Do we need Gold Standards in todays modern era?

Money is what money does’

Till 2008, big transactions were taking place in US dollars. The reason behind this was the faith in US economy. Peoples were thinking that US economy is very strong and it is impossible to fail. But the giant failed and give us big crisis. Freddie Mac, Fennie Mae, one of the best companies failed badly and government supposed to come to rescue them. Goldman Sachs, Company with AA+ RATING,also fails. The after shock of this crisis is so big that faith on US dollar is affected badly and people all over the world are trying to find a currency on which they faith. Why this all happen? Why we need some relevant figure which act as constant or gives guarantee like any underwriter in IPO? For finding the answer’s of all these questions, let’s see the history of gold standards and currencies and how it come into existence.

The history of currency start from China. Peoples realise that barter is not a good system when it comes to change for city or village or when you are going to a travel. The answer come from a system where you give your property which is like currency to a man. Most of time he is Priest or related with Temple. Against that all, he issue the ‘Promissory Note’. If you give the note to another person who is in another City or in another temple or related with him, another fellow will give you all the things equal to the value of that note. But after some time peoples are not interested in property, but the note itself. There paper money or coin’s era started. In next stage, as development takes worldwide. promissory notes are connected with gold as gold is precious metal, for giving guarantee about the currency. And it is the base of gold standards. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold. US was the country which scrap Gold standards lastly, in 1971. All because of this peoples all over the world feel secure when they were in US dollars. As US was taking guarantee to give gold with equivalent amount, if something will go wrong.

Following the end of World War II in 1945, Europe and the rest of the world embarked on a lengthy period of reconstruction and economic development to recover from the devastation inflicted by the war. Crude Oil was not invented then as fuel. It was used as natural medicine.(Yes) . So, for some time US is the winner and so the affecting to all global commerce. Although gold initially served as the base reserve currency, the US dollar gained momentum as an international reserve currency that was linked to the price of gold. But because of some reasons, Central Bankers all over the world were not in situation to continue the system. One major reason is in Gold Standards, there are limitations for printing money. One of the main problems was that the systems were ultimately reliant on central banks to “play by the rules.” The rules required central banks to adjust the discount rate to allow for proper inflow and outflow of gold to bring the exchange rate back to par with trading partners. While many countries followed the rules, several did not – namely, France and Belgium. Any system requires the cooperation of the parties involved, and the gold standard was no exception. It means it is difficult in situation where if any country is in deficit, they supposed to handed the gold reserves as the money is related with it. That was not good for any economy and possibly some may denied to do so. A second problem with the gold standard was that while it did maintain average price stability over the long run, there were still short-term price shocks that needed to be absorbed by economies. The California gold discovery of 1848 is a prime price shock example. The gold find increased the money supply, which raised expenditures and price levels, creating a short run of instability. While this could be counteracted with the proper protocol, it should be noted that economic disruptions did occur during gold standard times, and no attempts to sustain a gold standard have lasted. So what to do? How to come out of this. The answer was BRETTON WOODS AGREEMENT.

A landmark system for monetary and exchange rate management established in 1944. The Bretton Woods Agreement was developed at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire, from July 1 to July 22, 1944. Major outcomes of the Bretton Woods conference included the formation of the International Monetary Fund and the International Bank for Reconstruction and Development and, most importantly, the proposed introduction of an adjustable pegged foreign exchange rate system. Currencies were pegged to gold and the IMF was given the authority to intervene when an imbalance of payments arose. One of the proposals of the Bretton Woods conference was that currencies should be convertible for trade and other current account transactions. ( Investopedia )

After the crisis, some peoples are advocating re adoption of gold standards. It is impossible to readopt Gold standards. The reasons are many. But the main reason is that it can not generate economic value or in another word, it only control the flow of money and Growth takes place in Economics. In today’s world where we are trying to make growth, Gold standards are nowhere. Another point is about faith on currency and exchange. I agreed that after crisis our faith on currency was shacked. But that was also happened with Gold in history. Just search on Google and you will find many incidences. Want to close this post with one thought. Economics and financial sector is dynamic in nature. It changes itself with every new situations and problems. So answer of one might not applicable to all the time.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter