Stories of the return of the gold standard. Part two.

Gold standard

- a monetary system in which the basic unit of payment is a certain standardized amount of gold.

In an economy built on the gold standard, it is guaranteed that every unit of currency issued can be exchanged for an appropriate amount of gold on demand. When making payments between states using the gold standard, a fixed exchange rate is established based on the ratio of these currencies to a unit of mass of gold.

Proponents of the gold standard point out that its use makes the economy more stable and less prone to inflation, since under the gold standard the government cannot print money not backed by gold at its discretion. However, the shortage of means of payment causes a decline in production due to a liquidity crisis.

Story

Gold prices during and after the gold standard (until 2005) in US dollars per troy ounce (31.1 g)
Earlier monetary systems were based on bronze and later on silver ( Silver Standard

).[
source not specified 3248 days
] A pure silver standard existed in Central Europe in the 8th-14th centuries. With the increase in the volume of trade transactions, gold began to be used more and more often as a means of payment. Beginning in the 15th century, bimetallism was established with a fixed exchange of silver for gold. Due to the gradual change in the value of metals, the exchange rate had to be revised. However, the need to have small silver coins prevented the abandonment of bimetallism. This obstacle was removed only in the 19th century with the transition to paper money and coins made of base metals.

The main reasons for choosing gold as the standard currency:

• high cost of small volume and weight,
• durability, stability during storage,
• divisibility and unification,
• possibility of identification by many characteristics (color, weight, degree of malleability, acoustic properties),

This contributed to the fact that already in ancient states it was gold that was used as money.

Gradually, the direct use of gold began to be abandoned. The main reasons for this:

• the impossibility of rapid additional emission in accordance with the needs of money circulation (with the growth of trade turnover to service it, the need for the money supply also grows),
• transporting gold is a technically difficult and expensive task (signaling and proper security are required; large quantities require high carrying capacity),
• the loss of gold coins led to an imbalance in monetary circulation and to restore it a new, similar amount of gold was required,
• coins made of precious metal are subject to wear during circulation (including the cutting of coins), the real value of the reduced metal content conflicts with the face value of the coin,
• Damage to coins led to deformations of monetary circulation.

The appearance of paper money solved precisely these problems. The gold was kept in one place and strictly guarded. Paper money was essentially a certificate that gave its owner the right to claim. By paying each other with paper money, people transferred ownership of a certain amount of gold without transferring the gold itself. It was much more convenient and safer because:

• gold certificates can have completely different denominations, which allows them to be used equally successfully in both small and large transactions,
• certificates do not lose value due to normal wear and tear,
• Under certain conditions, certificates may be replaced or restored.

Subsequently, paper money also began to be used by governments to control financial activities on their territory.

The abolition of the currency's peg to gold allowed for relatively arbitrary monetary emission. When there is an excess of paper money in the economy, prices begin to rise (inflation). For example, a troy ounce of gold rose in price from 35 to 1900 dollars over the period from 1967 to 2011 (that is, it increased in price by more than 50 times in 44 years).

Dates

Five rubles in gold
(1924—1947)

• From 1821 to 1914, the pound sterling was freely and without restrictions convertible into gold. At this time, the pound is actually the main reserve currency.
• 1914 - with the outbreak of World War I, the US dollar takes the leading position. A dollar zone is emerging in North and Latin America.
• 1922 - Genoa Conference. The creation of a gold standard and a reserve currency system based on the pre-war model was envisaged.
• 1925 - Britain adopts the gold standard based on the pre-war parity of the pound sterling and gold. Reserves were not limited to gold, they also included currencies convertible into gold (such as the US dollar).
• 1929 - US stock market crash. The crisis gave impetus to the development of the “Great Depression” and fundamental changes in the state’s economic policy in financial markets.
• 1931 - England faced major budgetary difficulties associated with a decrease in income as a result of the crisis and an increase in expenses associated with it. European countries (in particular, Holland and Switzerland), as a result of the deteriorating financial situation, withdrew their capital from England. France, dissatisfied with England's position regarding Germany and Austria's desire for a customs union, and wanting to put political pressure on England, began to liquidate its London holdings. Thus, a huge outflow of gold began from England[1]. Panic in the London financial market led to a change in the leaders of the reserve currencies. The dollar came out on top, and the pound took second place.
• September 1931 - Great Britain abolishes the gold standard and introduces a freely floating exchange rate for the pound sterling. In order to manage the exchange rate, a special “Exchange Stabilization Account” was created.
• 1933 - abolition of the gold standard in the United States and the introduction of a freely floating dollar.
• 1933 - formation of the “golden bloc”. It included France, Italy, Switzerland, Holland, Belgium and Luxembourg. The purpose of the creation is to ensure mutual trade to maintain the convertibility of their national currencies into gold at the level of parities fixed in the 20s.
• January 30, 1934 - ratification of the “Gold Reserve Act” by US President Roosevelt, which fixed the parity of the American currency to gold at $35 per troy ounce.
• March 1935 - exit from the "gold bloc" of Belgium and devaluation of the Belgian franc.
• September 1936 - complete collapse of the “golden bloc”.
• September 25, 1936 - the signing of a trilateral agreement by Great Britain, France and the United States, according to which these countries assumed mutual responsibility for the normal functioning of the exchange market of their currencies. Currency interventions by central banks became official.
• July 1944 - The Bretton Woods Agreement established the “gold-dollar standard.” The currencies of 44 countries were rigidly pegged to the US dollar, and the dollar to gold ($35 per troy ounce).
• December 1945 - Bretton Woods agreements enter into force.
• 1947 - Italy introduced a free exchange rate to the US dollar. An underestimated cross rate of the pound to the dollar through the Italian lira appeared (at 2.60, compared to the official rate of 4 dollars per pound).
• July 15, 1947 - British official announcement of the convertibility of the pound sterling, which for the first time since the war restored the conversion of the pound into dollars and into gold.
• August 1947 - the IMF begins its work.
• August 20, 1947 - temporary suspension of the convertibility of the pound sterling.
• June 1948 - monetary reform was carried out in Germany.
• July 1, 1948 - adoption of the Marshall Plan to restore the war-ravaged economies of European countries.
• 1948 - France introduces a free exchange rate to the US dollar.
• April 1949 - monetary reform was carried out in Japan.
• September 18, 1949 - 30% devaluation of the pound against the dollar. The new rate is $2.80 per pound.
• 1950 - The European Payments Union was founded, which became one of the foreign trade policy instruments of the OECD (Organization for European Cooperation and Development). The purpose of creating the ENP is to prepare European currencies for convertibility.
• March 1954 - the introduction by Great Britain of liberalization measures in relation to the exchange of the pound sterling for other currencies. As a result, there was a convergence of the market and official exchange rates of the pound.
• February 1955 - the pound sterling actually became convertible.
• 1958 - devaluation of the French franc by 17.55%.
• December 27, 1958 - Convertibility officially came into force for all currencies of member countries of the European Payments Union. The European Monetary Agreement (EMA) was signed. Convertibility relied on the “dollar-gold”.
• October 20, 1960 - The price of gold in London reached $40 per ounce, which threatened the stability of the dollar.
• 1960 - creation of the “gold pool”. The goal is to curb the rise in gold prices. From the end of 1960 to the end of 1967, the price of gold never exceeded $35.35 an ounce.
• March 1961 - revaluation of the German mark and the Dutch guilder against the US dollar. The reason is the large positive balance of payments of these countries.
• November 18, 1967 - devaluation of the pound sterling by 14.3%. The main reasons are war debts, obligations of the second reserve currency, and the restructuring of the British economy. After the June six-day war in the Middle East, massive sales of pounds by Arab countries began. There was a UK trade deficit. The official pound parity fell from US$2.80 to US$2.40.
• March 15-17, 1968 - collapse of the “gold pool”. The reason is the sharp rise in gold prices.
• May 1968 - social unrest in Paris. The French National Bank has used up most of its foreign exchange reserves. This ultimately led to the subsequent devaluation of the French franc.
• 1969 - Special Drawing Rights (SDR) were created within the IMF. SDRs were originally intended to be used as an alternative to gold to fill official reserves.
• August 8, 1969 - The French franc devalued by 11.1% against the US dollar.
• September 28, 1969 - Germany decided to introduce a floating exchange rate for its currency, which subsequently led to the strengthening of the German mark.
• October 27, 1969 - revaluation of the German mark against the US dollar by 9.3%.
• 1970 - the entire year there was a decrease in interest rates in the United States.
• May 3-5, 1971 - massive sales of US dollars.
• May 9, 1971 - Switzerland and Austria revalued their currencies by 7.1 and 5.1 percent, respectively.
• August 15, 1971 - President Nixon announces a temporary suspension of the convertibility of the dollar into gold. The reason o is the discrepancy between the real purchasing power of the dollar relative to the declared gold parity, long periods of deficit in the US balance of payments and trade balance. Nevertheless, the dollar remained the main reserve currency, despite the obvious crisis of the Bretton Woods monetary system.
• December 18, 1971 - the “group of ten” countries concluded the “Smithsonian Agreement” in Washington, according to which it was decided to revalue the main currencies against the dollar and allowed maximum fluctuations of 2.25% in one direction or another (currency corridors). The official price of gold was 37-38 dollars per ounce, but the convertibility of the dollar into gold was not restored. In fact, the dollar devalued by 7.66%.
• March 7, 1972 - The six original members of the EEC agreed that fluctuations in the currencies of these countries could not exceed 1.125% on one side or the other of the official parity, amounting to a total of 2.25% against the 4.5% stipulated by the Smithsonian Agreement. To maintain the fixed parities, a system of foreign exchange interventions was developed. The German mark is beginning to play a leading role in Europe.
• June 1972 - Great Britain decided to introduce a free floating exchange rate for the pound sterling.
• January 1973 - the Italian government was forced to divide the foreign exchange market into two sectors - commercial and financial.
• February 12, 1973 - devaluation of the dollar against gold from 38 to 42.2 dollars per troy ounce. This decision caused a series of changes in fixed rates and revaluation of currencies against the dollar (Switzerland and Japan revalued their currencies by 12 and 7.5 percent, respectively).
• March 1973 - Japan and European hard currency countries suspended their commitment to fixed exchange rates.
• July 1973 - Managers agreed to replace “managed fluctuations” with a regime of floating exchange rates.
• 1973 - the first abrupt (fourfold) increase in oil prices. Caused severe inflation in all industrialized countries and a sharp economic downturn in 1974-75. In the same year, the price of gold increased significantly.
• 1975 - the first summit of the heads of leading Western states in an unofficial circle (later it became the G7). An agreement was reached to abolish the official price of gold.
• January 1976 - The Jamaican IMF conference noted the impossibility of returning to fixed exchange rates. For the first time, at the official international level, each country was given the option of adopting a fixed or floating exchange rate.
• 1976 - strong “polarization” of European currencies. Traditionally, “weak” currencies (pound sterling, Italian lira, French franc) are subject to strong devaluation, while “strong” currencies (deutsche mark, Swiss franc and Dutch guilder) continue to strengthen.
• January 10, 1977 - The pound officially ceased to serve as a reserve currency.
• April 1978 - Central banks of the leading industrial countries were allowed to buy and sell gold without restrictions on the free market.
• November 1, 1978 - The United States, Germany, Japan and Switzerland agreed on joint action to stabilize exchange rates. The goal is to keep the dollar from falling.
• 1979 - The European Monetary System is created. A single settlement currency was introduced - ECU (European Currency Unit), which in 1999 was transformed into the euro.
• 1984 - Reaganomics, the rise of the US dollar due to high interest rates amid moderate inflation.
• 4th quarter 1984 - lowering interest rates in the United States, with the goal of weakening the dollar. However, after a slight decline, the dollar rate rose to another high. American industry began to switch to imported raw materials and move production abroad. As a result, the strong dollar became the main problem for the United States.
• September 1985 - The G7 agrees to depreciate the dollar through joint action in the foreign exchange market.
• February 1987 - Louvre Agreement between the G5 countries (USA, Germany, UK, France and Japan) and Canada to coordinate currency interventions to stabilize the US dollar. Broken up after the October 19 stock market crash in the United States.
• 1990 - The reunification of Germany gave rise to increased inflation in the united country and a subsequent increase in interest rates. As a result, the balance of power between the German mark and the other currencies included in the European Monetary System (EMS) was disrupted.
• 1992 - Italy’s exit from the EMU, accompanied by the devaluation of the Italian lira
• September 1992 - after Black Wednesday, the pound sterling is devalued and the UK leaves the EMU.
• April 20, 1995 - Japan lowers its policy rate to a historically low 1%. At the then current inflation rate (about 2%), the Bank of Japan was actually subsidizing commercial banks.
• April 25, 1995 - G7 finance ministers agreed on joint interventions to help the dollar to stem its precipitous decline.
• On September 5, 2011, the morning fixing price (AM Fixing) for gold set a record in the entire history of the gold fixing - $1896.5 per troy ounce[2].

Educational program historical

A long time ago, people used a variety of objects, such as shells, as money. And also furs and animal skins. And also cocoa beans...

As a rule, money was used for items that, firstly, were valued among the local population, secondly, were relatively “mobile”, and thirdly, were relatively rare or, if not rare, then very useful in the household. Later, people paid attention to valuable metals and began making metal coins, which we still use today. Why did everyone choose gold and silver over animal skins?

Coins made from precious metals are highly valuable, easy to store, durable, and could be melted down into different items, even melted together or divided into smaller coins. Gold was considered to be resistant to counterfeiting because it could be identified by its softness (malleability), sound, color or weight. In general, it is not surprising that gold has become such a popular means of exchange.

Russian banks are breaking records for investments in gold. Is it time to follow their example?

Varieties of the gold standard

Gold coin

The gold coin standard, which is conventionally called the classical gold standard, existed in countries whose monetary system was based on gold coins, that is, coins minted from gold. At the same time, paper money was also issued. Any owner of a banknote could exchange paper money at the bank for gold coins or gold bars according to the established guaranteed parity, which was fixed on the banknotes themselves.[3]

The gold coin standard existed as long as the state guaranteed the free exchange of paper money for gold to any owner of paper money. However, this monetary system lasted until the First World War. With the outbreak of World War I, all warring countries suspended the free conversion of banknotes into gold. The exception was the United States of America, where the gold coin standard existed until 1933, where it was also abolished, but not because of the war, but due to the economic crisis.[3][4]

Gold bullion

Attempts by Great Britain and France to return to the pre-war gold coin standard after World War I proved impossible. The main reason is the discrepancy between gold reserves and the availability of paper money in circulation. In this regard, it was established that paper money could be exchanged for gold, but only in bullion, the minimum weight of which was 12.5 kg, which corresponded to an amount of 1,700 pounds sterling. (the cost of a luxury Rolls-Royce). Thus, millions of small potential gold claimants were cut off from reserves. However, the holder of a small number of banknotes did not need to exchange them for gold, since paper money was backed by a sufficient number of goods. However, paper money was still backed by gold.[3]

Gold and foreign exchange

Gold exchange standard, sometimes called gold exchange standard

, was a continuation of the gold standard system in the new international economic conditions that arose after World War II.

The gold exchange standard, which underlies the Bretton Woods monetary system, was laid down at the Bretton Woods conference.

In accordance with international agreements, the United States of America assumed the obligation to provide the gold content of the dollar at the rate of 35 dollars per troy ounce. The gold reserves accumulated by the United States of America, which amounted to about 25 thousand tons and were stored in the underground vaults of Fort Knox, seemed inexhaustible. However, the right to exchange US dollars for gold was reduced even further compared to the gold bullion standard. Only states represented by central banks received the right to convert dollars into gold.[3]

This was the time when in America (and not only) they said:

The era of the gold exchange (gold exchange) standard ended in 1971, when the United States abandoned the free exchange of dollars for gold. The main reason for the collapse of the Bretton Woods system was the large number of dollars issued by the US that were not backed by gold.

What are banknotes

In fact, initially banknotes are, roughly speaking, “receipts” stating that a certain merchant left a lot of gold in a special institution and can be guaranteed to receive the same amount of gold in another branch of this institution. Why transport gold yourself along a trade route if you can hand it over in one place and receive it in another by presenting a paper receipt? Comfortable? And how!

So it turns out that the first banknotes appeared thanks to gold and were of no value without it. But what then?

Gold standard in Russia

Witte reform

The last widely used gold standard was introduced in Russia by the Imperial Decree of January 3, 1897. The reform was carried out under the leadership of Finance Minister Sergei Yulievich Witte. The ruble was devalued by one and a half times, and its gold content amounted to 0.774235 g of pure gold. With the outbreak of World War I, the free exchange of paper money for gold was stopped.

Golden chervonets 1923

In order to improve monetary circulation, in 1923 the USSR issued a gold coin with a denomination of “one chervonets”, containing 7.74235 grams of gold, that is, exactly as much as 10 rubles of the 1897 model contained. However, the circulation of the Soviet chervonets was small, and the exchange of paper money for it was very limited. In parallel with the Soviet chervonets, tsarist gold tens were minted and used for foreign trade transactions. However, the gold standard did not last long in the Soviet Union. With the beginning of industrialization, the ruble exchange rate began to fall, and since 1937, a new chervonets was introduced into circulation, which was not convertible into gold, even theoretically.

Why was gold exchanged for paper?

Gold is, of course, good, but, as it turned out, it also has its drawbacks. For example, you can cut small pieces from coins and then melt them together into something else. The gold in the cut coin will be less than “according to the declared value.” If the coins are lost, then a valuable medium of exchange will disappear from the economy (new gold coins are not easy to make). And, perhaps, the main problem is transporting coins over long distances. First of all, they are heavy. Very. Secondly, transporting gold itself is an unsafe task and, therefore, expensive.

Sergey Altyntsev, private investor, association of experts “Friend of Coins”:

— Gold is the metal of the Day of Judgment. You can use it to buy anything you want when and if the current financial system collapses due to the many accumulated problems.

Risks and prospects of the modern monetary system

The main risk of a monetary unit that does not have a strong anchor in the form of gold remains the possibility of rapid depreciation. At the global level, the currency risk of exporters and importers plays a key role. It is due to free exchange rates, which can change quickly relative to each other. In addition, excessive issuance leads to the fact that profits in the market are redistributed in favor of the financial sector. Manufacturers account for a smaller part of it.

However, such a prospect for the development of the world monetary system as a return to the gold standard seems impossible today. This is explained, first of all, by the lack of gold reserves. The following scenarios are more likely:

• the formation of new transnational currencies similar to the euro;
• the emergence in the distant future of a global payment unit;
• an increase in the number of global reserve currencies;
• the prospect of switching to digital money, for example, in the form of cryptocurrencies.

I also recommend reading:

Why insure your mortgage?

How to avoid losing money by saving on mortgage insurance

What is the backing of the Russian ruble today?

Although Russia has been steadily accumulating the country's gold reserves over the past decade, these reserves are not enough to fully back the ruble. The factors that support the current ruble are foreign currencies, mostly the US dollar, and energy resources.

However, in conditions of economic pressure from OPEC, Russia needs alternative solutions.

Is the ruble currently pegged to gold?

Today's ruble is not tied to gold; the country's reserves in precious metals, in all its magnitude, can barely cover 5% of convertible currency.

However, recent discoveries by chemists in gold mining have significantly reduced the cost of extracting gold from ore, which can significantly accelerate the build-up of the country's reserves.