Gold standard and Related Topics

Cordell Hull, U.S. Secretary of State 1933–44

Bretton Woods system

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The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement.

Roosevelt and Churchill during their secret meeting of 9–12 August 1941, in Newfoundland resulted in the Atlantic Charter, which the U.S. and Britain officially announced two days later.

John Maynard Keynes (right) and Harry Dexter White at the inaugural meeting of the International Monetary Fund's Board of Governors in Savannah, Georgia, U.S., 8 March 1946

Gold prices (US$ per troy ounce) with a line approximately marking the collapse of Bretton Woods.

The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars to within 1% of fixed parity rates, with the dollar convertible to gold bullion for foreign governments and central banks at US$35 per troy ounce of fine gold (or 0.88867 gram fine gold per dollar).

Silver standard

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Monetary system in which the standard economic unit of account is a fixed weight of silver.

The move away from the silver to the gold standard began in the 18th century when Great Britain set the gold guinea’s price in silver higher than international prices, attracting gold and putting them on a de facto gold standard.

The Eccles Federal Reserve Board Building in Washington, D.C. houses the main offices of the Board of Governors of the United States' Federal Reserve System

Central bank

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Institution that manages the currency and monetary policy of a state or formal monetary union,

The European Central Bank building in Frankfurt

Central bank independence versus inflation. This often cited research published by Alesina and Summers (1993) is used to show why it is important for a nation's central bank (i.e.-monetary authority) to have a high level of independence. This chart shows a clear trend towards a lower inflation rate as the independence of the central bank increases. The generally agreed upon reason independence leads to lower inflation is that politicians have a tendency to create too much money if given the opportunity to do it. The Federal Reserve System in the United States is generally regarded as one of the more independent central banks

Sealing of the Bank of England Charter (1694), by Lady Jane Lindsay, 1905.

The Bank of England, established in 1694.

Walter Bagehot, an influential theorist on the economic role of the central bank.

The headquarters of the People's Bank of China (established in 1948) in Beijing.

At the most basic level, monetary policy involves establishing what form of currency the country may have, whether a fiat currency, gold-backed currency (disallowed for countries in the International Monetary Fund), currency board or a currency union.

The Hatter's hat shows an example of the old pre-decimal system: the hat costs half a guinea (10/6).

Pound sterling

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Official currency of the United Kingdom and its associated territories.

Guinea of James II, 1686. The "Elephant and Castle" motif below his head is that of the Royal African Company: the gold came from Britain's trade in African slaves from the Guinea region of West Africa

"Shield reverse" sovereign of Queen Victoria, 1842

The cost of £1 in US dollars (from 1990)

The cost of one Euro in sterling terms (from 1999)

Reverse of a £5 Series G Bank of England note

The British Islands (red) and overseas territories (blue) using sterling or their local issue

Selection of current sterling banknotes printed by all banks

Uk bonds 1960-2022 Government borrowing for debt (10 year bond) increased to over 15% in the 1970s and early 1980s

But without addressing the problem of underweight silver coins, and with the high resulting gold-silver ratio of 15.2, it gave sterling a firmer footing in gold guineas rather than silver shillings, resulting in a de facto gold standard.

Spanish silver eight-real or peso of 1768

United States dollar

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Official currency of the United States and several other countries.

Alexander Hamilton finalized the details of the 1792 Coinage Act and the establishment of the U.S. Mint.

Continental one third dollar bill (obverse)

John Maynard Keynes (right) and Harry Dexter White at the inaugural meeting of the International Monetary Fund in 1946. They were instrumental in drafting the provisions of the post-war global financial system.

The Headquarters of the Federal Reserve System in Washington, D.C.

U.S. Consumer Price Index, starting from 1913

Worldwide use of the U.S. dollar:
United States
External adopters of the US dollar
Currencies pegged to the US dollar
Currencies pegged to the US dollar w/ narrow band
Worldwide use of the euro:
Eurozone
External adopters of the euro
Currencies pegged to the euro
Currencies pegged to the euro w/ narrow band

From implementation of the 1792 Mint Act to the 1900 implementation of the gold standard the dollar was on a bimetallic silver-and-gold standard, defined as either 371.25 grains (24.056 g) of fine silver or 24.75 grains of fine gold (gold-silver ratio 15).

John Maynard Keynes

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English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments.

King's College, Cambridge. Keynes's grandmother wrote to him saying that, since he was born in Cambridge, people will expect him to be clever.

Keynes's colleague, David Lloyd George. Keynes was initially wary of the "Welsh Wizard," preferring his rival Asquith, but was impressed with Lloyd George at Versailles; this did not prevent Keynes from painting a scathing picture of the then-prime minister in The Economic Consequences of the Peace.

The Great Depression and its periods of worldwide economic hardship formed the backdrop against which the Keynesian Revolution took place. This image is Migrant Mother, taken by photographer Dorothea Lange in March 1936.

Keynes (right) and the US representative Harry Dexter White at the inaugural meeting of the International Monetary Fund's Board of Governors in Savannah, Georgia in 1946

Prime Minister Clement Attlee with King George VI after Attlee won the 1945 election

Neo-Keynesian IS–LM model is used to analyse the effect of demand shocks on the economy

The economist Manmohan Singh, the then prime minister of India, spoke strongly in favour of Keynesian fiscal stimulus at the 2008 G-20 Washington summit.

Friedrich Hayek, one of Keynes's most prominent critics

Painter Duncan Grant (left) with Keynes in 1912

46 Gordon Square, where Keynes often stayed while in London. Following his marriage, Keynes took out an extended lease on Tilton House, a farm in the countryside near Brighton, which became the couple's main home when not in the capital.

Keynes advised it was no longer a net benefit for countries such as Britain to participate in the gold standard, as it ran counter to the need for domestic policy autonomy.

Croeseid bimetallic equivalence: 1 gold Croeseid of 8.1 grams was equivalent in value to 10 silver Croeseids of 10.8 grams.

Bimetallism

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Monetary standard in which the value of the monetary unit is defined as equivalent to certain quantities of two metals, typically gold and silver, creating a fixed rate of exchange between them.

Achaemenid bimetallic equivalence: 1 gold Daric was equivalent in value to 20 silver Sigloi. Under the Achaemenids the exchange rate in weight between gold and silver was 1 to 13.

1896 Republican poster warns against free silver.

During the 19th century there was a great deal of scholarly debate and political controversy regarding the use of bimetallism in place of a gold or silver standard (monometallism).

Dorothea Lange's Migrant Mother depicts destitute pea pickers in California, centering on Florence Owens Thompson, age 32, a mother of seven children, in Nipomo, California, March 1936.

Great Depression

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Severe worldwide economic depression between 1929 and 1939 that began after a major fall in stock prices in the United States.

The unemployment rate in the U.S. during 1910–60, with the years of the Great Depression (1929–39) highlighted

The Dow Jones Industrial Average, 1928–1930

Money supply decreased considerably between Black Tuesday and the Bank Holiday in March 1933 when there were massive bank runs across the United States.

Crowd gathering at the intersection of Wall Street and Broad Street after the 1929 crash

The Great Depression in the U.S. from a monetary view. Real gross domestic product in 1996-Dollar (blue), price index (red), money supply M2 (green) and number of banks (grey). All data adjusted to 1929 = 100%.

Crowd at New York's American Union Bank during a bank run early in the Great Depression

Crowds outside the Bank of United States in New York after its failure in 1931

Power farming displaces tenants from the land in the western dry cotton area. Childress County, Texas, 1938

The Depression in international perspective

The overall course of the Depression in the United States, as reflected in per-capita GDP (average income per person) shown in constant year 2000 dollars, plus some of the key events of the period. Dotted red line = long-term trend 1920–1970.

A female factory worker in 1942, Fort Worth, Texas. Women entered the workforce as men were drafted into the armed forces.

An impoverished American family living in a shanty, 1936

Unemployed men march in Toronto, Ontario, Canada.

Benito Mussolini giving a speech at the Fiat Lingotto factory in Turin, 1932

Unemployed people in front of a workhouse in London, 1930

Unemployed men standing in line outside a depression soup kitchen in Chicago 1931.

Burning shacks on the Anacostia flats, Washington, D.C. put up by the Bonus Army (World War I veterans) after the marchers with their wives and children were driven out by the regular Army by order of President Hoover, 1932

Buried machinery in a barn lot; South Dakota, May 1936. The Dust Bowl on the Great Plains coincided with the Great Depression.

CCC workers constructing drainage culvert, 1933. Over 3 million unemployed young men were taken out of the cities and placed into 2,600+ work camps managed by the CCC.

The WPA employed 2–3 million at unskilled labor.

Black Friday, May 9, 1873, Vienna Stock Exchange. The Panic of 1873 and Long Depression followed.

One reason why the Federal Reserve did not act to limit the decline of the money supply was the gold standard.

Clockwise from top-left: Federal Reserve, Bank of England, European Central Bank, Bank of Canada

Monetary policy

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Policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing or the money supply, often as an attempt to reduce inflation or the interest rate, to ensure price stability and general trust of the value and stability of the nation's currency.

Banknotes with a face value of 5000 in different currencies. (United States dollar, Central African CFA franc, Japanese yen, Italian lira, and French franc)

Reproduction of a Song dynasty note, possibly a Jiaozi, redeemable for 770 mò.

Yield curve becomes inverted when short-term rates exceed long-term rates.

2016 meeting of the Federal Open Market Committee at the Eccles Building, Washington, D.C.

Mechanics of open market operations: Demand-Supply model for reserves market

1979 $10,000 United States Treasury bond

A run on a Bank of East Asia branch in Hong Kong, caused by "malicious rumours" in 2008.

Gold certificates were used as paper currency in the United States from 1882 to 1933. These certificates were freely convertible into gold coins.

The Bank of Japan, in Tokyo, established in 1882.

The Bank of Finland, in Helsinki, established in 1812.

The headquarters of the Bank for International Settlements, in Basel (Switzerland).

The Reserve Bank of India (established in 1935) Headquarters in Mumbai.

The Central Bank of Brazil (established in 1964) in Brasília.

The Bank of Spain (established in 1782) in Madrid.

The establishment of national banks by industrializing nations was associated then with the desire to maintain the currency's relationship to the gold standard, and to trade in a narrow currency band with other gold-backed currencies.