Chapter 2, International Financial Mgmt, Eun et al 3460.02 notes
by A.P. Palasvirta, PhD Slide 2 Bronze Silver Gold U.S. Dollar
Standard June 13, 2014 3460.02 gold standard notes: a.p.
palasvirta, ph.d. 2 Slide 3 Bank of Amsterdam (15 th century) 100%
reserves of gold and silver Depositors brought gold, silver Were
given warehousing certificates for the amount of gold, silver minus
a charge Depositors would use the warehousing certificates as money
Lower transactions costs Easier to use June 13, 2014 3460.02 gold
standard notes: a.p. palasvirta, ph.d. 3 Slide 4 Gold 1 00%
Warehouse receipts June 13, 2014 3460.02 gold standard notes: a.p.
palasvirta, ph.d. 4 AssetsLiabilities Slide 5 Queen Elizabeth I
1563 to 1603 Created the Bank of England Held partial reserves of
gold and silver The rest were in treasury bills This was not a
strict gold standard, but a gold exchange standard This bank could
not refund all claims for gold with gold June 13, 2014 3460.02 gold
standard notes: a.p. palasvirta, ph.d. 5 Slide 6 Gold 30 40%
T-bills 60 70% http://www.gata.org/node/104 June 13, 2014 3460.02
gold standard notes: a.p. palasvirta, ph.d. 6 currency
AssetsLiabilities Slide 7 Fix the value of the unit of account
Something immutable Ounce of silver Ounce of gold Gold standard
Unit of account the troy ounce Medium of exchange Coinage Gold
certificates June 13, 2014 3460.02 gold standard notes: a.p.
palasvirta, ph.d. 7 Slide 8 If the cost of mining gold increases
deflation Value of gold increases Value of other goods remain
constant Prices decrease If the cost of mining gold decreases
Inflation Value of gold decreases Value of other goods remain
constant Prices increase June 13, 2014 3460.02 gold standard notes:
a.p. palasvirta, ph.d. 8 Slide 9 June 13, 2014 3460.02 gold
standard notes: a.p. palasvirta, ph.d. 9 1/P Gold 1/P Demand Supply
Slide 10 June 13, 2014 3460.02 gold standard notes: a.p.
palasvirta, ph.d. 10 1/P Gold 1/P Supply Demand Slide 11 Two
markets for gold official government market Legal unofficial
private markets Parity Price greater than market price governments
price (parity) the high price external markets price the low price
trader buys low sells high buys externally sells to government June
13, 2014 3460.02 gold standard notes: a.p. palasvirta, ph.d. 11
Slide 12 June 13, 2014 3460.02 gold standard notes: a.p.
palasvirta, ph.d. 12 Par D1D1 S1S1 PgPg PgPg QgQg D2D2 S2S2
Government Market Private Market Slide 13 Private market gold
supplies decrease holders of gold will sell first to the government
arbitrageurs will buy up stocks and sell to the government excess
supply will dry up bringing market price to equal the parity price
Government gold supplies will increase increases the money supply
decrease the value of money (inflation) June 13, 2014 3460.02 gold
standard notes: a.p. palasvirta, ph.d. 13 Slide 14 Countries fix
parity price of gold usd parity price = $20.67/ounce uk parity
price = 4.2474/ounce usd/uk = 4.8665$/ They allow arbitrage between
two markets parity price of gold at Central Bank free market price
of gold De facto single currency the ounce of gold many units of
account periodic falling off of the gold standard Balance of
Payments deficits settled with gold June 13, 2014 3460.02 gold
standard notes: a.p. palasvirta, ph.d. 14 Slide 15 Mechanism which
mitigates BOT surplus gold is paid to pay for excess of exports to
imports gold coming into the central bank increases money supply
inflation in the economy your goods now more expensive in foreign
markets foreign goods less expensive to you Price-specie flow
mechanism BOP balances settled in gold Money adjusts Prices adjust
International prices converge June 13, 2014 3460.02 gold standard
notes: a.p. palasvirta, ph.d. 15 Slide 16 Gold T-bills gold
increases due to BOT surplus cash currency Money supply increases
June 13, 2014 3460.02 gold standard notes: a.p. palasvirta, ph.d.
16 Assets Liabilities Slide 17 Gold backs all money prices move
relative to excess demand for gold (economic growth) deflation
excess supply of gold (new gold finds) inflation Treasuries have no
independent monetary policy June 13, 2014 3460.02 gold standard
notes: a.p. palasvirta, ph.d. 17 Slide 18 Fixed parity price (not
fixed value) Unit of account varied with the cost of mining gold
Often the unit of account appreciated (increased in value) as gold
supplies were harder to mine With new gold discoveries, the unit of
account depreciated (decreased in value) as the cost of mining gold
decreased June 13, 2014 3460.02 gold standard notes: a.p.
palasvirta, ph.d. 18 Slide 19 All currencies fixed to gold Gold is
the de facto currency single world wide currency all international
trade is denominated in gold No need to hedge exchange rate
volatility since exchange rates are constant June 13, 2014 3460.02
gold standard notes: a.p. palasvirta, ph.d. 19 Slide 20 When CBs
execute a monetary policy discipline of the gold standard is gone
after WWII governments ran inflationary policies interest rate
policies employment policies inflation sometimes running at 200% or
more Exchange rates fluctuate creating uncertainty for trade June
13, 2014 3460.02 gold standard notes: a.p. palasvirta, ph.d. 20
Slide 21 Colonizers (France, Spain, England, Portugal) Gold
standard Colonies Silver standard Greshams Law Bad money drives out
good June 13, 2014 3460.02 gold standard notes: a.p. palasvirta,
ph.d. 21 Slide 22 Germany reparations heavy and denominated in
Deutsche Marks not gold Germany inflated their currency in order to
reduce the cost of reparations Inflation 1 trillion% United States
had most of the gold France, England paid for war materials bought
from the U.S. in gold Stock market crash of 1929 Led to
protectionism Sterilization polices Depression June 13, 2014
3460.02 gold standard notes: a.p. palasvirta, ph.d. 22 Slide 23
WWII U.S. again the supplier of arms got most of the gold in the
world 1944 end of the was the Gold Exchange Standard The U.S.
dollar became the reserve currency Traded at par value with all
currencies part of system Balance of payments imbalances were
cleared with U.S. dollars instead of gold Cheaper to ship dollars
instead of gold Countries could earn interest on their foreign
exchange reserves Special Drawing Rights (SDRs) June 13, 2014
3460.02 gold standard notes: a.p. palasvirta, ph.d. 23 Slide 24
Creation of the International Monetary Fund (IMF) International
clearing house for exchange transactions with SDRs and dollars
Special Drawing Rights Exchange reserves held at the IMF Value
weighted average of basket of major currencies Deutsche Mark (20%),
franc (12%), pound (12%), yen (16%), us dollar (42%) The SDR as
well as the U.S. dollar became the reserve currencies June 13, 2014
3460.02 gold standard notes: a.p. palasvirta, ph.d. 24 Slide 25
U.S. had to run a chronic BOP deficit to supply us dollars to the
worlds economies The fixed parities between currencies dependent on
certain assumptions for all economies Monetary policies aligned
Fiscal policies aligned Revaluations necessary periodically
Monetary policies of many countries very expansionary June 13, 2014
3460.02 gold standard notes: a.p. palasvirta, ph.d. 25 Slide 26 US
running inflationary monetary policy to finance Vietnamese war US
increase the dollar parity price (devalued) twice DeGaulle demanded
payment of BOP surplus with the U.S. in gold June 13, 2014 3460.02
gold standard notes: a.p. palasvirta, ph.d. 26 Slide 27 January
1976 All currencies will float with respect to each other June 13,
2014 3460.02 gold standard notes: a.p. palasvirta, ph.d. 27 Slide
28 Gold = $1,212.1 Silver = $18.411 Platinum = $1,548.7 Paladium =
$462.7 June 13, 2014 3460.02 gold standard notes: a.p. palasvirta,
ph.d. 28
