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Gold Standard
Key Term
The gold standard is the key term I have chosen to focus on for my discussion post. I picked the gold standard because the relevance of a currency backed by gold relates to the massive inflation that has occurred over the past year. As most currencies are no longer backed by gold, inflation is likely to occur more rapidly as governments can essentially print money with no value behind it. This dilution of the currency has occurred since the onset of the pandemic as the US government looked to aid unemployed workers during the shutdowns across the country. The gold standard is relevant as countries wouldn’t be able to print money without the price of gold being diluted as well.
Term Overview
Saterlee (2019) explains that the gold standard occurred “when governments started issuing currency in the form of paper money, it was usually convertible into a predetermined amount of gold” (p. 146). The gold standard spread across the world and was the major backing of most currencies into the 20th century. The onset of World War I in combination with the later Great Depression eventually led to the end of the Gold Standard, with the United States among the last to keep it in practice until the mid-1930s (Saterlee, 2019). The gold standard was eventually replaced by a currency exchange system, which we still utilize today.
Article Overview
Cutsinger (2020) focuses on how feasible it is to return our modern economic systems to the antiquated gold standard. This question is raised due to the massive inflation that has been occurring in the past few years across the globe and discussions in previous administrations on returning to a gold standard (Cutsinger, 2020). Cutsinger (2020) argues that returning to the gold standard is feasible and there is enough gold for it to be a realistic option.
Many economists argue that returning to the gold standard is unrealistic and “is a relic of a past marred by macroeconomic instability that central banks helped to alleviate” (Cutsinger, 2020, p. 88). Cutsinger (2020) demonstrates that while significant hurdles may exist, the gold standard would offer advantages like lower inflation levels, a common currency, increased international trade, and lower price-level uncertainty. One of the major questions on returning to the gold standard is the availability of above-ground gold. While a need to convert non-monetary uses of gold would be needed to support a fully backed currency, a realistic reserve ratio can be utilized reducing the need by a factor of ten (Custinger, 2020). Overall, the need to mine more gold is not necessary for a full conversion as “Australia, Brazil, Canada, China, the Eurozone, Great Britain, India, Japan, Russia, South Korea, and the United States” own about 80% of all gold (Custinger, 2020, p. 89). While additional costs for maintenance and conversion would exist, conversion to the gold standard is still possible even as its merits continue to be argued.
Discussion
Cutsinger (2020) directly addresses the gold standard and discusses the reasons outlined by Satlerlee (2019) relating to why the gold standard was replaced. This article furthers understanding of how the gold standard was implemented and why it is still a reasonable monetary system, despite years of dismissal. Overall monetary policy is discussed by both Custinger (2020) and Saterlee (2019), but Cutsinger (2020) focuses on the merits and disadvantages of the gold standard. Understanding the gold standard is fundamental to this module as it provides an outline for how monetary policy was dictated before the modernized economy and how central banks have picked up the pieces since.
Many other supporting articles provided overviews on the gold standard and other monetary policies. Dorn (2020) discussed how the gold standard has many misguided criticisms and could be an answer for current inflation and price uncertainty. Lennard (2018) explores the causal effects of monetary policy on economies including the British economy during the gold standard. Othman et al. (2020) determine how macroeconomic policies affect income inequality and wealth distribution. Both the gold standard and cryptocurrency contribute positively to government promotion of social welfare, while centralization may lead to more inequalities (Othman et al., 2020). Finally, Teupe (2020) explores the historical significance of the gold standard with case studies on Germany and the United States and the relation their monetary systems had on inflation and wage negotiation.
References
Cutsinger, B. P. (2020). On the feasibility of returning to the gold standard. The Quarterly Review of Economics and Finance, 78, 88–97. https://doi.org/10.1016/j.qref.2020.03.002
Dorn, J. A. (2020). How the classical gold standard can inform monetary policy. Cato Journal, 40(3), 777-790. http://dx.doi.org/10.36009/CJ.40.3.11
Lennard, J. (2018). Did monetary policy matter? Narrative evidence from the Classical Gold Standard. Explorations in Economic History, 68, 16–36. https://doi.org/10.1016/j.eeh.2017.10.001
Othman, A. H., Musa Alhabshi, S., Kassim, S., Abdullah, A., & Haron, R. (2020). The impact of monetary systems on income inequity and wealth distribution. International Journal of Emerging Markets, 15(6), 1161–1183. https://doi.org/10.1108/ijoem-06-2019-0473
Teupe, S. (2020). Inflation and the negotiation of wages. comparative responses to monetary changes in Germany and the United States during the Gold Standard Era, 1876–1926. Labor History, 62(1), 1–22. https://doi.org/10.1080/0023656x.2020.1844875
Satterlee, B. (2019). International Business with Biblical Worldview. McGraw-Hill.