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Gold standard, During the FP war, France suspended conversion of the Frank…
Gold standard
Bimetallism
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Bimetallism was difficult to maintain while avoiding arbitrage between the global market and the world market.
In case of large differences between the two, a country could lose all reserves of a metal, such as happened with England in the 18th century, forcing it to adopt the Gold Standard.
France tries to get a large control over bimetallism, but loses it during and after the Franco Prussian war.
They held large quantities of silver, but expenses during the war created inflation everywhere and countries stopped converting silver.
Traits
Countries had gold reserves and in order to retain their gold they had to limit government spending.
They also raised interest rates on government funds, to make people buy more of them and thus get more gold.
Hence, left wing parties were against the gold standard, as raising interest prevented companies from expanding and made them lower wages.
In theory, the value of a currency depends on the amount of gold in circulation.
In order to function it required free trade and stability, two factors that disappeared when the first world war started.
History
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France, Italy, Switzerland, Belgium and others formed the Latin Monetary Union to set a fixed price for silver, but the Franco Prussian war caused massive inflation of silver.
Germany got massive amounts of gold from the war, and since it's partners Russia and Austria didn't use silver and it had strong trade relations with England, Germany adopted the gold standard.
The discovery of large silver reserves in the US devalues it even more, leading to the Latin Monetary Union, Russia, Japan and many others adopting gold.
There was no big conference for the adoption of the gold standard across the world, it was merely adopted by multiple countries with time.
The British Empire controls the Gold Standard as the dominant industrial power of the world, thus having great influence over other countries with the system.
The US resisted adopting the Gold Standard, since silver helps agrarian exports. They even try to campaign for the restoration of international Bimetallism in 1878, but fail. Thus, the US adopts gold at the end of the 19th century.
During the 1870 depression, England refused to adopt protectionism and thus saw its power decline.
The financial sector remained prosperous, but across the world industry slowed down.
How it worked
Gold-pound system
Gold centre countries (England, France, Germany and US) have coins made of gold and some whose value is determined by their gold reserves.
Gold currency (Divisas-ouro) countries (Russia, Austria, Japan, etc) are those that keep gold reserves and currencies (such as the pound) that can be converted, being really vulnerable to foreign exchange.
Countries with no exchange rate (Latin America, China, Africa, etc) had no reserves.
Military statuses
Fiduciary (Estatuto Fiduciário) was the most common, and allowed the Central Bank to produce currency without lastro while selling bonds to deal with the excess liquidity.
Proportional was rare, but present in the US, It stablished a fixed rate between gold reserves and currency, so whenever the Central Bank printed currency it had to buy something to keep the rate fixed.
Control
Discount rates (Taxa de redesconto) were interest rates, for when the Central Bank buys titles. Interest rates can be controlled by lower liquidity, sale of bonds, lower prices, etc.
During the FP war, France suspended conversion of the Frank due to its inability to pay debts during the war, making silver go to other bimetalic and silver countries, who also suspend conversion to prevent inflation until the end of the war.
Thus Britain becomes to most attractive investment, and silver is sold cheaply for the purchase of gold and pounds. Thus, bimetalism collapsed.
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After the Franco-Prussian war and the Treaty of Frankfurt, Germany sold its silver and got large reserves of gold, thus adopting the Gold Standard and making the Silver Standard even more outdated.
Some countries, such as Japan, kept their reserves on other countries for interest and pressure, leaving them vulnerable to being seized.
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No country really plays by the rules, but the fact that everyone is cheating creates a balance and a bubble.