classical gold standard system
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THE CLASSICA
GOLD STANDARSYSTEM
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The gold standardmonetary system in whicstandard economic uni
account is based on a quantity of gold.
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A commitment b
participating countries tfix the prices of the
domestic currencies terms of a specifieamount of gold.
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Why GOLD?GOLD has the desirable properties
that early writers in economics haveIt is durable, easily standardized. Eimportant, changes in its stock are least in the short run, by high
production, making it costly for govemanipulate. Because of these attributes, it emerged as one of thforms of money.
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CLASSICAL GOLD STANDA1875-
1914
During this period in most major cou Gold alone was assured of unr
coinage
There was two-way convertibility gold and national currencies at a stab
Gold could be freely exported or imp
The exchange rate between two cocurrencies would be determined brelative gold contents.
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For example, if the dollar is peggto gold at U.S.$30 = 1 ounce of go
and the British pound is peggedgold at 6 = 1 ounce of gold, it mbe the case that the exchange ratedetermined by the relative g
contents:$30 = 6
$5 = 1
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Highly stable exchange rates underthe classical gold standard providedan environment that was conducive
to international trade andinvestment.
Misalignment of exchange rates andinternational imbalances of paymentwere automatically corrected by the
price-specie-flow mechanism.
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The price-level adjustment mechaunder the gold standard is know
as the
price-specieautomatic adjustment mechanism
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Price specie flow mechanism is adjustment of prices as gold (spe
flows into or out of a country, causinadjustment in the flow of goods.
An inflow of gold tends to inflaprices.
An outflow of gold tends to deprices.
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Thus, price specie flow mecha
of the gold standard could recurrent account surpluses deficits, achieving a measu
external balance for all countrie
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There are shortcomings:
The supply of newly minted gold is so res
that the growth of world trade and investmcan be hampered for the lack of sufficientmonetary reserves.
Even if the world returned to a gold stand
any national government could abandon tstandard.
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The policy of not allowinga change in reservesto change supply of money
is known asSTERILIZATION or NEUTRALIZATION P
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The gold standard broke
down at the outset of WorldWar I, as countries resortedto inflationary policies to
finance the war and, later,the reconstruction efforts.
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The EN
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