TOPIC: Can the economic pros and cons help
to explain the wide range of past and present
policy choices?
I. Introduction
II. Gold standard policies
1.The appearance of gold standard
When production and society develop. As commodity production and markets expand more and
more, a unified common price equivalent must be formed. When the common equivalent is fixed
There have been many items used as money, including seemingly impossible things like snail
shells and tobacco leaves. The properties that must be present for a form of matter to become
the basic form of money are
- Easy to distinguish
- Lasting
- Stable in available quantity
- Intrinsic value does not fluctuate.
Gold meets all the above requirements and it can be said that it is the only form of
matter in the world that does and gold has been chosen as the standard means of economic
calculation.
The gold standard or gold standard is a monetary regime in which the standard means of
economic calculation is determined by gold content. Under the gold standard, the issuer of cash
(in the form of notes or coins - also known as coins) pledges to be willing to receive the cash
back and repay the gold if requested.
Since 300 AD, during the time of the Pharaohs, gold has been considered a means of
payment and storage. Greece and the Roman Empire used gold coins until the commercial
expansion of the 19th century. When greater trade increased, there was a need for a formal
system in the balance of international trade. Countries in turn set denominations for their
national currencies according to the value of gold and thereby adhere to the set rules of the
game.
In 1821, Great Britain pioneered the use of the gold standard and spread it to European
countries. America is said to be the latest country to use the capitalist system. In 1874, this
regime became popular and was applied by many countries around the world. Gold prices were
always kept at a stable level during this period.
From 1874 to before World War I is considered the golden period of the Gold Standard, when
most major industrial countries participated in this system, the United States was the latecomer
and only country. acknowledged this system until 1879. The classical gold standard had three
main principles as follows:
- Countries fixed the value of their currencies according to a fixed amount of gold and pledged
to freely convert paper money into gold and vice versa
For example: America declared 20.67 US$ for 1 ounce of gold, and Great Britain set the price
as 4.2474 Pounds for 1 ounce of gold. Based on the gold standard, the British Pound to US$
exchange rate would be: note: 1 ounce = 28,3495231 gram
- Countries allow free import and export of gold between countries. This helps maintain
the balance of international trade and payments. When a country has a trade deficit, it will have
to pay in gold to the country with the surplus, reducing its gold reserves and the amount of
money circulating in the country. This will cause a decrease in prices, a decrease in spending, a
decrease in imports and an increase in exports, restoring the trade balance.
- Central banks maintain a minimum ratio of gold reserves to the amount of money issued.
This helped ensure the convertibility of money into gold and prevented inflation caused by
excessive money printing.
2. Chaos caused by the gold standard (1914-1929)
2.1 Political and economic situation after World War I (1914 – 1929)
- The classic gold standard was stalled during World War I, when countries had to
print money to pay for the war and stop converting money into gold.
- After the war, some countries tried to restore the gold standard but faced many
difficulties and challenges due to differences in the level of economic recovery,
fluctuations in gold prices, and differences in monetary policy among countries.
- Some countries, such as Britain, France, Belgium, Italy, decided to return to the
old value of pre-war money, called the old gold standard. This requires them to
tighten monetary policy, lower interest rates, cut public spending and raise taxes to
reduce inflation and increase gold reserves. However, this action also has negative
consequences, such as weakening domestic demand, slowing economic recovery,
increasing unemployment and causing social discontent.
- Some other countries, such as the U.S., Japan, Germany, decided to adjust the
value of money to the current market price of gold, called the new gold standard.
This allows them to relax monetary policy, raise interest rates, increase public
spending and reduce taxes to stimulate domestic demand, economic growth,
reduce unemployment and maintain social stability. However, this action also has
negative consequences, such as raising inflation, devaluing currencies, putting
pressure on gold prices and disrupting international trade and payment balance.
The reason why gold flows from Europe to America
● The war caused economic turmoil in Europe, undermining the financial and
economic systems of many countries.
● European countries, especially the victorious nations such as Britain and France,
faced heavy public debt due to war and difficult economic recovery.
● The currency instability and the depreciation of the value of the European
currency (such as the French franc, German mark) have made it unsafe and
unstable to keep gold reserves in Europe.
The devaluation of the British pound after floatation in 1914 is not really apparent here due to forex
capital controls during wartime. It becomes more apparent after those controls are lifted after the
war’s end. The pound was returned to its prewar gold parity in 1920-1925.
Germany had hyperinflation after WWI, which was resolved by the introduction of the Rentenmark
at the prewar parity in November 1923. A new gold mark was introduced to replace the rentenmark,
also at the prewar parity, in 1924.
This shows the number of U.S. cents per French franc. The franc lost a lot of value during WWI and
soon afterward, far too much to allow the franc’s value to be raised back to its prewar parity, as was
the case in the U.S. and Britain. It was repegged to gold in late 1926, at a devalued rate.
● The U.S. dollar is one of the strongest reserves in the world, and the
conversion of gold into U.S. dollars has become an attractive option for
European nations.
The value of the US dollar in terms of gold shows that the United States held the gold
standard until before the Great Depression. After World War I, instability and economic
woes in Europe, combined with American resistance and developed financial systems,
made gold flowing back to the United States an important trend.
=> To keep the gold standard, European countries must keep interest rates high, while
interest rates in the U.S. are low. Due to the aftermath of the war, Germany and Austria
have not been able to return to the gold standard immediately but even print money to
pay their debts. While the US because there is too much gold flowing in, can comfortably
lower interest rates.
3. Response of the world in the Great Recession (1929-1933)
Khi sự hỗn loạn của bản vị vàng cùng hàng loạt các vấn đề kinh tế khác dẫn đến cuộc đại suy
thoái, các cường quốc trên thế giới lại có những phản ứng rất khác nhau
Anh và Mỹ
-Britain's economy, which was already facing difficulties when having to apply high interest rates
to maintain the gold standard, is now experiencing even more hardship when the Great
Depression spreads from the US. Facing the greatest risk of deflation in history, Britain officially
left the gold standard in September 1931 and reduced interest rates immediately afterward,
becoming the first of the Four Great Powers to escape recession. This also meant that Britain
accepted a floating exchange rate regime, something that was considered shameful at the time.
-In 1932, Democratic candidate Franklin D.Roosevelt was elected and became the new
president, doing so with a number of drastic measures, often referred to as the "New Policy"
which imply that :
+leaving gold standard and increasing money supply => decreasing interest rate (r) => Increase
exchange rate (E) => Increase net export
+launch large-scale infrastructure upgrade programs => Increase Government spending (G)
Pháp và Đức
In 1928-1931, the Bank of France drew more than 30 billion francs in gold from central banks
abroad, aggravating the monetary contraction and the price deflation that set off the Depression.
After sterling went off gold in September 1931, the Bank withdrew 24 billion francs in gold from
the international monetary system, increasing the contractionary force of the gold standard.
From 1931 to 1936, France remained committed to the gold standard, organizing a handful of
countries in a Gold Bloc to preserve convertibility while the international gold standard
disintegrated around them.
Similarly, due to witnessing hyperinflation in the years after World War I, Germany insisted on
maintaining the gold standard even though the amount of gold reserves at that time was quite
small.
=> France was loyal to the gold standard until 1936 and suffered deflation while Germany
remained it longer
=> They accept the recession and keep their currencíe stable.
III. From Bretton Woods to present
1.BRETTON WOODS AGREEMENT AND SYSTEM
A.Post - WWII era
● Much of the world was left devastated by the war, with infrastructure destroyed,
economies in ruins, and populations displaced. The immediate focus of many
countries was on rebuilding their societies and economies.
● By 1945, exhausted countries faced severe economic problems that frustrated
reconstruction efforts:
+ Inflation
+ Debt (mostly owed to the United States)
+ Trade deficit
+ B.O.P deficit
● The United States experienced a period of significant economic transformation
and growth. The post-war period saw the United States emerge as the world's
leading economic power, with significant influence in shaping the global
economy.
B.Bretton Woods agreement
Origin
● The Bretton Woods Agreement was negotiated in July 1944 by delegates from
44 countries at the United Nations Monetary and Financial Conference held in
Bretton Woods, New Hampshire. Thus, the name “Bretton Woods Agreement”.
These countries saw the opportunity for a new international system after World
War II that would draw on the lessons of the previous gold standards and the
experience of the Great Depression and provide for postwar reconstruction.
● BWAS were centered around creating an efficient foreign exchange system,
preventing competitive devaluations of currencies, and promoting international
economic growth. The Bretton Woods Agreement also created two important
organizations — International Monetary Fund (IMF) and the World Bank, which
still remain as a strong pillars for the exchange of international currencies.
● Countries would peg to the U.S. dollar; this made the U.S. dollar the center
currency and the United States the center country. The U.S. dollar was, in turn,
pegged to gold at a fixed price, a last vestige of the gold standard.
● The dollar was fixed at $35 per ounce, while all other currencies had fixed, but
adjustable, exchange rates to the dollar with diversions of only 1% allowed.
Countries were required to monitor and maintain their currency pegs which they
achieved primarily by using their currency to buy or sell U.S. dollars as needed.
C.Advantages of BWAS over the gold standards
● Flexibility: The Bretton Woods system allowed for some flexibility by pegging
currencies to the US dollar, which was in turn linked to gold. This provided more
room for countries to manage their domestic economies while still maintaining
some stability in exchange rates.
● Economic Stability: While the gold standard provided a degree of stability in
exchange rates, it was not immune to speculative attacks and currency crises, as
evidenced by the volatility experienced during the interwar period. The Bretton
Woods system aimed to provide a more stable framework for international trade
and finance by pegging currencies to the US dollar, which was backed by gold
reserves held by the United States.
2. The collapse of Bretton Woods and Gold Standard
Status of some countries in the world:
- Britain adjusted the pound exchange rate in the 1960s to reduce export pressure and improve
its financial situation. (Exchange rate adjustment)
- France and Germany accumulated large amounts of gold in the years leading up to the
system's collapse.
- Japan :
1. Promote exports: Japan has focused on developing the export industry, especially industries
such as automobiles, electronics, machinery and consumer goods.
2. Moving capital controls: Japan has imposed moving capital controls to control the flow of
money into and out of the country.
This causes many socialist countries to be born and achieve high levels of
development →a factor that puts pressure on the US trade balance
Besides the US, there have been measures to reduce the US trade deficit and create conditions
for the improvement of the economic situation such as the 1985 Plaza Accord agreement
between the US, Japan, Germany, France and the UK, to reduce value of Japanese Yen to
USD. But it didn't work
3 World financial situation from 1972 to present:
- Financial crises: The 1980s witnessed many financial crises, such as the Mexican
currency crisis (1982), the Southeast Asian financial crisis (1997-1998), and the global
financial crisis year 2008.
-
- The 1992 devaluation of the British Pound, also known as "Black Wednesday",
causing a sharp decline in the GBP/USD exchange rate and putting great pressure on the
British central bank.
- German government’s expansionary fiscal policy. The Bundesbank was afraid that the
boom in German output might cause an increase in German rates of inflation. Using its
policy autonomy, the Bundesbank tightened its monetary policy by contracting the
money supply and raising interest rates. German interest rates to the even higher.
● In the context of the devaluation of the British Pound in 1992, floating exchange
rate was the monetary policy applied.
- The COVID-19 epidemic has created a series of fluctuations and strong impacts on the
world economy: Global economic recession, Large decline in production and exports,
High unemployment rate
In summary, from 1972 until now, the world financial situation has witnessed many
changes, from the end of the classical financial system to the strong development of new
financial markets and response measures. deal with financial crises.
III. Conclusion
Current financial policy trends in the world:
Covid-19 crisis and economic impact: The Covid-19 pandemic has caused a health crisis
and loss of human life. This also has a strong impact on the world economy, far
exceeding the previous Global Financial Crisis.
Monetary policies of countries are focusing on stabilizing the currency and foreign
exchange markets, controlling inflation and supporting economic growth.
To summarize, financial policy around the world is facing many challenges and needs to
be flexible to ensure economic and fiscal stability in the future.
