Documentos de Académico
Documentos de Profesional
Documentos de Cultura
Agenda
• Paper notes are backed only by use of' "lawful force and
legal tender laws" of the government, in particular by its
Fiat Money acceptability for payments of debts to the government
Introduction
The Monetary authority of each country must take steps to fix the gold
value of its own national currency
There must be a free import and export of gold into, and out of, each
country which follows this system
Gold Bullion Standard: Under this system, gold coins need not be in
circulation, but currency is freely convertible into gold at statutory prices
Gold Exchange Standard : Central Bank is ready to buy and sell the
currency of another country which is itself on gold bullion or gold specie
standard , at stipulated rates
Example
When 2 countries are on Gold Standard , the first two rules ensure that the
rate of exchange between them will be automatically determined and will
remain fixed with slight fluctuations
This is less than the value of circulating money in the U.S. alone, where
more than $8.3 trillion is in circulation or in deposit
For example, instead of using the ratio of $1,000 per ounce, the ratio can
be defined as $2,000 per ounce effectively raising the value of gold to $8
trillion. However, this is specifically a disadvantage of return to the gold
standard and not the efficacy of the gold standard itself
Disadvantage
Gold standards replaced the use of gold coins as currency in the 17th-19th
centuries in Europe
In 1844 the Bank Charter Act established that Bank of England notes, fully
backed by gold, were the legal standard. According to the strict
interpretation of the gold standard, this 1844 Act marks the establishment
of a full gold standard for British money
Governments faced with the need to fund high levels of expenditure, but
with limited sources of tax revenue, suspended convertibility of currency
into gold on a number of occasions in the 19th century. The British
government suspended convertibility during the Napoleonic wars and the
US government during the US Civil War. In both cases, convertibility was
resumed after the war
Gold standard from peak to
crisis (1901–1932)
As in previous major wars under its gold standard, the British government
suspended the convertibility of Bank of England notes to gold in 1914 to fund military
operations during World War I
As had happened after previous major wars, the UK returned to the gold standard in
1925. Although a higher gold price and significant inflation had followed the wartime
suspension, Churchill followed tradition by resuming conversion payments at the
pre-war gold price
For five years prior to 1925 the gold price was managed downward to the pre-war
level, causing deflation throughout those countries of the British Empire and
Commonwealth using the Pound Sterling
In order to attract gold, Britain needed to increase the value of investing in its
domestic assets. They needed to increase the demand for the pound. By doing this,
Britain attracted gold from the stronger US, which decreased the US money supply
as well as depressed Britain’s own economy. Because of these price declines and
predictable depressionary effects, the British government finally abandoned the
standard September 21, 1931
Depression and World War II
During the 1939–1942 period, the UK depleted much of its gold stock in
purchases of ammunitions and weapon on a "cash and carry" basis from
the U.S. and other nations. This depletion of the UK's reserve convinced
Winston Churchill of the impracticality of returning to a pre-war style gold
standard. To put it simply the war had bankrupted Britain
According to later analysis, the earliness with which a country left the gold
standard reliably predicted its economic recovery from the great depression
For example, Great Britain and Scandinavia, which left the gold standard in
1931, recovered much earlier than France and Belgium, which remained
on gold much longer. Countries such as China, which had a silver
standard, almost avoided the depression entirely
Introduction
After the Second World War, a system similar to a Gold Standard was
established by the Bretton Woods Agreements
Because the United States at the time accounted for over half of the
world's manufacturing capacity and held most of the world's gold, the
leaders decided to tie world currencies to the dollar, which, in turn, they
agreed should be convertible into gold at $35 per ounce
Main Reason for Choosing
Dollar
Political Scenario
The political basis for the Bretton Woods system was in the confluence
of several key conditions:
One of the reasons Bretton Woods worked was that the US was clearly the
most powerful country at the table and so ultimately was able to impose its
will on the others, including an often-dismayed Britain
At the time, one senior official at the Bank of England described the deal
reached at Bretton Woods as “the greatest blow to Britain next to the war”,
largely because it underlined the way in which financial power had moved
from the UK to the US
Rules of Bretton Woods
Member countries could only change their par value with IMF approval,
which was contingent on IMF determination that its balance of payments
was in a "fundamental disequilibrium”
For the Bretton Woods system to remain workable, it would either have to
alter the peg of the dollar to gold, or it would have to maintain the free
market price for gold near the $35 per ounce official price
The greater the gap between free market gold prices and central bank gold
prices, the greater the temptation to deal with internal economic issues by
buying gold at the Bretton Woods price and selling it on the open market
Gold's price spiked in response to events such as the Cuban Missile Crisis,
and other smaller events, to as high as $40/ounce
Arbitrage Opportunity
The attempt to maintain the peg collapsed in November 1968, and a new
policy program was attempted
Floating Bretton Woods
This occurred from 1968–72. By 1968, the attempt to defend the dollar at a
fixed peg of $35/ounce, the policy of the administrations had become
increasingly untenable
By the early 1970s, as the Vietnam War accelerated inflation, the United
States as a whole began running a trade deficit (for the first time in the
twentieth century). The crucial turning point was 1970, which saw U.S. gold
coverage deteriorate from 55% to 22%
Gold was revalued and at the same time dollar was devalued at $38/ounce,
then $44.20/ounce
Floating exchange rates are considered more efficient, because the market
will automatically correct the rate to reflect inflation and other economic
forces
Transaction costs
Tourists and others who cross several borders during the course of a trip had to
exchange their money as they entered each new country. The costs of all of
these exchanges added up significantly. With the euro, no exchanges are
necessary within the Euroland countries
Nearly 65% of global central bank reserves are held in US dollars, while
around 25% are in Euros
The emergence of the Euro since 1999 has given the US dollar tough
competition. It has been estimated that since early 2007 the value of Euro
notes in circulation has risen to over € 600 billion
Option 1- Single World Currency
Advantages
Elimination of transaction costs related to trading currencies
Do away with the need of maintaining forex reserves
Do away with currency risk, benefiting foreign investors
Eliminate the chance of currency failure, which would make foreign
investment decisions much easier in emerging economies
Such a currency would in one go eliminate the problem of current
account deficits as there would be no need for foreign exchange
Disadvantage
Loss of national monetary policy – A single currency would imply a
single interest rate. Thus, a region or nation experiencing economic
depression will be unable to use the interest rate lever to boost the
economy
Political barriers – Political differences between nations make it
extremely difficult for them to adopt a common currency
Option 2-One More world
Reserve Currency
Statement-French President Nicolas Sarkozy said that the dollar can't
remain the world's only reserve currency, as the rise of emerging powers
such as China and Russia challenge the U.S.'s prominence
Another currency can be Euro, reason being the second most floated
currency
Contradiction-Sarkozy also said that he won't allow the euro to be the only
currency to bear the weight of foreign exchange market adjustments as has
happened in the pas
Option 3-Back to Gold Standard
During 1879-1914 , the classical gold standard era , the average inflation in
most countries was 1 percent
The period after Bretton woods 1 saw two major energy crisis, at least 4
recessions, one currency crisis, national bankruptcies and bouts of
hyperinflation
But during the same period the Gross GDP rose 400 percent to $ 62 trillion
What if India were to adopt the
Gold Standard???
Money Supply in India Rs 49,72,000 crore
It must keep gold for that value. But can it find so much Gold?
Conclusion
Even If RBI maps up all the gold in the country, It wont be able to
support the current money stock. It either needs more gold or higher
value for the stock
The yellow metal’s rightful place is in jewellery, not monetary policy
The dollar will keep its status as the ``world currency'' for 15 to 20
years, said Stephen Roach, chairman of Morgan Stanley Asia Ltd.,
after Chinese officials signalled plans to diversify from the slumping
U.S. currency
Chinese Vice Foreign Minister He Yafei said U.S. dollar would continue
to be the world's leading reserve currency for years to come."The U.S.
dollar is still the most important and major reserve currency of the day,
and we believe that that situation will continue for many years to
come,“(Why wont they say- Export Oriented Economy)