
   would produce deflation in such a system, and that successful nations
   would see less benefit than Mundell expected, since gold entering a
   nation would produce internal inflation. This argument mirrors the one
   made by Adam Smith and David Hume in the eighteenth century about
   increasing the quantity of money not being a worthwhile objective.

Advocates of a renewed gold standard

   Some monetarists, objectivists, followers of the Austrian School of
   Economics, former Chairman of the Federal Reserve Alan Greenspan, and
   many libertarians, support a strict version of the internal gold
   standard. In Russia, Pravda has supported a gold standard in various
   editorials, arguing that a gold ruble would be a counterweight to the
   power of the American dollar. Various Islamic groups, such as the Hizb
   ut-Tahrir, support a return to a hard currency economy with gold as a
   primary backer of currency. Supporters of a gold standard often argue
   that fiat currency falls in purchasing power over time and that
   governments cannot be trusted to regulate the money supply.

   The international gold standard still has advocates who wish to return
   to a Bretton Woods-style system, in order to reduce the volatility of
   currencies, but the unworkability of Bretton Woods, due to its
   government-ordained exchange ratio, as well as the temptation for
   governments to print more money than would be backed by their reserves,
   has allowed the followers of Austrian economists Ludwig von Mises,
   Friedrich Hayek and Murray Rothbard to foster the idea of a total
   emancipation of the gold price from a State-decreed rate of exchange
   and an end to government monopoly on the issuance of gold currency.

   Many nations back their economies by holding gold reserves. These
   reserves are not intended to redeem notes, but are retained as a hard
   liquid asset to protect against hyperinflation. Gold advocates claim
   that this extra step would no longer be necessary since the currency
   itself would have its own intrinsic store of value. A Gold Standard
   then is generally promoted by those who regard a stable store of value
   as the most important element to business confidence.

   It is generally opposed by the vast majority of governments and
   economists, because the gold standard has frequently been shown to
   provide insufficient flexibility in the supply of money and in fiscal
   policy, because the supply of newly mined gold is finite and must be
   carefully husbanded and accounted for.

   A single country may also not be able to isolate its economy from
   depression or inflation in the rest of the world. In addition, the
   process of adjustment for a country with a payments deficit can be long
   and painful whenever an increase in unemployment or decline in the rate
   of economic expansion occurs.

   One of the foremost opponents of the gold standard was John Maynard
   Keynes who scorned basing the money supply on “dead metal.” Keynesians
   argue that the gold standard creates deflation, which intensifies
   recessions as people are unwilling to spend money as prices fall, thus
   creating a downward spiral of economic activity. They also argue that
   the gold standard also removes the ability of governments to fight
   recessions by increasing the money supply to boost economic growth.

   Gold standard proponents point to the era of industrialization and
   globalization of the nineteenth century as the proof of the viability
   and supremacy of the gold standard, and point to the UK’s rise to being
   an imperial power, ruling nearly one quarter of the world's population
   and forming a trading empire which would eventually become the
   Commonwealth of Nations as imperial provinces gained independence.

   Gold standard advocates have a strong following among commodity traders
   and hedge funds with a bearish orientation. The expectation of a global
   fiscal meltdown, and the return to a hard gold standard, has been
   central to many hedge financial theories. More moderate goldbugs point
   to gold as a hedge against commodity inflation, and a representation of
   resource extraction. Since gold can be sold in any currency, on a
   highly liquid world market, in nearly any country in the world, they
   view gold as a play against monetary policy follies of central banks,
   and a means of hedging against currency fluctuations. For this reason
   they believe that eventually there will be a return to a gold standard,
   since this is the only “stable” unit of value. The fact that monetary
   gold would soar to $5,000 an ounce (almost 8 times its current value)
   may well influence the advocacy of a renewed gold standard, as holders
   of gold would stand to make an enormous profit.

   Few economists today advocate a return to the gold standard, other than
   the Austrian school and some supply-siders. However, many prominent
   economists are sympathetic with a hard currency basis, and argue
   against fiat money. This school of thought includes former US Federal
   Reserve Chairman Alan Greenspan and macroeconomist Robert Barro.
   Greenspan said in 2000

          If you are on a gold standard or other mechanism in which the
          central banks do not have discretion, then the system works
          automatically. The reason there is very little support for the
          gold standard is the consequences of those types of market
          adjustments are not considered to be appropriate in the
          twentieth and twenty first century. I am one of the rare people
          who have still some nostalgic view about the old gold standard,
          as you know, but I must tell you, I am in a very small minority
          among my colleagues on that issue.

   The current monetary system relies on the US Dollar as an “anchor
   currency” which major transactions, such as the price of gold itself,
   are measured in. Currency instabilities, inconvertibility and credit
   access restriction are a few reasons why the current system has been
   criticized. A host of alternatives have been suggested, including
   energy-based currencies, market baskets of currencies or commodities;
   gold is merely one of these alternatives.

   The reason these visions are not practically pursued is much the same
   reason the gold standard fell apart in the first place: a fixed rate of
   exchange decreed by governments has no organic relationship between the
   supply and demand of gold and the supply and demand of goods.

   Thus gold standards have a tendency to fall apart as soon as it becomes
   advantageous for governments to overlook them. By itself, the gold
   standard does not prevent nations from switching to a fiat currency
   when there is a war or other exigency. This happens even though gold
   gains in value through such circumstances, as people use it to preserve
   value; the fear is that fiat currency is typically introduced to allow
   deficit spending, which often leads to either inflation or to
   rationing.

   The practical difficulty that gold is not currently distributed
   according to economic strength is also a factor: Japan, while one of
   the world's largest economies, has gold reserves far less than would be
   required to support that economy. Finally the quantity of gold
   available for reserves, even if all of it were confiscated and used as
   the unit of account, would put the value of gold upwards of 5,000
   dollars an ounce on a purchasing-parity basis. If the current holders
   of gold imagine that this is the price that they will be paid for
   giving up their gold, they are quite likely to be disappointed. For
   these practical reasons — inefficiency, instability, misallocation, and
   insufficiency of supply — the gold standard is likely to be more
   honored in literature than practiced in fact.

   In 1996 e-gold launched a privately issued digital gold currency
   system, attempting to replicate a gold standard and create an
   alternative global monetary system. Other digital gold currency systems
   soon followed, such as e-Bullion and GoldMoney.

   In 2001 Malaysian Prime Minister Mahathir bin Mohamad proposed a new
   currency that would be used initially for international trade between
   Muslim nations. The currency he proposed was called the Islamic gold
   dinar and it was defined as 4.25 grams of 24- carat (100%) gold.
   Mahathir Mohamad promoted the concept on the basis of its economic
   merits as a stable unit of account and also as a political symbol to
   create greater unity between Islamic nations. The purported purpose of
   this move would be to reduce dependence on the United States dollar as
   a reserve currency, and to establish a non-debt-backed currency in
   accord with Islamic law against the charging of interest. Nonetheless,
   gold dinar currency has not yet materialized . However, a digital gold
   currency called e-dinar has been successfully launched.

Gold as a reserve today

   Gold ingots like these, from the Bank of Sweden, still form an
   important currency reserve and store of private wealth.
   Enlarge
   Gold ingots like these, from the Bank of Sweden, still form an
   important currency reserve and store of private wealth.

   During the 1990s Russia liquidated much of the former USSR's gold
   reserves, while several other nations accumulated gold in preparation
   for the Economic and Monetary Union. The Swiss Franc left a full
   gold-convertible backing. However, gold reserves are held in
   significant quantity by many nations as a means of defending their
   currency, and hedging against the US Dollar, which forms the bulk of
   liquid currency reserves. Weakness in the US Dollar tends to be offset
   by strengthening of gold prices. Gold remains a principal financial
   asset of almost all central banks alongside foreign currencies and
   government bonds. It is also held by central banks as a way of hedging
   against loans to their own governments as an "internal reserve".
   Approximately 25% of all aboveground gold is held in reserves by
   central banks.

   In addition to other precious metals, stores of value also include real
   estate. As with all stores of value, the basic confidence in property
   rights determines the selection of which one is chosen, as all of these
   have been confiscated or heavily taxed by governments. In the view of
   gold investors, none of these has the stability that gold had, thus
   there are occasionally calls to restore the gold standard. Occasionally
   politicians emerge who call for a restoration of the gold standard,
   particularly from libertarians and anti-government leftists. Mainstream
   conservative economists such as Barro and Greenspan have admitted a
   preference for some tangibly backed monetary standard, and have stated
   that a gold standard is among the possible range of choices.

   Both gold coins and gold bars are widely traded in deeply liquid
   markets, and therefore still serve as a private store of wealth. Also
   some privately issued currencies, such as digital gold currency, are
   backed by gold reserves. In effect, the holder of such currencies is
   long on gold and short on their own fiat currency, writing checks on
   their account.

   In 1999, to protect the value of gold as a reserve, European Central
   Bankers signed the "Washington Agreement", which stated they would not
   allow gold leasing for speculative purposes, nor would they "enter the
   market as sellers" except for sales that had already been agreed upon.
   A selling band was set. This was intended to prevent further
   deterioration in the price of gold. (See Washington Consensus)

   The end of the Great Commodities Depression has affected the price of
   gold as well, gold prices rising out of a 20-year trading bracket. This
   has led to a renewed use by monetary authorities of gold to back their
   currencies, but has not constituted adoption of a gold standard for
   money. In fact, the reverse is the case—the more expensive gold is, the
   more expensive the acquisition project to create a gold standard
   becomes.

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