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The Gold Standard

Gold Standard presentation for BMT 524 - Economics for Managers

Jeremy Wilder

on 7 June 2013

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Transcript of The Gold Standard

Our History of Money The Gold Standard JKL & M - Economics for Managers JKL & M An Introduction to... Why Should I Care? Other than the fact that your purse is now lighter... So What About Gold??? Enables holder to exchange an ounce of gold for dollars Dollars are backed by a fixed asset... The amount of dollars and gold must be equal... Enabled easier global trade... The What Standard? A monetary system in which a country's government allows its currency unit to be freely converted into fixed amounts of gold and vice-versa. The exchange rate under the gold standard monetary system is determined by the economic difference for an ounce of gold between two currencies. 1690: 1600 - 1700's: In addition to gold and silver... Beaver Pelts, Fish, Corn, Tobacco, Rice, Foreign Currencies Massachusetts introduced first fiat money 1857: Congress outlawed use of foreign coins 1740: All colonies but Virginia were circulating their own fiat paper money 1751: Parliament outlawed fiat paper money 1792: Hamilton passed "Coinage Act of 1792" 1863: U.S. Dollar became sole currecy French Crown French Guinea French Livre Spanish Doubloon Portuguese "Joe" Wait... What's Money? Currency that has no intrinsic value and is not backed by a physical commodity (e.g. gold) Currency's value is its relative scarcity and the faith placed in it by the people that use it. In a fiat monetary system, there is no limit on the amount of money that can be created. In most cases, a fiat monetary system comes into existence as a result of excessive public debt. Similar to insurance... probably won't need to trade it, but just in case... Fiat (paper) money's value inevitably erodes There must be a consistent rate of exchange between gold and dollars Consistency is enforceable by the chance that holders will turn in dollars for gold if the price begins to rise/drop Gold's value is stable and sensitive to variations in supply History of the Gold Standard Concept began in England by Sir Isaac Newton During the Revolutionary War, $1 in gold was equal to $1,000 in paper money The Constitution does not give government the power to issue paper money not backed by gold/silver... Tell Me More, Tell Me More... The Constitution DID allow the Government to borrow money, to be used during war... Once the war was over, the Government was to retire the notes, restoring the currency rate. The value of the dollar remain consistent between 1775 - 1900. The early 1930's brought the shift toward the gold standard. The 3 Phases of the Gold Standard Keynesian Economics John Maynard Keynes Monetarism - a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. Proposed to put the power to print money and control interest rates in the hands of a centralized bank. Based mainly on theories of John Maynard Keynes Austrian Economics Carl Menger Ron Paul Milton Friedman Generally argue that ineffective central bank policies... tend to set artificial interest rates too low for too long, resulting in excessive credit creation, speculative "bubbles", and artificially low savings. Prices fixed below market clearing prices will lead to lasting shortages. No form of taxation can be equitable; every taxation involves the creation of two distinct and unequal classes (tax-payers vs. tax-receiver-consumers). Austrian economists favor a market for currency competition... The Central Bank (The Fed) Ben Bernanke
2006 - Present Alan Greenspan
1987 - 2006 A political economic philosophy that believes that government fiscal and monetary policy can help close any output (GDP) gap in the economy An institution that manages a nation's currency, money supply, and interest rates. Possesses a monopoly on increasing the nation's monetary base, and usually also prints the national currency, which usually serves as the nation's legal tender. Commercial Bank (Local Bank) Provides transactional, savings, and money market accounts and that accepts time deposits. High rates set by "The Fed" cause banks to borrow less, tightening the money supply and driving up interest rates for businesses and consumers. Commercial banks set their prime lending rates off a spread tied to the rates set by their central banks Landmark
Bank Regions
Bank It's a Barbarous Relic! 1834 - 1932: The Gold Standard 1933 - 1970: The Gold Exchange Standard 1971 - Present: The Fiat Money Era Phase I - The Gold Standard U.S. fixed the price of gold to $20.67 per ounce U.S. dollars and gold were interchangeable according to the fixed price Average annual inflation rate was 1.43% Phase II - The Gold Exchange Standard Private ownership of gold by U.S. citizens was outlawed by President Roosevelt. Only foreigners could demand U.S. government to exchange gold for dollars Average annual inflation rate was 2.97% 1834 - 1932 1933 - 1970 Phase III - Fiat Money System Nixon declared U.S. dollars could no longer be exchanged for gold by anyone, foreign or domestic Since 1971, gold and dollar prices have fluctuated wildly Average annual inflation rate was 4.47% 1971 - Present Roosevelt's "Contributions" Elected in '32, during the Great Depression Runs on the Banks U.S. Government control over all gold in the country In 1933, made it illegal for U.S. citizens to possess gold coins, or to exchange dollars for gold. Arbitrarily raised price of gold from $21/oz. to $35/oz., devaluing the currency by $14 Nixon Shock!! In 1972, inherited the Vietnam War and ultra-expensive social programs. Unilaterally canceled the direct convertibility of the U.S. dollar to gold; ended the existing Bretton Woods system. Imposed a 10% import surcharge. By 1976, the WORLD's major currencies were floating - very few followed a gold standard anymore. To be continued... Now that we're using fiat money, what does this mean for us? How is the current system affecting our economy? How is fiat money affecting the global economy? Why do we even care? Sources http://seekingalpha.com/article/127585-the-gold-standard-and-inflation



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