8/15/2019 Classical Gold Standard

1/5

Classical Gold Standard

Defnition

 The gold standard based on a commitment by participating countries to fx

the prices o their domestic currencies in terms o a specifed amount o gold.

National money and other orms o money (bank deposits and notes) were

reely converted into gold at the fxed price. The process was frst used by

England in !! ater the master o the mint" #ir $saac Newton" overvalued

the guinea" a ormer %ritish gold coin" in terms o silver" and England ormally

adopted the gold standard in &'. The nited #tates used a bimetallic (gold

and silver) standard. They switched to gold standard in &* and the process

was legali+ed in ',, by -old #tandard ct passed in /ongress. $n &*" the

nited #tates fxed the price o gold at 01,.2! per ounce" where it remaineduntil '. 3ther ma4or countries 4oined the gold standard in the &!,s. The

period rom &&, to '* is known as the classical gold standard. 5uring

that time" the ma4ority o countries adhered (in varying degrees) to gold. $t

was also a period o unprecedented economic growth with relatively ree

trade in goods" labor" and capital.

How it worked

8/15/2019 Classical Gold Standard

2/5

 The gold standard made price levels around the world to move together as

exchange rates among the

participating countries were fxed.

 This co6movement occurred

mainly through an automatic

balance6o6payments ad4ustment

process called the price6specie6

7ow mechanism. n example

might help to understand total

process. #uppose that a

technological innovation brought

about aster real economic growth

in the nited #tates. %ecause the

supply o money (gold) essentially

was fxed in the short run" .#.prices ell. 8rices o .#. exports then ell relative to the prices o imports.

 This caused the %ritish to demand more .#. exports and mericans to

demand ewer imports. .#. balance6o6payments surplus was created"

causing gold (specie) to 7ow rom the nited 9ingdom to the nited #tates.

 The gold in7ow increased the .#. money supply" reversing the initial all in

prices. $n the nited 9ingdom" the gold out7ow reduced the money supply

and" hence" lowered the price level. The net result was balanced prices

among countries.

Advantages

1. Simplicity:

-old standard is considered to be a very simple monetary standard. $t avoids

the complicacies o other standards and can be easily understood by the

general public.

2. P!lic Confdence:

-old standard promotes public confdence because (a) gold is universely

desired because o its intrinsic value" (b) all kinds o no6gold money (paper

money" token coins" etc.) are convertible into gold" and (c) total volume o

currency in the country is directly related to the volume o gold and there is

no danger o over6issue currency.

". Atomatic #orking:

8/15/2019 Classical Gold Standard

3/5

nder gold standard" the monetary system unctions automatically and

re:uires no intererence o the government. -iven the relationship between

gold and :uantity o money" changes in gold reserves automatically lead to

corresponding changes in the supply o money. Thus" the dise:uilibrium

conditions o adverse or avorable balance o payment on the international

level or o in7ation or de7ation on the domestic level are automatically

corrected.

$. Price Sta!ility:

-old standard ensures internal price stability. nder this monetary system"

gold orms the currency base and the prices o gold do not 7uctuate much

because o the stability in the monetary gold stock o the world and also

because the annual production o gold is only a small raction o world;s total

existing stock o monetary gold. Thus" the price system which is ounded on

relatively stable gold base will be more or less stable than under any other

monetary standard.

%. &'c(ange Sta!ility:

-old standard ensures stability in the rate o exchange between countries.

#tability o exchange rate is necessary or the development o international

trade and the smooth 7ow o capital movements among countries.

istory shows that money shortages lead to hording. This

sti7es economies as people buy and sell less.*. The gold standard the ability o governments to make economic

policy. common practice during tough economic times is to increase

the money supply to stimulate the economy. This would not be

possible under the gold standard since currency supply is limited by

the gold supply. /urrency can only be increased as more gold is

mined or purchased.

8/15/2019 Classical Gold Standard

4/5

)easons *or its +ailre

.

8/15/2019 Classical Gold Standard

5/5

,i!liograp(y

Bordo, Michael D. “The Classical Gold Standard—Some Lessons for Today.” Federal Reserve

 Bank of St. Louis Review 63, no. !"#$"%& '(").

Bordo, Michael D. “*inancial Crises, Ban+in Crises, Stoc+ Mar+et Crashes, and the Money

S-ly& Some /nternational 01idence, "$)2("#33.” /n *orrest Caie and Geoffrey 0. ood, eds.,

 Financial Crises and the World Banking System. London& Macmillan, "#$6.

Bordo, Michael D., and 4. 5. Schart7, eds. A Retrospective on the Classical old Standard!

"#$"%"&'". Chicao& 8ni1ersity of Chicao 9ress, "#$:. 0secially “The Gold Standard and the

Ban+ of 0nland in the Crisis of "$:),” ;y