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purpose:


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analysis of the forms of international monetary system in the period until World War II

The Gold Standard

(Period Before World War II)

first complete international monetary system

based on the automatic balance-of-payments mechanism under fixed exchange rate:

classical gold standard period: from about 1870 to 1914 (beginning of World War II)

managed gold standard period: from 1926 to 1931

Evolution of the Gold Standard

replacement of bimetalism with gold standard in Great Britain (1816):

Greshams Law, forfeiting

different shares of silver in silver coins

increasing financial dependency between countries because of trading (industrial

revolution)

unpromising political circumstances in Europe:

numerous countries had to give up convertibility of their currencies

Germany gave up bimetalism in 1871 and set up the gold standard

chain reaction in the area of establishing gold standard:

strong interest of every country to implement the same international monetary system

as their most important economic and financial partners have implemented

The Interwar Experience

With the outbreak of World War I, the classical gold standard came to an end:

exchange rate depended completely on the supply of and demand for foreign currency

extremely negative effects of the lack of agreement on the functioning of the international

monetary system

three trials of establishment:

Conference in Genova (1922)


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negotiations in 1933

three-party agreement between the USA, Great Britain and France (1936)

Weaknesses of the Gold Standard

The gold standard tended to be deflationary

under some circumstances, it pushed countries to raise their interest rates which

reduced output and increased unemployment

it never provided a countervailing push to other countries to lower their interest rates

If the exchange rate is floating, foreigners domestic currency earnings must be used to buy

exports or to invest in the home country

If a countrys net exports plus net foreign investment are less than zero, its Treasury will find

itself losing gold

the countrys gold reserves shrink

If a countrys gold reserves are shrinking, it has a choice

abandon the fixed exchange rate system

make it more attractive for foreigners to invest by raising domestic interest rates

puts contractionary pressure on the economy

Countries gaining gold face no incentive to lower interest rates in order to stay on the gold

standard

Collapse of the Gold Stand

The gold standard was suspended during World War I

After the war ended, politicians and central bankers sought to restore it

they believed it was an important step in restoring prosperity

After the Great Depression began, the gold standard broke apart

Four factors made the gold standard a less secure monetary system

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everyone knew that governments could abandon their gold parities in an emergency

everyone knew that governments were trying to keep interest rates low enough to

produce full employment

Four factors made the gold standard a less secure monetary system

after World War I, countries held their reserves in foreign currencies rather than gold

the post-war surplus economies did not lower interest rates as gold flowed in

As soon as a recession hit, governments found themselves under pressure to raise interest rates

and lower output

could either stay on the gold standard and face a deep depression or abandon the gold

standard

the further countries moved away from their gold-standard rates, the faster theyrecovered from the Great Depression


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The Gold Standard Journey

The Gold Standard is a national framework for

continuous professional development setting out the

skills required for world class performance in key job

roles in the process industries.

It describes and maps the competencies required to

do each job across four areas of competence:

Technical Competence

Business Improvement

Compliance

Functional and Behavioural

Documents

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