Gold Standard
Gold Standard
Can someone explain to me the gold standard in great detail?
I think that I support the gold standard, but before I put my support behind it, I really want to understand EXACTLY how it works. Does anyone know the details? I get a price set at a certain level and the government has enough the amount of gold to back currency, our bill gives the actual value. That is about all I know. I do not understand how the world works in the system and the workings of the exchange gold. Thanks for answering!
The standard gold is based on the government's promise to change the unit of currency against a fixed amount of gold. For some odd reason the myth of currencies pegged to the gold price just refuses to die, although there is no rational economic reason to support the gold or other commodity currencies are supported. Why is gold anyway? Why not use other traded commodities such as oil ecxchange, copper, orange juice, or pork belly? The basic problem with commodity-backed currency (gold or other commodities) is a liquidity problem: there must be an increase in money supply as the economy grows. The money supply should grow at about the same speed as the general economic growth. Bretton Woods currency system, which is the last remnant of the standard of gold, collapsed in 1970 because there simply is no reliable mechanism to increase the gold reserves available to keep pace with world economic growth. Even before the most countries abandoned the gold standard before World War II, monetary policy depends on the discovery and mining new gold reserves, so that's out of control of monetary policy. Fact that the currency is pegged to the gold price made a significant contribution to the Great Depression in 1937, because it prevents the central bank from increasing liquidity in the economy to ensure that credit markets continue to function. Today, no country in the world using a gold-backed currency, for good reason: it just does not do anymore work on the economy the current environment. A return to the gold standard will throw the economy into a heart attack, a deflation and recession far worse than what the world has seen so far.
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