The Gold Standard


Oct 28, 2013 (3 years and 8 days ago)


The Gold Standard

Spring 2010: Open Economy Macroeconomics

Brittany Causey

How does a Gold
Standard work?

How does a Gold Standard

Each country fixes the price of its currency in terms
of gold by standing ready to trade domestic currency
for gold when necessary to defend the official price.

Each country is responsible for pegging its currency’s
price in terms of the official international reserve
asset, gold.

Results in fixed exchange rates between all

Monetary Policy
Under a Gold

Monetary Policy Under a
Gold Standard: Example

Bank of England increases M

by purchasing domestic assets. Increase
in M

making foreign assets more attractive.

Sell pounds to Bank of England for gold, then sell gold to other Central
Banks for their currencies. Use new currencies to buy deposits with
higher R than

Bank of England loses reserves because it is forced to buy pounds and
sell gold to keep the pound price of gold fixed. Foreign Central Banks
gain reserves as they buy gold with their currencies

British MS decreases causing

to increase and Foreign MS
increases causing R to decrease until R is equal across countries and
asset market is in equilibrium. Total world MS increases by amount of
Bank of England’s initial domestic asset purchase and R lower
throughout the world.

Monetary Policy Under a
Gold Standard: Summary

International monetary adjustment under a gold
standard is symmetric

Whenever one country is losing reserves and its
money supply is decreasing, foreign countries are
gaining reserves and seeing their money supplies

Benefits of the Gold

Benefits of the Gold

Money supply cannot grow more rapidly than real
money demand

Places automatic limits to increases in national price
levels through expansionary monetary policy

Drawbacks of the
Gold Standard

Drawbacks of the Gold

Undesirable constraints on use of monetary policy to
fight unemployment.

Tying currency values to gold ensures a stable overall
price level only if the relative price of gold and other
goods and services is stable.

Central Banks cannot increase their holding of
international reserves as their economies grow unless
there are continual new gold discoveries

Countries with potentially large gold production have
ability to influence world macroeconomic conditions
through market sales of gold.

The Bimetallic

The Bimetallic Standard

Currency based on both gold and silver

Could reduce the price level instability resulting from
use of just one metal as the standard.

The Gold Exchange

The Gold Exchange

Halfway between the gold standard and a pure
reserve currency standard

Central Bank’s reserves include gold and currency
whose price in terms of gold are fixed, and each
central bank fixes its EXRA to a currency with a
fixed gold price.

Restrains excessive money growth, but allows more
flexibility in growth of international reserves