the gold standard
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The Gold Standard. Chapter 2, International Financial Mgmt, Eun et al 3460.02 notes by A.P. Palasvirta, PhD. Historical Monetary Standards. Bronze Silver Gold U.S. Dollar Standard. The Bank of Deposit. Bank of Amsterdam (15 th century) 100% reserves of gold and silver - PowerPoint PPT PresentationTRANSCRIPT
Chapter 2, International Financial Mgmt, Eun et al
3460.02 notes by A.P. Palasvirta, PhD
Bronze
Silver
Gold
U.S. Dollar Standard
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Bank of Amsterdam (15th century)100% reserves of gold and silverDepositors brought gold, silver
Were given warehousing certificates for the amount of gold, silver minus a charge
Depositors would use the warehousing certificates as moneyLower transactions costsEasier to use
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Gold 100%
Warehouse receipts
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Assets Liabilities
Queen Elizabeth I 1563 to 1603Created the Bank of England
Held partial reserves of gold and silver The rest were in treasury bills
This was not a strict gold standard, but a gold exchange standard This bank could not refund all claims for gold
with gold
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Gold30 – 40%
T-bills60 – 70%
http://www.gata.org/node/104
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currency
Assets Liabilities
Fix the value of the unit of accountSomething immutable
Ounce of silver Ounce of gold
Gold standardUnit of account the troy ounceMedium of exchange
Coinage Gold certificates
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If the cost of mining gold increasesdeflation
Value of gold increases Value of other goods remain constant Prices decrease
If the cost of mining gold decreases Inflation
Value of gold decreases Value of other goods remain constant Prices increase
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1/P
Gold
1/P
Demand
Supply
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1/P
Gold
1/P
Supply
DemandDemand
Two markets for gold official government market Legal unofficial private markets
Parity Price greater than market price government’s price (parity) the high price external markets price the low price
trader buys low sells high buys externally sells to government
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Par
D1
S1
Pg
Pg
Qg
D2
S2
GovernmentMarket
Private Market
Private market gold supplies decrease holders of gold will sell first to the government arbitrageurs will buy up stocks and sell to the
government excess supply will dry up bringing market
price to equal the parity price Government gold supplies will increase
increases the money supply decrease the value of money (inflation)
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Countries fix parity price of goldusd parity price = $20.67/ounceuk parity price = 4.2474£/ounce
usd/uk£ = 4.8665$/£ They allow arbitrage between two markets
parity price of gold at Central Bank free market price of gold
De facto single currency the ounce of gold many units of account periodic falling off of the gold standard
Balance of Payments deficits settled with gold
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Mechanism which mitigates BOT surplus gold is paid to pay for excess of exports to
imports gold coming into the central bank increases
money supply inflation in the economy
your goods now more expensive in foreign markets
foreign goods less expensive to you Price-specie flow mechanism
BOP balances settled in gold Money adjusts Prices adjust International prices converge
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Gold
T-bills
gold increases due to BOT surplus
cash
currency
Money supply increases
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Assets Liabilities
Gold backs all money prices move relative to
excess demand for gold (economic growth) deflation
excess supply of gold (new gold finds) inflation
Treasuries have no independent monetary policy
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Fixed parity price (not fixed value)Unit of account varied with the cost of
mining gold Often the unit of account appreciated (increased
in value) as gold supplies were harder to mine With new gold discoveries, the unit of account
depreciated (decreased in value) as the cost of mining gold decreased
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All currencies fixed to gold Gold is the de facto currency
single world wide currencyall international trade is denominated in
gold No need to hedge exchange rate
volatility since exchange rates are constant
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When CBs execute a monetary policydiscipline of the gold standard is goneafter WWII governments ran inflationary
policies interest rate policies employment policies inflation sometimes running at 200% or more
Exchange rates fluctuatecreating uncertainty for trade
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Colonizers (France, Spain, England, Portugal)Gold standard
ColoniesSilver standard
Gresham’s LawBad money drives out good
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Germany reparations heavy and denominated in Deutsche Marks not goldGermany inflated their currency in order to
reduce the cost of reparations Inflation 1 trillion%
United States had most of the goldFrance, England paid for war materials
bought from the U.S. in gold Stock market crash of 1929
Led to protectionism Sterilization polices Depression
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WWII U.S. again the supplier of arms got most of the gold in the world
1944 end of the was the Gold Exchange Standard
The U.S. dollar became the reserve currency Traded at par value with all currencies part of
system Balance of payments imbalances were
cleared with U.S. dollars instead of gold Cheaper to ship dollars instead of gold Countries could earn interest on their foreign
exchange reserves Special Drawing Rights (SDRs)
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Creation of the International Monetary Fund (IMF) International clearing house for exchange
transactions with SDRs and dollars Special Drawing Rights
Exchange reserves held at the IMFValue weighted average of basket of major
currencies Deutsche Mark (20%), franc (12%), pound (12%),
yen (16%), us dollar (42%)
The SDR as well as the U.S. dollar became the reserve currencies
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U.S. had to run a chronic BOP deficit to supply us dollars to the worlds economies
The fixed parities between currencies dependent on certain assumptions for all economiesMonetary policies alignedFiscal policies aligned
Revaluations necessary periodicallyMonetary policies of many countries very
expansionary
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US running inflationary monetary policy to finance Vietnamese warUS increase the dollar parity price
(devalued) twice DeGaulle demanded payment of BOP
surplus with the U.S. in gold
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January 1976 All currencies will float with respect to
each other
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Gold = $1,212.1 Silver = $18.411 Platinum = $1,548.7 Paladium = $462.7
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