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Post on 03-Jun-2018
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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
0FG-NFINX
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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
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