Discussion Responses Required - 10 To 12 Hours At The Maximum

Selected Key Term

My interest in the key term, the gold standard, is motivated by gaining greater insights into how this system first became integrated and what ultimately lead to a deviation from this practice. In addition to these initial impressions, there is also an interest in discerning how we attribute value to paper currency today and whether the assigned worth is an accurate representation or if it is misleading. Since this standard regulated value by association with precious metals, one must also ask, who then determined the intrinsic worth of the substance backing the country’s currency? While an exploration of these matters may not yield direct answers to the aforementioned inquiries, there is the prospect of gaining a greater understanding of its impact on cross border commerce.

Explanation of Key Term

According to Satterlee (2014) the gold standard’s roots were founded in governing authorities, traced as far back as biblical times, that allowed gold as well as other precious metals to function as a form of currency for the purchase or exchange of goods and/or services. This foundation was expanded upon when governments began distributing paper currency, which had a predetermined value assigned based on a certain amount of gold, in lieu of the actual substance(s) (Satterlee, 2014). It was the implementation, regulation, and participation in this system by various governing powers globally that the term “the gold standard” came to be.

Major Article Summary

The article, Brief History of the Gold Standard in the United States, references the various historical periods in which America held the standard, the measure in which it was held as well as the changes implemented which brought about its brief resurgence and its eventual end. Elwell (2012) begins his exploration from 1792 to 1834 by clarifying that the US began with a mixed standard which silver was the dominant metal used for domestic purchases while a smaller quantity of gold was designated for transactions globally. As time progressed, a variety of paper monies were used in transactions such as bank notes, treasury notes, and bills of exchange, these forms of currency, some backed by the standard, brought about numerous benefits along with many woes. For example, though bank notes were convertible for a particular amount of gold, financial intuitions often failed to honor redemption in circumstances where there was economic disparity or when the demand by patrons exceeded the bank’s reservoir. In other words, an honoring of the gold standard was subject to a variety of external factors, which made it difficult to uphold.

The Gold Standard Act of 1900, as stated by Elwell (2012), served as a declaration of the government’s “commitment to the gold standard” by way of formally backing dispersed paper currency with gold. Unfortunately, many of the challenges associated with honoring the system were still left unresolved with further complications arising when the use of checks became more prevalent. In an effort to combat these issues, the Federal Reserve was created and acted as a pipeline by which banks that experienced an influx of withdrawals could meet demands, however, this too was limited in creating a lasting solution due to the necessity of adhering to the gold standard (Elwell, 2012). Consequently, in 1933, “a wave of bank runs resulted in massive bank failures, the Fed failed to provide sufficient liquidity to enable the banks to meet their customers' demands for cash” (Elwell, 2012). In the years that followed numerous policies and actions took place that ultimately brought an end to the standard in the US. Although variations would arise after the banking failure in the 1930’s, all eventually gave way to fiat money.

Discussion

a. The article assisted me in better understanding the impact of the gold standard on the economy along with the changes in business practice which soon followed its subsequent end. One perspective worth noting is that the issue was not necessarily with the gold standard itself, rather blame could be attributed to the American banking system as a whole. Although other variables added to the pressure of adherence, the creation of the Federal Reserve served as an indication of negligence coupled with a lack of safeguards by financial intuitions. A departure from the gold standard did not preserve the US from the financial catastrophes that followed the Great Depression, i.e. the crisis of 08-09, rather it prompted a call-to-action regarding change in policies and commerce. In addition, with the gold standard laid aside in favor of fiat money, there is a greater degree of ambiguity regarding actual worth, inflation rates, accountability, and trade.

b. How Japan remained on the Gold Standard despite unsustainable external debt, references the perseverance of the Japanese government in adopting and maintaining the gold standard, despite a staggering collection of foreign debt, by way of leveraging political relations with Britain. Pittaluga & Seghezza (2016) reference an alliance with Britain that enabled Japan to have access to London’s financial markets in exchange for preserving foreign interests in the East. This source, in relation to the main article, prompts one to consider whether America could have remained on the gold standard if a similar agreement would have been established in a timely manner.

Harvests and Financial Crises in Gold Standard America, expands upon the factors that contributed to a series of financial calamities during the gold standard era. The chief factor sited was anomalies in agriculture which disrupted the flow of trade, but other influences such as the lack of a central bank and branch networks, increased loan defaults, low liquidity, and a wave of bank failures were also noted (Hanes & Rhode, 2013). This cited work further expands on the failures associated with the gold standard referenced in the main article.

Gold and Government, makes a case for the utilization of a gold standard or private markets by asserting that the use of fiat money removes the element of accountability by lack of convertibility and is thereby subject to distortion. Its relation to the main article is founded in the fact that the assertations referenced regarding fiat money did allow the US government flexibility to compensate, for what is arguably, poor banking practices.

In conclusion, Could the United States Have Had a Better Central Bank? An Historical Counterfactual Speculation, proposes a different outcome with regards to a secondary bank and how that could have stimulated greater financial stability while granting prolonged use of the gold standard. Bordo (2012) states that, “the Second Bank could have smoothed the price level and dampened the international price and output shocks that characterized the experience under the pre-1914 classical gold standard”. The cited work singles out the failures associated with the Federal reserve, which sped up a departure from the gold standard, thus rendering further insights into the US banking system cited in the main article.

References