Gold standard - what is it?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:40

The term "gold standard" has many meanings. First of all, the gold standard is a monetary system in which within the state there is a free conversion of monetary units into gold. The exchange rate is determined by the central bank of the state and is fixed.

The concept and essence of the system

The gold-pegged monetary system in most countries began to exist from the end of the 19th century. Great Britain switched to this system in 1816, France in 1803, and America in 1837.

At the global level, the gold standard is a monetary system of relations in which each country has brought its own monetary unit into line with it. State banks or governments of these countries were required to buy and sell currency at a fixed price.

Basic principles of the system:

• conversion was provided both within the state and outside the country, which did not allow the issue of monetary units without taking into account the gold reserve;
• gold bars were freely exchanged for money within the state;
• gold was freely imported and exported on international markets.

Advantages and disadvantages

The system made it possible to regulate inflationary processes, but still had a number of drawbacks:

• every country that adopted the gold standard was completely dependent on the increase and decrease in gold production, on the discovery of new deposits of the precious metal;
• inflation processes have begun at the transnational level;
• the government was deprived of the opportunity to pursue an independent monetary policy within its own state, therefore, it was not possible to solve internal economic problems.

However, the gold standard is not only disadvantages, but also a huge list of advantages:

• general stability was achieved, both in the foreign and domestic policies of the countries united by the gold standard;
• flows of gold, which flowed from the treasury of one state to the treasury of another, stabilized exchange rates, international trade began to develop rapidly;
• stability of exchange rates was achieved;
• companies operating in foreign and domestic markets have been able to predict profits and future costs.

Varieties

Historically, there are three forms of the standard.

The gold standard is the very first gold standard in the world. Any person who possessed a sufficient amount of precious metal or jewelry had the right to mint the amount of gold coins he needed. The system does not imply any restrictions on the import or export of gold from the country.

Guidelines:

• set the gold content of each national currency;
• gold acted as an international means of payment;
• gold was freely exchanged for money;
• deficit was covered by gold bars;
• each state maintains an internal balance between gold reserves and the supply of monetary units.

The exchange rate of any country could not deviate from parities by more than 1%, in fact there was a fixed rate. The most basic advantage of the system is that inflation was completely excluded. When extra monetary units appeared, they were withdrawn from circulation and turned into gold.

Gold bullion standard. This system meant that the gold standard was gold bars, not coins. The main purpose of the system is to eliminate the indiscriminate buying and selling of gold. The stock of the precious metal was kept only in the Central Bank, because it was impossible to walk with 1 kg of gold in your pocket, especially to pay for it when buying food. The policy did not allow, with an increase in prices in the foreign market, to increase the emission of monetary units, which would lead to an increase in prices within the country.

The gold exchange standard is actually the same as the gold bullion standard, but with one difference. The central bank could not only sell bullion of the precious metal, but also issue mottos representing gold at a fixed price. In fact, not only a direct connection between gold and currency was established, but also an indirect one.

Gold Exchange Standard

The system is better known asBretton Woods, which was adopted in 1944 at the International Conference. Key principles:

• 1 troy ounce of gold cost $35;
• all countries that became members of the system adhered to a strictly established exchange rate;
• central banks of participating countries kept a stable exchange rate in the country through foreign exchange interventions;
• it was possible to change the exchange rate only through devaluation or revaluation;
• The IMF and IBRD entered the organizational system.

But the main goal that Washington faced was to strengthen the shaken positions of the dollar in any way.

History of Russia

The introduction of the gold standard in Russia began in 1895. Finance Minister S. Witte managed to convince the emperor of the need to introduce a gold standard. Indeed, at that time, Russia possessed a huge amount of gold: as of 1893, about 42 tons were mined, which equaled 18% of the total world level.

Since 1896, new coins have appeared. It was the responsibility of the state bank to freely exchange credit notes for coins.

At that time, Russia was in the lead in the gold standard, and the ruble was the most stable currency in the world. Even the revolution of 1905-1907 could not change the internal and external exchange rate, the ruble also withstood the pre-revolutionary situation until 1913.

The golden era of the Russian Empire ended around 1914, when 629 million golden moments disappeared without a trace and monetaryexchange in the country stopped. Later, there was another attempt to restore economic stability in the country by issuing gold coins, but this did not affect the stabilization of the situation. The country had to completely abandon the gold standard system with the start of industrialization.

The situation after the first and second world wars

During the First and Second World Wars, gold was forced out of domestic circulation in almost all countries. Last of all, the circulation of gold ceased in the United States in 1933. Exchange operations with gold were carried out only as a last resort, if it was necessary to pay off the deficit in the balance of payments.

All countries have completely switched to paper money. The era of the introduction of the gold standard in the form of a gold division system began, which is still in effect today. However, the international monetary system of the pre-war period is fundamentally different from the modern one. The Bretton Woods system ceased to exist in 1971, and they stopped converting dollars to gold and vice versa.

Since this year, the dollar has ceased to be an integral part of the income regulation policy, the exchange rate has become floating, and the US currency has ceased to be an international reserve instrument.

Consequences of abandoning the gold standard

At the same time, the rejection of gold violated the clear order in the economic relations of countries, but accelerated the growth of world lending. In fact, the United States could buy itself anything and anywhere, paying with everythingthe world in non-convertible dollars. The foreign trade deficit since the 1990s reached its maximum critical point, but no one tried to cope with the situation. As a result, by about 2007, the factories of America and most of Europe were closed, and production was moved to Asia. How this will all end, the whole world will soon see.

Gold proof

Gold standard and jewelry are slightly different. The highest standard of gold in Russia is 999. This precious metal is used in the manufacture of ingots. For jewelry, gold 750 and 585, 900 is used.

The highest grade does not allow making jewelry with good wear resistance, as gold is obtained:

• fragile;
• plastic;
• the product has chips and scratches, even due to minor mechanical damage.

999 gold items will deform quickly.

Other interpretations of the term

The concept of the gold standard is used not only in the economic sphere.

Previously, if a patient went to the hospital with a certain problem, he had to go to a therapist who ordered a series of examinations. After receiving the results of the tests, the patient was referred to specialized specialists who prescribed other tests. To date, a new examination algorithm called the "Gold Standard of Diagnostics" is being used. In fact, this is a comprehensive examination, consisting of 10 andmore analyzes and research. This includes a blood test for various indicators, ultrasound of internal organs, ECG and other methods. As a result, the doctor gets a complete picture of what processes are taking place in the patient's body.

There is a notion of a gold standard in healing. The term implies not only compliance with diagnostic standards, but also certain therapeutic measures that allow achieving the best results in treatment. In evidence-based medicine, the term refers to the use in practice of precisely those methods that fall under the category of class 1 research.

At the same time, both terms are evaluative and subjective, that is, there are no such concepts in the official standardization system. In the last century, questions arose in the medical field about introducing the concept of "gold standard" into the standardization system. However, at the beginning of this century, such attempts were subjected to strong criticism, since it is impossible to prove that one or another method of treatment is really effective for all patients.