Gold Standard Essay, Research Paper

Topic: The ?Classical? Gold Standard between the period of the early 1870?s until the first world war, what was wrong with it and the collapse of the standard.

I have picked this topic as it is of great interest to me. The reason being that South Africa was a big contributor to the way the Gold Standard played out in world finance. This was because of South Africa being one of the leading suppliers of Gold in the world As a result of its huge mining interests. This is important to me as I feel it is a big part of South African history and thus important to write learn about.

Thesis: The classical gold standard, the method of basing a country’s currency on a value of gold. It was this theory which was the driving force behind the World economy for over 40 year. What was this economic theory about?

- Prior to the First World War, most countries were usually on what was called the gold standard. This meant that gold was the official money, and paper monies were redeemable in gold. Which in today?s society is unrealistic.

- In the 18th century some people, now called mercantilists, believed that the road to riches for a nation was to accumulate gold. They thought that just as an individual who had more gold was richer than one who had less, so a nation, which had more gold in its vaults, would be richer than a nation, which had less.

What was the Gold Standard?

a) A gold value must be fixed for the currency of every country within the system.

b) There must be free movement of gold between countries within the system.

c) The monetary system of all member countries must be such that the domestic money supply is linked more or less automatically to movements of gold in and out of the country.

By following the above three rules, the adjustment function of the standard will be satisfied. However, if this is to be accompanied by domestic balance, a fourth rule is necessary:

d) That within each country there must be a high degree of wage flexibility.

Problems with the Standard

- The quantity theory, however, suggested that this policy was self-defeating. Suppose a nation was accumulating gold. This gold would be used as money domestically, or it would be used to support paper money. In either case M would rise, and the quantity theory predicted that this would raise the domestic price level.

- This could be looked at a different way. The loss of gold from foreign nations would reduce their money stock, causing prices to drop. The higher prices (relative to prices in foreign nations) in the nation gaining gold would mean that imports would be more attractive because foreign products were now lower-priced. Thus exports would be harder to sell because they would have risen in price relative to foreign substitutes. This change in relative prices would work to stop the gold inflow.

This essay plans to examine those topics and more, depending on the space constraint. The paper will explain the Gold Standard as well as what was inherently wrong with it and why it failed.