The research objective of this term paper is to answer the question in how far a return to a gold-backed currency is possible in the USA. In order to answer this question, this paper starts with the history of gold-backed currencies. The main emphasis of this chapter is put on the Bretton Woods system and its arguments for and against this system. In chapter 3, the Fiat Money System, which was the aftermath of the Bretton Woods system and is still the common money system of the USA and the world, is explained more precisely while stating the positive and negative effects it had on the economy. In the following chapter, the question of a return to a gold-backed currency will be answered based on the results previously elaborated. Completing this research, a final conclusion will briefly summarise the conflicting arguments.
Nowadays the worth of currencies is to be perceived as a result driven by the state and trust of the people. Therefore, currencies do not have an intrinsic value. This money system is the so-called Fiat Money System. However, these facts simultaneously raise the question of what will happen if the people lose trust in their currency. In this case, a gold-backed currency, also termed commodity money, would be the alternative. Having used the gold-backed dollar from 1944 until 1971, point for the scenario in question. Moreover, talks about a new gold-backed US dollar, which have increased since the election of President Donald Trump, will be analysed as well.
Table of Content
Table of Figures
1 Introduction
1.1 Problem
1.2 Objective and methodology
2 History
2.1 The Bretton Woods System
2.2 The End of the gold standard
3 The Fiat Money System
3.1 How does the Fiat Money System work?
3.2 History after the Bretton Woods System collapsed
3.3 Positive and negative effects of the Fiat Money System
4 Return to a gold-backed US-Dollar?
4.1 Policy options
4.2 Consequences of a return to the gold standard
5 Conclusion
Table of Figures
Table 1: Progress of the average gold price from 1900 until 2019
1 Introduction
The following chapter states the problem and the research issue of this term paper.
1.1 Problem
Nowadays the worth of currencies is to be perceived as a result driven by the state and trust of the people. Therefore, currencies do not have an intrinsic value. This money system is the so-called Fiat Money System. However, these facts simultaneously raise the question of what will happen if the people lose trust in their currency. In this case, a gold-backed currency, also termed commodity money, would be the alternative. Having used the gold-backed dollar from 1944 until 1971, point for the scenario in question. Moreover, talks about a new gold-backed US dollar, which have increased since the election of President Donald Trump, will be analysed as well.
1.2 Objective and methodology
The research objective of this term paper is to answer the question in how far a return to a gold-backed currency is possible in the USA. In order to answer this question, this paper starts in chapter 2 with the history of gold-backed currencies. The main emphasis of this chapter is put on the Bretton Woods system and its arguments for and against this system. In chapter 3, the Fiat Money System, which was the aftermath of the Bretton Woods system and is still the common money system of the USA and the world, is explained more precisely while stating the positive and negative effects it had on the economy. In the following chapter, the question of a return to a gold-backed currency will be answered based on the results previously elaborated. Completing this research, a final conclusion will briefly summarise the conflicting arguments.
2 History
In the following sub-chapters, the history of the linkage between gold and money during the Bretton Woods era will be discussed.
2.1 The Bretton Woods System
After the end of the Second World War, the world economy was in a depression and general instability spread throughout the world. Something had to be done to rebuild and boost it again. The formerly prosperous Britain was not spared either. In order to boost the economy and create new jobs, national currencies were devalued. Britain went ahead in 1931 and devalued the pound sterling. Gradually, other countries followed.1
With this idea, the countries wanted to raise their exports over imports. This was an attempt to expand domestic production in order to fight unemployment. However, this idea was not very successful because every country wanted to profit from this economic ad- vantage.2 Consequently, 44 countries gathered in Bretton Woods, USA, to shape and control their economic relations. The stated objective of the conference was the expansion and balanced growth of international trade.3 The main concern of the USA, which were the only superpower barely being affected by the depression, and the 44 nations was to create the monetary policy basis for reviving international trade and capital movements. Another aim was to ensure that they could develop as smoothly as possible.4 Since the British pound had lost its function as a world currency, the aim of the conference was therefore the convertibility of national currencies and the creation of an international payment instrument. The new reserve currency was the US dollar.5 That was set due to the plans of John Maynard Keynes from England and Harry Dexter White from the USA were presented and discussed. Both proposals provided for fixed exchange rates that were largely free of fluctuations and thus should form a secure basis for calculation in foreign economic relations. The Bretton Woods system was largely based on the White Plan and saw the International Monetary Fund as its centre of power. On 27 December 1945, the agreement on the establishment of an International Monetary Fund and a World Bank became law.6 All nations except the USA fixed their exchange rates against the dollar with a maximum fluctuation margin of ±1% and established capital controls.7 The USA voluntarily undertook exchanging dollar currencies of foreign central banks for gold at a ratio of US$ 35 to 1 troy ounce. This created a gold foreign exchange standard with the dollar as the reserve currency. Thus, the dollar had a double function: It was both, a means of payment and a reserve currency.8
2.2 The End of the gold standard
The central banks' gold redemption guarantee to the US Federal Reserve served as a protection measure against inflationary money creation. This allowed them to exchange their dollar reserves for gold at a fixed rate of US$35/troz., the so-called gold parity of the dollar. Due to the gold redemption guarantee, dollar reserves had a similar character to bonds issued by the Federal Reserve and guaranteed to be converted into gold at any time.9 During the Bretton Woods era, several central banks made use of this redemption guarantee. Subsequently, the huge gold reserves of the USA shrank.10
The main factor that undermined the Bretton Woods System was the way the US financed the Vietnam War. They did not do this by raising taxes or cutting spending in other areas but by increasing the money supply; they simply printed more dollars.11
The high inflation in the USA had the same effect on these states as a tax that the USA imposed on them against their will, because the dollar reserves, they held were losing value. This behaviour of the US government led to an international loss of confidence in the US dollar. As a result, French President de Gaulle threatened to convert all US dollars held by France into gold. In response to that, President Nixon declared in 1971 that the gold redemption guarantee would be unilaterally suspended with immediate effect.12 This led to the end of the fixed exchange rate era and the end of the commodity money.
On the one hand the advantages of the Bretton Woods system included high monetary stability, stable exchange rates and a high degree of confidence in other currencies. In addition, currencies were easily exchangeable as exchange rates were fixed and ultimately all were a securitisation of gold.13 This stability and the real countervalue of money has a positive effect on the average saver, whose comparatively small monetary assets are not subject to an inflationary loss of value.14
On the other hand, one of the drawbacks is that growing economies need more money. - but increasing the money supply with the gold standard only works if more gold is bought to ensure coverage or the standard is softened. Since gold is limited and the per capita amount has been roughly stable for hundreds of years, this limits economic output.15 As mentioned above, the expansionary monetary policy, which led to higher inflation, in combination with the economic rise of Japan and Germany, weakened the economic power of the USA. Because of the inability to limit its expansive financial policy, the gold standard no longer had any basis.16
3 The Fiat Money System
In the following chapter the Fiat Money System is discussed by using historical facts and experiences with focus on the USA.
3.1 How does the Fiat Money System work?
As mentioned before, Fiat money is a term describing money which is not backed and therefore has no value. There are three characteristics of Fiat money:
1) Fiat money is money monopolised by the State. The state central banks have the production monopoly of the money.
2) Fiat money is usually created by lending, which is not matched by real savings. It is created out of nothing.
3) Fiat money is dematerialized money.17
The value of this money must be given externally by the government. Hence, governments commissioned central banks to make sure that the currency is stable. In the United States, the Federal Reserve System is the central bank and has the following five tasks:
“The Federal Reserve
1) conducts the nation's monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.
2) promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad.
3) promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system.
4) fosters payment and settlement system safety and efficiency (...)
5) promotes consumer protection and community development (...)”18
The task is therefore to influence the money supply so that the economy grows at stable prices without threatening the financial markets. This might allow an equalization in the American balance of payments to be achieved.19
[...]
1 cp. Andersen, U.: Das internationale Währungssystem zwischen nationaler Souveränität und supranationaler Integration, 1977, p. 26
2 cp. Tetzlaff, R.: Weltbank und Währungsfonds. Gestalter der Bretton-Woods-Ära, 1996, p. 42
3 cp. Dormael, Armand. BRETTON WOODS: Birth of a Monetary System, 1979, p. 9
4 cp. Senf, B.: Der Nebel um das Geld: Zinsproblematik, Währungssysteme, Wirtschaftskrisen, 2009, p. 175
5 cp. Eichengreen, B.: Global Imbalances and the Lesson of Bretton Woods, 2007, p. 133
6 cp. Copur and Schneider: IWF & Weltbank: Dirigenten der Globalisierung, 2004, p. 11
7 Ibid., p. 13
8 cp. Herr, Geld, Währungswettbewerb und Währungssysteme, 1992, p. 313
9 cp. Senf, B.: Der Nebel um das Geld: Zinsproblematik, Währungssysteme, Wirtschaftskrisen, 2009, p. 186
10 Ibid., p. 187
11 cp. Gilpin: Global Political Economy, 2001, p. 236
12 cp. Herr, Geld, Währungswettbewerb und Währungssysteme, 1992, p. 322
13 cp. https://www.alleaktien.de/aktienlexikon-und-boersenlexikon-und-definitionen/goldstandard- vorteile-nachteile-bretton-woods-system/, accessed 22.02.2020
14 cp. https://www.gold.de/goldstandard/#goldfu%C3%9F, accessed 22.02.2020
15 Ibid., accessed 22.02.2020
16 cp. https://oxiblog.de/1973-markierte-den-zusammenbruch-des-systems-von-bretton-woods-und-den-be- ginn-des-grossen-neoliberalen-umbruchs/, accessed 22.02.2020
17 cp. https://www.misesde.org/2018/07/die-welt-leidet-unter-fiat-geld/, 23.02.2020
18 https://www.federalreserve.gov/aboutthefed/files/pf_complete.pdf, accessed 23.02.2020
19 cp. Das Federal Reserve System, die Deutsche Bundesbank und das Europäische System der Zentralban- ken/die Europäische Zentralbank im Vergleich, 1994, p. 56
- Arbeit zitieren
- Mario Müller (Autor:in), 2020, Gold backed currencies. History and current policy options, München, GRIN Verlag, https://www.grin.com/document/914066
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Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen.