Difference between revisions of "Gold standard"
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| − | The '''Gold standard''' refers to the | + | The '''Gold standard''' refers to the convertibility of [[currency]] for [[gold]]. This does not mean that there is gold circulating amongst ordinary folk, in fact, soon after a worldwide gold standard was established in 1873<ref>Contemporaneously referred to as the <b>Crime of 1873</b>, the [https://en.wikipedia.org/w/index.php?title=Crime_of_1873 United States Coinage Act of 1873] had the effect of demonetizing silver in favor of gold, in the context of massive war reparations payable only in gold resulting from the Prussian victory against the French in 1871.</ref>, gold coins disappeared from circulation within a few years. In practice, people did not use gold coins but private paper banknotes <ref>Private issue of paper currency was legally in the form of [https://en.wikipedia.org/wiki/Promissory_note#Use_as_private_money promissory notes ]</ref> which were then issued by private commercial regional banks and that were convertible, adorned with the "promise to pay the bearer on demand" with precious metal coins <ref>Precious metal coinage has been used since 600BC and has been considered [https://en.wikipedia.org/wiki/Coinage_metals#History the most universal embodiment of money] </ref> issued by the government. The paper currency was of course never 100% backed and the backing was fixed by regulation to be anywhere from 20-50% of the total outstanding note issue. |
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| + | The purpose of the gold backed currency credo was to establish trust and confidence that the paper notes, of little intrinsic value<ref>Modern state-of-the art plastic polymer banknotes produced by the Bank of Canada, which come in denominations of 5$, 10$, 20$, 50$, 100$ all with identical high-security features [https://www.bankofcanadamuseum.ca/2021/02/money-past-present-and-future/ cost 42 cents to print per note]</ref> , were "as good as gold". Gold coins were indeed used as the ultimate settlement between banks after offsets on both sides of an inter-bank transaction had been accounted for, and with the national treasury of the government, as in that the government reimbursed its national debt in gold coins minted by its own national mint. Evidence of this is that the surviving gold coinage has very little wear from being carefully counted by clerks on their work tables and put alongside other gold coins inside small bags for transport and storage, whereas silver coins show massive wear often being worn smooth. <ref>There are artifacts of this as well in the paper currency itself, such as in India in 1917 with the very first issue of One Rupee notes, an [https://en.numista.com/catalogue/note204105.html image of which was shown prominently printed in the notes].</ref> | ||
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| + | The reasons for the success of the installation of the gold standard were several, though not deeply discussed by mainstream economists or even those of the Austrian school of economics. Silver since the times of Croesus in 600BC, had been the circulating medium of exchange and in Spanish the word plata or in French argent, silver still carries the meaning of money colloquially. Whereas the metal for universal money had been up to then silver and not gold, gold was in fact rarer and more valuable than silver. So gold due to its higher scarcity of 1:15 and because of its higher density taking up 44% less volume for the same weight, offered the possibility of being a store of value 26 times denser. After several manipulations, most notably the establishment of the Bank of England in 1694 and its "mono metallic gold standard" with 1£ gold coins (weighing 7.98g of 11/12 pure gold) and the gradual phasing out of the large British Crown coins which were minted occasionally and in small numbers, such as only in years of Coronation or other special occasions, as well as the establishment of the US Mint and the adoption of its bimetallic standard in the newly-formed United States<ref>The [https://en.wikipedia.org/wiki/Coinage_Act_of_1792 Coinage Act of 1792] was a compromise between Alexander Hamilton with the weight of all the financial backers against the rest of the Founding Fathers who preferred silver coinage and paper currencies. </ref>. | ||
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| + | The gold standard era coincided with a push towards the use of the decimal system to replace the old fractional notions upon which the Carolingian monetary system was based. The new fractions to count in cents were 1 (100 cents), 1/2 (50 cents), 1/4 (25 cents) , 1/10 (10 cents), 1/20 (5 cents), whereas before there were more practical denominations of 1<ref>[https://en.numista.com/catalogue/pieces15059.html 8 Reales - Carlos III - 1772]</ref>, 1/2<ref>[https://en.numista.com/catalogue/pieces121287.html 4 Reales - Carlos III - 1760] </ref>, 1/4<ref>[https://en.numista.com/catalogue/pieces88598.html 2 Reales - Carlos III 1773-1789]</ref>, 1/8, 1/16 and even 1/32 <ref>The [https://en.numista.com/catalogue/pieces28439.html 1/4 (cuarto de) real coin] with a value of 1/32 of the full-size 8 reales coin.</ref>, that is that the previous system of counting was an analog binary counting system with a resolution of 5 bits for fractions. | ||
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| + | It promptly saw the reduction in size of the largest silver coins (whole units) which were the basis of the silver standard to half their previous size, forcing people to use paper currency to fill in the gaps between the small silver coins and the more valuable, rarely seen in practice gold coins. And from the bottom, simultaneously, it the introduction of billon coinage for the lower denominations making the smaller silver denominations such as 1/20 denomination obsolete and replaced with a larger nickel coin as well as the copper penny. | ||
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| + | Thus at the zenith of this "gold standard era" there were only three denominations of circulating silver coins, half (50cents), quarter (25cents) and dimes (10cents). | ||
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| + | An example of the coinage of the gold standard era was the Indian One Rupee, a coin weighing a mere 11.6 grams and at 0.917 fine thus 0.3438ozt or a little over 1/3ozt of Actual Silver Weight. For reference, the largest silver coins in circulation during the previous silver standard era had more than 3/4ozt of pure silver, such as the Austrian thalers <ref>[https://en.numista.com/catalogue/pieces21961.html Numista - 1 Thaler - Maria Theresia]</ref>, Spanish piece of 8 reales<ref>[https://en.numista.com/catalogue/pieces15059.html 8 Reales - Carlos III]</ref>, the French écu <ref>[https://en.numista.com/catalogue/pieces16357.html French écu coin (Louis XV) ]</ref>, or even the rarely minted One Crown British coin. And the only remaining gold coin the sovereign had a legal value of 10 silver Rupees, but since its market value was much higher, no one presented gold sovereigns for redemption into silver Rupees. The size and weight of the One Rupee silver coin is comparable albeit 10% lighter to the American Half Dollar from the same period, or a little under two British Shillings Sterling. | ||
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| + | ==1913== | ||
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| + | In 1913, 40 years later after the demonetization of silver, the US passed a clandestine, rushed bill through Congress during the Christmas recess and thus created a third and final central bank, the "Federal" "Reserve" which is neither federal nor is a reserve. Within months, in the summer of 1914 when WWI broke out, all central banks worldwide requisitioned the gold coinage used as reserves in the private commercial banks and transferred the physical coins into the vaults of the national central banks. Banknotes ceased to be banknotes and became what they are now -- central banknotes. Gold coins were never to circulate again, and to discourage theft and pilfering from Central Bank employees of the highly coveted and easily pocketable gold coins, a contrived gold exchange scheme was devised, standardized worldwide because (private) central bankers helpfully coordinated their activities, thus thousands of small coins needed to be melted in order to conjure the monstrosity of the "good delivery" bar of 400 Troy ounces of fine gold or 12 kilograms. | ||
| + | |||
| + | So yes the new central banknotes were in law "convertible to gold" but only if one was able to find enough paper currency to afford to buy a 400ozt bar ... In the USA the 5$ gold coin weighed a tad under 1/4ozt so 1600 coins were needed... this corresponds to over 8000$ at a time when the average yearly wage was 1500$ <ref>When Frederick Trump (President Donald Trump's grandfather) passed away, he left his family a fortune [https://en.wikipedia.org/wiki/Frederick_Trump#Later_life_and_death that totaled $31,359 of which $4,000 was in savings], not even half of the more than $8,000 required for a single central bank gold brick. </ref> | ||
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| + | ==1933== | ||
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| + | In 1933 this gold window was closed to ordinary citizens and gold pegged from 20.66$ per Troy ounce of gold to 35$, now only friendly foreign governments and systemically important global financial institutions were allowed to redeem gold in 400ozt increments. | ||
| + | |||
==1971== | ==1971== | ||
| − | In [[1971]] as the US struggled to pay the expenses resulting from the [[Vietnam War]], it gave up the gold standard, revoking its promise to convert US dollars to gold. | + | In [[1971]] as the US struggled to pay the expenses resulting from the [[Vietnam War]], it gave up the gold standard, revoking its promise to convert US dollars to gold. Historically, this inter-convertibility was used to act as a check on [[inflation]] of the money supply, since the supply of gold or anything physical cannot be arbitrarily increased, there has to have been actual work of finding, mining, refining, minting and transporting the new gold. |
| + | |||
{{SMWDocs}} | {{SMWDocs}} | ||
==References== | ==References== | ||
{{reflist}} | {{reflist}} | ||
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Latest revision as of 23:14, 14 September 2023
 Gold standard    | |
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The Gold standard refers to the convertibility of currency for gold. This does not mean that there is gold circulating amongst ordinary folk, in fact, soon after a worldwide gold standard was established in 1873[1], gold coins disappeared from circulation within a few years. In practice, people did not use gold coins but private paper banknotes [2] which were then issued by private commercial regional banks and that were convertible, adorned with the "promise to pay the bearer on demand" with precious metal coins [3] issued by the government. The paper currency was of course never 100% backed and the backing was fixed by regulation to be anywhere from 20-50% of the total outstanding note issue.
The purpose of the gold backed currency credo was to establish trust and confidence that the paper notes, of little intrinsic value[4] , were "as good as gold". Gold coins were indeed used as the ultimate settlement between banks after offsets on both sides of an inter-bank transaction had been accounted for, and with the national treasury of the government, as in that the government reimbursed its national debt in gold coins minted by its own national mint. Evidence of this is that the surviving gold coinage has very little wear from being carefully counted by clerks on their work tables and put alongside other gold coins inside small bags for transport and storage, whereas silver coins show massive wear often being worn smooth. [5]
The reasons for the success of the installation of the gold standard were several, though not deeply discussed by mainstream economists or even those of the Austrian school of economics. Silver since the times of Croesus in 600BC, had been the circulating medium of exchange and in Spanish the word plata or in French argent, silver still carries the meaning of money colloquially. Whereas the metal for universal money had been up to then silver and not gold, gold was in fact rarer and more valuable than silver. So gold due to its higher scarcity of 1:15 and because of its higher density taking up 44% less volume for the same weight, offered the possibility of being a store of value 26 times denser. After several manipulations, most notably the establishment of the Bank of England in 1694 and its "mono metallic gold standard" with 1£ gold coins (weighing 7.98g of 11/12 pure gold) and the gradual phasing out of the large British Crown coins which were minted occasionally and in small numbers, such as only in years of Coronation or other special occasions, as well as the establishment of the US Mint and the adoption of its bimetallic standard in the newly-formed United States[6].
The gold standard era coincided with a push towards the use of the decimal system to replace the old fractional notions upon which the Carolingian monetary system was based. The new fractions to count in cents were 1 (100 cents), 1/2 (50 cents), 1/4 (25 cents) , 1/10 (10 cents), 1/20 (5 cents), whereas before there were more practical denominations of 1[7], 1/2[8], 1/4[9], 1/8, 1/16 and even 1/32 [10], that is that the previous system of counting was an analog binary counting system with a resolution of 5 bits for fractions.
It promptly saw the reduction in size of the largest silver coins (whole units) which were the basis of the silver standard to half their previous size, forcing people to use paper currency to fill in the gaps between the small silver coins and the more valuable, rarely seen in practice gold coins. And from the bottom, simultaneously, it the introduction of billon coinage for the lower denominations making the smaller silver denominations such as 1/20 denomination obsolete and replaced with a larger nickel coin as well as the copper penny.
Thus at the zenith of this "gold standard era" there were only three denominations of circulating silver coins, half (50cents), quarter (25cents) and dimes (10cents).
An example of the coinage of the gold standard era was the Indian One Rupee, a coin weighing a mere 11.6 grams and at 0.917 fine thus 0.3438ozt or a little over 1/3ozt of Actual Silver Weight. For reference, the largest silver coins in circulation during the previous silver standard era had more than 3/4ozt of pure silver, such as the Austrian thalers [11], Spanish piece of 8 reales[12], the French écu [13], or even the rarely minted One Crown British coin. And the only remaining gold coin the sovereign had a legal value of 10 silver Rupees, but since its market value was much higher, no one presented gold sovereigns for redemption into silver Rupees. The size and weight of the One Rupee silver coin is comparable albeit 10% lighter to the American Half Dollar from the same period, or a little under two British Shillings Sterling.
Contents
1913
In 1913, 40 years later after the demonetization of silver, the US passed a clandestine, rushed bill through Congress during the Christmas recess and thus created a third and final central bank, the "Federal" "Reserve" which is neither federal nor is a reserve. Within months, in the summer of 1914 when WWI broke out, all central banks worldwide requisitioned the gold coinage used as reserves in the private commercial banks and transferred the physical coins into the vaults of the national central banks. Banknotes ceased to be banknotes and became what they are now -- central banknotes. Gold coins were never to circulate again, and to discourage theft and pilfering from Central Bank employees of the highly coveted and easily pocketable gold coins, a contrived gold exchange scheme was devised, standardized worldwide because (private) central bankers helpfully coordinated their activities, thus thousands of small coins needed to be melted in order to conjure the monstrosity of the "good delivery" bar of 400 Troy ounces of fine gold or 12 kilograms.
So yes the new central banknotes were in law "convertible to gold" but only if one was able to find enough paper currency to afford to buy a 400ozt bar ... In the USA the 5$ gold coin weighed a tad under 1/4ozt so 1600 coins were needed... this corresponds to over 8000$ at a time when the average yearly wage was 1500$ [14]
1933
In 1933 this gold window was closed to ordinary citizens and gold pegged from 20.66$ per Troy ounce of gold to 35$, now only friendly foreign governments and systemically important global financial institutions were allowed to redeem gold in 400ozt increments.
1971
In 1971 as the US struggled to pay the expenses resulting from the Vietnam War, it gave up the gold standard, revoking its promise to convert US dollars to gold. Historically, this inter-convertibility was used to act as a check on inflation of the money supply, since the supply of gold or anything physical cannot be arbitrarily increased, there has to have been actual work of finding, mining, refining, minting and transporting the new gold.
Related Document
| Title | Type | Publication date | Author(s) | Description |
|---|---|---|---|---|
| Document:With Brexit, the UK has achieved the gold standard of self-harm | Article | 12 June 2022 | William Keegan | Events in the foreign exchange market forced the UK off the gold standard in 1931, under what was by then the National Government. The Labour politician Sidney Webb famously declared afterwards: “Nobody told us we could do that.” Brexit, too, is reversible. |
References
- ↑ Contemporaneously referred to as the Crime of 1873, the United States Coinage Act of 1873 had the effect of demonetizing silver in favor of gold, in the context of massive war reparations payable only in gold resulting from the Prussian victory against the French in 1871.
- ↑ Private issue of paper currency was legally in the form of promissory notes
- ↑ Precious metal coinage has been used since 600BC and has been considered the most universal embodiment of money
- ↑ Modern state-of-the art plastic polymer banknotes produced by the Bank of Canada, which come in denominations of 5$, 10$, 20$, 50$, 100$ all with identical high-security features cost 42 cents to print per note
- ↑ There are artifacts of this as well in the paper currency itself, such as in India in 1917 with the very first issue of One Rupee notes, an image of which was shown prominently printed in the notes.
- ↑ The Coinage Act of 1792 was a compromise between Alexander Hamilton with the weight of all the financial backers against the rest of the Founding Fathers who preferred silver coinage and paper currencies.
- ↑ 8 Reales - Carlos III - 1772
- ↑ 4 Reales - Carlos III - 1760
- ↑ 2 Reales - Carlos III 1773-1789
- ↑ The 1/4 (cuarto de) real coin with a value of 1/32 of the full-size 8 reales coin.
- ↑ Numista - 1 Thaler - Maria Theresia
- ↑ 8 Reales - Carlos III
- ↑ French écu coin (Louis XV)
- ↑ When Frederick Trump (President Donald Trump's grandfather) passed away, he left his family a fortune that totaled $31,359 of which $4,000 was in savings, not even half of the more than $8,000 required for a single central bank gold brick.
