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The Gold Standard – The History of the Stagflation

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the history of the gold standard

The Gold Standard – The History of the Stagflation

The Gold Standard is an historical monetary system in which the monetary value of a nation s currency is determined by the physical gold that is in its possession. When nations used the gold standards, a standardized price was set in terms of gold that was used to determine the value of the currency. For example, on February 12th, 1931, the United States passed an act establishing the gold standard. This act ended the previous system, the Bretton Woods system, in which the currencies of many countries were based on the price that was fixed for a single gold unit.

Many factors played into the development of the gold standard. One of these factors was the desire by several nations to have a common standard of money that would not be affected by political turbulence or economic collapse. In addition, some governments wanted the option of exchanging their currencies for a different one if they felt that the exchange rates were being manipulated in their favor. Another aspect that was instrumental in the development of the gold standard was the gradual decline of the US dollar as a result of deflation. Deflation essentially means that there is a shortage of goods and services in the economy, causing the prices of goods and services to decrease.

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The idea behind the creation of the gold standard was that an increase in the price of a nation’s currency would result in its re-emergence as the standard against which all others are measured. This would cause the purchasing power of the dollar to increase and thereby create a strengthened economic system. The existence and continued use of the US dollar after the advent of the system of fixed exchange rates was what kept the US economy afloat during the Great Depression. After the introduction of the international monetary system, the US dollar lost much of its reserve value and became an undesirable international currency instead of the US dollar.

The US government, fearing the effects of inflation and a collapse of the currency in the face of war could no longer rely on the gold standard to maintain its fiscal policy. As a result, the US government adopted the practice of gold convertibility. The British and Canadians followed suit and after the outbreak of war ii monetary authorities in the two countries also announced a universal acceptance of the British and Canadian dollar as the internationally accepted unit of currency.

Today, the history of the gold standard and the unit of currency is an interesting part of world history that is relevant in current economic debate. Economists argue that gold standards and standardization caused by gold standards have harmful effects on international trade. By making it difficult for international trade to conduct business, the existence of the unit of currency, no matter what its internal structure is, forces certain aspects of international business into a gray area.

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For instance, the existence of the dollar as the internationally accepted unit of currency forced other countries to set their exchange rates according to the US dollar. This forced the US to engage in trade wars as the dollar continued to be the world’s dearest currency. In addition, the US government manipulated the price of gold to control international trade. In a classic case of the manipulation of the market by the central banks, the US government started the gold program to control the gold market in the 1930s in order to stabilize the trade balance. This act contributed to the birth of the Great Depression.

After the outbreak of World War II, the Bretton Woods system was replaced by the gold standard. The Bretton Woods system allowed for the free movement of currencies among member nations. In this manner, the purchasing power of the dollar was maximized by the accumulation of international capital in the United States. International capital accumulated in the US significantly increased the rate of exchange rates between the US dollar and other currencies. This process lasted until the end of the Bretton Woods system in 2021. This period of time was conducive for globalization because it resulted in the free movement of capital throughout the world thereby allowing multinational companies to establish their global foothold.

The last part of the history of the gold standard is the era of Nixon’s presidencies. After the demise of the Bretton Woods system, Nixon pursued a protectionist trade agenda which resulted in the constriction of the flow of international capital. On the back of this protectionist measure, the American economy contracted for three years running up the inflation of the 1970s. When the stagflation hit the economy, the supply of the dollar against the demand for it became extremely difficult to control leading to the outbreak of the Great Recession.

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