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The International Monetary System (Gold Standard (Advantages :check:…
The International Monetary System
Gold Standard
What is it?
Fixed exchange rate between value of a currency and quantity of gold
Increases cooperation between countries (E.g. US in 1920 was the main exporter of the world)
Great repercussions = exacerbated the Great Depression
Early adopter: Britain (19th century)
Industrial Revolution (advancement in technology) lead to balance of payment surplus
Cheaper exports to the rest of the world
Pushed countries to adopt the gold standard to ease trade with Britain
E.g. Germany
Germany's trading partners adopted the Gold Standard -> Spreading of the Gold Standard
Attaract British finance and capital
Increased investments in capital = Capital generation
Advantages :check:
Common medium of currency exchange -> convenience -> eases trade with other countries
international cooperation
Increases trade volume e.g. adoption of Euro
Case of Britain
Dramatic increases to trade and production
Greater discoveries of gold
Adherance to gold standard
Fixes trade imbalances through gold
Fixed asset (gold) backs moneys value
Stabilizing effect e.g. Price Specie Flow
Government can only print as much money as it has in gold reserves
Discourages inflation
Disadvantages :red_cross:
Little political pressure
Dealing of B.O.P deficits through deflationary pressures
Interdependence of countries
Bretton Woods System
Why was the Gold Standard abandoned?
Massive changes after WW1
Universal suffrage
Inflexible labor markets
De-globalization
Fractional reserve banking
Bi-Metallism
What is it?
System of fixed exchange between value of a currency and quantities of two metals (silver and gold)
Gold
Greater value than silver
Used for purchased of important assets
Silver
Used for everyday purchases
Substituted with other low value forms of currency: token coins or paper money
Free and unlimited market for the two metals, imposed no restrictions on the use and coinage of either metal
Larger monetary base -> Greater price stability
Greater monetary reserves
When was it used?
Early 19th century, before the Gold Standard
Problems of Bi-Metallism
What if value of currency is higher outside the country?
Arbitrage: taking advantage of differing prices of gold/silver
Profits generation to fund further economic growth
Countries independently setting its own rate of exchange between the two metals
Increased cost of coinage of both metals
Gresham's law: "Bad money driving out the good"
Occurs when value of gold is significantly higher/increases in the world market
Increased coinage of silver (cheaper metal) -> Used for payments instead of gold
Leads to the hoarding of gold (Higher valued metal)
Reversible law: Good money can drive out the bad
Occurs when the value of gold is lower/declines in value in world market
Increased coinage of gold, decreased coinage of silver (less value) = Greater circulation of 'good money'
Britain in 18th century
Lack of silver in the british economy -> use of more token coins and paper money
Result of the Great Depression and effects on the world economy
Balance of payment deficit which needs to be paid for by monetary means (I > X)
Credit deficit
Increased borrowing from abroad > Amount of money lent to others as loans
Serious repercussions if economy is unable to repay debt
How is the debt financed?
Expense of the public (Higher taxes) but there were poor economic conditions at that time
Acceptable medium of exchange to creditor -> rise of common currency across economies
Current account deficit
Exporting country: Injections into the circular flow as money flows into the economy = greater economic power and wealth
Importing country: More leakage from the circular flow of income to buy overseas imports