Mr. E.P. Salazar
17 August 2012
Bring It Back to the Gold Standard
The 2007 global financial crisis considered by many economists to be the worst since the Great Depression in the 1930s caused the downfall of large financial institutions such as drop of interconnected stock markets and the bailing out of major banks. This was triggered by the complex interplay of over-valuated mortgages, accumulated malpractice of trading between buyers and sellers, and especially the lack of capital holdings of banks involved in those financial commitments (Simkovic, 253). This caused declines in credit availability and investor confidence which then had a major impact on the global stock market. The United States being a major template for the global economy surely hit other economies too. Due to the downfall of major economies like the States, currencies should revert back to the gold-standard monetary system for economic recovery and stability and in order to prevent another chain reaction of decline in economic dependents. I. Gold-standard: the basis and platform of the world’s economies The gold-standard was the foundation of economies around the world. It is the monetary system wherein the standard economic unit corresponds to a fixed weight of gold. The currency of a country is directly backed by its national gold reserves ("Gold Standard: The Concise Encyclopedia of Economics”, Web). During the pre-World War I period, countries such as Britain used the gold-standard as a system in which countries redeemed their domestic currencies in gold and the offsetting of the gold was through monetary authorities in order to maintain the existing monetary conditions (Bordo, 1). It was inevitable that some countries would have more gold than the others by means of geological reasons like England which was the centre of commodities and gold market, but still, many nations still stuck to this system of gold reserves. Their holding of a foreign exchange was indication of confidence in the stability of this system (Bordo, 2). The backing of it was due to the general fact it prevents inflation and ensures public trust in the economy. There are specific kinds of gold-standard. The first one is the gold specie standard wherein the system involves the monetary unit being associated with circulating gold coins or the unit given the definition of the circulating gold coin with a subsidiary coinage from lesser metals. It denotes the unit of currency is the gold coin itself. Another kind is the gold exchange standard in which the monetary value still involves of coins but of silver and other metals. The authorities fix the exchange rate with other countries based on the gold standard; the silver coins have an external value in terms of gold. The last one is the gold bullion standard which is a system that doesn’t need the circulation of gold coins but it is compensated by the selling of the gold bullion on demand and at a fixed price for the circulating currency. Due to its availability and commodity, gold was simply accepted as the universal currency and this standard wasn’t designed (Lipsey, 683). According to Graham Levy, the Lydians minted coins from electrum which was an alloy of gold and silver. The Roman Empire soon adapted this system as such Croesus and Constantine have their emblems on Roman coins. Gold became a primary means for exchange in the Roman Empire, so the invasion of the British islands was essential for the gold mining (Kemmerer, 17). Queen Anne’s proclamation in 1704 made the British West Indies adopt a gold standard with the Spanish gold doubloon coin; even Sir Isaac Newton established a mint ratio between gold and silver put gold as the total means of circulation. Over time, the United States also adapted a silver standard in 1785, but also codified a Mind and Coinage Act in 1792 to establish a ratio of gold to the U.S. dollar. Only after World War II did Richard Nixon removed it...