The Gold Standard and Foreign Exchange Markets Summary

Solution Preview

Hi,
I will provide you with information for each question, which you can draw on for your response. Please note that while the British Library link is no longer active, the information remains relevant.

1. Scenario: You have been asked by a local college to write a lecture that explains the gold standard and addresses the functions of the world's major foreign exchange markets. Write a 1200 word summary detailing the functions of the world's major foreign currency exchange markets. Be sure to discuss the positive and negative aspects of using a gold standard.

The Gold Standard is the original system for supporting the value of currency issued, where the price of gold is fixed against the currency, It means that the increased supply of gold does not lower the price of gold but it causes prices to increase. It is a monetary system in which currency is convertible into fixed amounts of gold. The US used to be on the gold standard but was taken off in 1971 (http://pages.britishlibrary.net/mikepymm/gold.htm).

Referring to the world's major foreign exchange market:

"The Gold Standard is a fixed exchange rate whereby currency can be exchanged for fixed amounts of gold - e.g. both the value of a unit of the currency and the quantity of it in circulation are specified in terms of gold. If two currencies are both on the gold standard, then the exchange rate between them is approximately determined by their two prices in terms of gold. In fact, the gold-standard system was largely abandoned during WWI. Up to that time many countries kept gold reserves large enough to meet all likely demands on their currencies by exports and well as backings on the issuing of bank notes. The high cost of WWI as well as the 1930s Depression forced countries to abandon the gold standard since their reserves weren't enough to keep in step with demands. Also, imbalance in payments between countries is financed by transfers of gold or foreign exchange" (http://pages.britishlibrary.net/mikepymm/gold.htm).

In other words, the gold standard (GS) is a monetary system in which nations "fix" the rate of exchange between their currencies and gold, which effectively "fixes" exchange rates between nations. In other words, the gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. When several nations are using such a fixed unit of account, the rates of exchange among national currencies effectively become fixed
(n.wikipedia.org/wiki/Gold_standard). It ensures a common measure for the international exchange e.g. economic trade. It is a monetary system with fractionally backed convertible paper in which a currency could be converted into gold at a guaranteed value on demand. Said another way, it is the practice of pegging currencies to gold and guaranteeing convertibility.

Let's look at several examples for you to consider for your paper.

Example 1: History and role of Gold Standard in the world's major foreign exchange market

Monetary system in which the standard unit of currency is a fixed quantity of gold or is kept at the value of a fixed quantity of gold. The currency is freely convertible at home or abroad into a fixed amount of gold per unit of currency. In an international gold-standard system, gold or a currency that is convertible into gold at a fixed price is used as a medium of international payments. Under such a system, exchange rates between countries are fixed; if exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold from one country to another, large gold inflows or outflows occur until the rates return to the official level. These "trigger" prices are known as gold points. The gold standard was first put into operation in Great Britain in 1821. Prior to this time silver had been the principal world monetary metal; gold had long been used intermittently for coinage in one or another country, but never as the single reference metal, or standard, to which all other forms of money were co-ordinated or adjusted. For the next 50 years a bimetallic regime of gold and silver was used outside Great Britain, but in the 1870s a monometallic gold standard was ...