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I should start by saying that until the Franco-German War of 1870 - 1871, Europe's currencies were based on a combined gold and silver standard (BIMETALLISM). In the Versailles Peace Treaty, France had to agree to pay 5 billion Gold Francs in reparations, over the next few years. Germany partially made use of this influx by switching from the bimetallic to a pure gold standard; most other European countries followed soon. When the world's richest goldfields were found at WITWATERSRAND near Johannesburg, in the Transvaal, sufficient gold was available to keep the standard in a period of a strongly growing world economy. The Gold Standard was kept up until 1914, when, during World War I, it could no more be upheld. In the 1920 es a number of countries, such as Great Britain and the Netherlands, tried to reintroduce it and to stick to it despite heavy problems for their respective economies; Britain gave up the gold standard in 1931.
In the following essay I am going to speak about the macroeconomics of the Gold standard system. I will present various educated findings together with my personal opinion on the given matter. Body: Part I: The gold standard is a monetary system in which the standard unit of currency is a fixed weight of gold or is kept at the value of a fixed rate of gold with paper money convertible on demand into gold. Under such a system money represents gold: coins are made of the corresponding amount of gold, and / or coins and notes represent an amount of gold held in a vault somewhere. Rates of exchange between countries were fixed by their currency values in gold (Thompson, 89). Most financially important countries were on the gold standard from 1900 until it was suspended in many nations during World War I (notably in the United States it was not suspended during the war).
It was reintroduced partially in 1925 as the Gold Exchange Standard but finally abandoned in 1931. In Great Britian it was Winston Churchill in his role as Chancellor of the Exchequer that was responsible for initiating the 1925 return (Snyder, 134). In an internal gold-standard system, which implies the use of an international gold standard, gold coins circulate as legal tender or paper money is freely convertible into gold at a fixed price (More, 78). Here is the rational. 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, 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 (Rockwell, 9).
If all circulating money can be represented by the appropriate amount of gold, then this is known as a 100 % reserve gold standard, or a full gold standard. Some believe there is no other form of gold standard, since on any "partial" gold standard the value of circulating representative paper in a free economy will always reflect the faith that the market has in that note being redeemable for gold (Thompson, 92). 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. The commitment to maintain gold convertibility tightly restrains credit creation, because doing so would be to commit fraud.
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. This is caused when people realise that the bank notes are, in a sense "oversold", and go to redeem their notes for their printed face value in gold - if they are quick enough (Snyder, 137). Hence, notes circulating in any "partial" gold standard will either be redeemed for their face value of gold (which would be higher than it's 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 (More, 83).
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Research essay sample on Gold Standard Gold Coins
