Gold standard: Difference between revisions
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==The history of the gold standard== | ==The history of the gold standard== | ||
Paper currency was in general use before the 17th century, especially for large transactions. When the Bank of England was established in 1694, it made its first loan to the government of the day partly in the form of banknotes which then circulated as means of payment and were held as reserves by other banks. They were generally acceptable on the understanding that they could always be converted into gold or silver at a stipulated rate. | Paper currency was in general use before the 17th century, especially for large transactions. When the Bank of England was established in 1694, it made its first loan to the government of the day partly in the form of banknotes which then circulated as means of payment and were held as reserves by other banks. They were generally acceptable on the understanding that they could always be converted into gold or silver at a stipulated rate. In 1717, on the recommendation of Isaac Newton (then Warden of the Mint) the price of an ounce of gold was set at £3 17s 10 1/2d <ref>[http://www.pierre-marteau.com/editions/1701-25-mint-reports/report-1717-09-25.html Isaac Newton: Statement to the House of Lords, September 25 1717]</ref>. In 1797, however, a panic prompted withdrawals that threatened to exhaust the Bank of England's reserves of gold and convertibility was suspended <ref>[http://www.mn5.org/finance/1-money/30-bank-restriction-act-of-1797-england The Bank Restriction Act of 1797]</ref>. Although intended to be temporary, that suspension lasted for 24 years. A letter to a newspaper by the economist David Ricardo | ||
<ref>[http://ia311224.us.archive.org/2/items/threelettersonpr00rica/threelettersonpr00rica.pdf. David Ricardo ''The Price of Gold'' (letter to the ''Morning Chronicle'' 19th August 1809) in ''Three Letters on the Price of Gold'', John Hopkins Press, 1903]</ref> led to the setting up of the Bullion Committee | <ref>[http://ia311224.us.archive.org/2/items/threelettersonpr00rica/threelettersonpr00rica.pdf. David Ricardo ''The Price of Gold'' (letter to the ''Morning Chronicle'' 19th August 1809) in ''Three Letters on the Price of Gold'', John Hopkins Press, 1903]</ref> led to the setting up of the Bullion Committee | ||
<ref> Edwin Canan: ''The paper pound of 1797-1821'', Report of the House of Commons Select Committee on the High Price of Gold, | <ref> Edwin Canan: ''The paper pound of 1797-1821'', Report of the House of Commons Select Committee on the High Price of Gold, | ||
Revision as of 02:43, 30 December 2008
The gold standard has long been abandoned, but for a century and a half from 1821 to 1971, the gold standard (with the gold exchange standard) was a significant influence on the economic policies of the industrialised countries, and it was an important factor in the international development of the great depression.
The operation of the gold standard
A country was said to be on the gold standard when its central bank was required to give gold in exchange for any of the country's currency presented to it. The rates at which national currencies were freely convertible into gold determined their exchange rates, and all international debts were settled by the shipment of gold.
In classical economic theory, the maintenance of balance of payments equilibrium under the gold standard was deemed to operate through its influence upon the money supply. A balance of payments surplus would result in an inflow of gold into the reserves of the country's central bank, which would enable it to expand the money supply without risk of not having enough gold to meet possible demands. The increase in the money supply was expected to raise domestic prices, which would tend to reduce the surplus by raising imports and reducing exports. In principle, tbe reverse of those consequences would follow a balance of payment deficit.
The history of the gold standard
Paper currency was in general use before the 17th century, especially for large transactions. When the Bank of England was established in 1694, it made its first loan to the government of the day partly in the form of banknotes which then circulated as means of payment and were held as reserves by other banks. They were generally acceptable on the understanding that they could always be converted into gold or silver at a stipulated rate. In 1717, on the recommendation of Isaac Newton (then Warden of the Mint) the price of an ounce of gold was set at £3 17s 10 1/2d [1]. In 1797, however, a panic prompted withdrawals that threatened to exhaust the Bank of England's reserves of gold and convertibility was suspended [2]. Although intended to be temporary, that suspension lasted for 24 years. A letter to a newspaper by the economist David Ricardo [3] led to the setting up of the Bullion Committee [4][5] whose report recommending the resumption of convertibility was put into effect in 1821.
The role of the gold standard in the great depression
- ↑ Isaac Newton: Statement to the House of Lords, September 25 1717
- ↑ The Bank Restriction Act of 1797
- ↑ David Ricardo The Price of Gold (letter to the Morning Chronicle 19th August 1809) in Three Letters on the Price of Gold, John Hopkins Press, 1903
- ↑ Edwin Canan: The paper pound of 1797-1821, Report of the House of Commons Select Committee on the High Price of Gold, A. M. Kelley (1969
- ↑ The Bullion Report, Hansard 14 May 1811
- ↑ Hubert Bancroft (ed) "The Gold Standard in the United States" (excerpt from The Great Republic by Master Historians)