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Gold Standard Essay

1009 words - 4 pages

The gold standard is the idea that gold, rather than paper money, holds a specific value and goods and services are to be priced according to that value. The value is based on the weight and fineness of the gold bullion. Just after the Great Depression, one of major ideas to get the economy booming again was that gold and silver could be a great source of wealth for the United States. Early economists did not believe in anything except payment for any goods in gold. Major advantages said that gold was the only type of wealth to actually be held on to and for the most part it would not lose its value. (We know that this wasn't true!) Other ideas included that gold is the only way for a nation to gain power and riches. Economists figured that the only way to store up gold was to have a surplus of exports to countries and payments were to be in gold. The more they exported the more they country would get back in gold. There was also belief that increases in the amount of gold circulated would reduce interest rates and promote business.The gold standard trend caught on very quickly and soon the United States became accustomed to it. The economic devastation after World War I saw most of the developed nations suspend their gold standards (to later return to it) and all suffered from varying degrees of inflation. Devaluation is done in to reverse inflation, a step crucial to returning to the gold standard. There were a number of devaluation's in the 1920's to go back to the gold standard, as much the world did after the war. These devaluation's were used as "runs" on currencies that boosted employment and an increased the business cycle. (Www.fame.org/research, Kemmerer) The Great Depression encouraged several nations to resort to a devaluation to stimulate foreign trade and exports to bring on economic recovery. That use of devaluation did not work, but governments, and many economists too, refused to abandon the idea. Countries that held on to the gold standard, as the US did, suffered the worst from the Great Depression. Being committed to the Gold Standard prevented the Federal reserve system to expand the money supply in 1930 and 1931. It was during this time that the United States abandoned its gold standard. (Www.econ161.berkely.edu, DeLong) Then came World War II, stimulating more inflation all over the world and serious economic problems after the war. Economy's had never fully recovered after both WWI and WWII so it was rather difficult to go back to a pure gold standard as there was before the Great Depression. Devaluation's became increasingly frequent. Knowing that a "true" gold standard could have been accomplished, the government established the Bretton Woods System. This system, which incorporated a currency peg to gold, in combination with the establishment of the IMF (International Monetary Fund) and GATT (General Agreement and Trade and Tariffs) was used to reboost the worlds' economic stability.The end of gold standard in the 1970's...

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