Reluctance of the Gold Standard
Before the First World War, most of the nations in the world used gold as their standard of measuring the value of money. The value of a nation's currency was equated to the country's gold reserve meaning that countries with more gold reserves had high value money and vice versa. However, after the war most of the nations were required to move to the flat currency that is not backed by gold but by the full faith and credit of their authoritative governments. The following is an analysis of the benefits that governments accrued from the gold standards and reasons why nations were reluctant to move from the gold standard to back their currencies.
High Economic Performance, Stability and Growth
Nations were reluctant to move from the gold standards because they felt that their economies grew and performed better under the gold standard. Their argument here was that since every nation declared their gold reserves, it was impossible for the ruling bodies to authorize unplanned printing of notes. Unplanned printing of notes leads to large cash circulation in the economy. This in turn leads to inflation as very many notes chase very few goods. People are willing to pay more to access the same amount of products or services as before the cash boom. In the current flat currency standard careless printing of notes is frequently done so as to finance government projects and unplanned events. This is done without the proper considerations of the negative implications that such notes bring into the country's economic system. Gold standards also ensure that ruling governments kept their running costs at minimum. Ruling bodies under the gold system were aware that misuse of public funds was difficult to conceal or to rectify. This is because such rectifying measure meant selling of the country's gold so as to acquire money to cover the expenditure. This action would brew instability as investors would pull away their investments and citizens would cry foul. It was therefore difficult to conceal misuse of public finds. Governments are also more likely to minimize national debts as doing so means using the country's gold reserves as security. The fear of risking a country's stability and gold reserves ensures that governments run their nations at minimized costs. This is beneficial to the country as well as the local citizens as the general standards of living are well maintained. Good economic performance allows the economy to grow as elements of the economy such as inflation are kept at minimal levels while factors such as income continue to increase. Low inflation attracts investors who are attracted by the low costs of operations such as labor, land and capital. With these inputs investors are able to comfortably combine them to create employment and finished products for local consumption and export. Export of excess finished goods in return earns the country more gold reserves. As this trend repeats itself, the country's economy continues to grow as more and more investors set up productions there.
Stable International Exchange Rates
Trading between various nations is made possible by exchange of money from the seller's currency to the buyer's currency and vice versa. In the flat currency system, the value of money keeps changing drastically and such changes are triggered by farfetched factors such as political climate. The gold standard on the other hand, provided a stable international trade. This was because the amount of gold reserves that each country held were well known and factors such as politics could not change that fact. The gold standard was also self adjusting such that any instability in the rates would be automatically reversed. For instance, if one country used its gold reserves to import goods, their gold reserve would go down. This meant that the value of their money would also go down leading to cheap and attractive goods. Other countries would get attracted to the cheap goods and hence make their payments for exportation. The amount of depleted gold would be restored hence restoring the value of the country's currency and stabilizing the exchange rates. Low inflation associated with the gold standards helps to allow the international exchange market to be stable and well predictable. Stability and predictability are the two elements that provide a long term fixed rate that is not affected by farfetched factors such as political changes.
When unstable countries borrow debt from stable nations and are unable to pay, their debtors take control of their lending system so as to earn 'tax' from it and pay themselves. This occurs in various forms starting with the implementation of a high reserve requirement. This discourages new players from entering into the financial industry hence forming a monopoly. This monopoly controls the interest rates and normally sets very high ones. Repression also happens with a imposition of capital control regulations that regulate the transfer of personal assets to outside country. Capping of interest rates on deposit rates and government debt further oppresses the country's investors. The debtors also impose control on all financial institutions so that no new players can penetrate the market. Poor nations therefore supported the gold system since it discourages such kind of repression. Investors fear an environment where the financial system is repressed. They pull away their investments and set up productions in countries with a more flexible lending system. Initial repression measures make the situation worse by recreating more instability. As investors move to condusive countries, they start exporting finished products into the repressed country. Financial reserves are consequently depleted as the remaining currency is used to pay for the inputs. Gold standards helps to get rid of all this by ensuring that governments do not borrow extensively beyond their gold reserve amounts. They are kept in check by the gold standard which ensures that they can only borrow up to the amount that can be covered by the gold reserve. Once this limit is reached, governments can only source funds from """sale of their shares or bonds to the local citizens which in turn benefits them.
The Gold Standard Solves Unemployment Problem
Unemployment has risen drastically in the last decade. Despite the expansion in the education system so that more trained labor exits every year, most of it becomes redundant over the years as it never gets into proper use. Unemployment is one of the menaces that many governments have tried unsuccessfully to solve. The gold standard was a sure solution to unemployment. The years before the world war have been recorded to have the lowest unemployment ratios. This was so because the value of capital against gold (interest) was always high and there was no cheap debt. This meant that investors were willing to employ more resources including labor so as to recover their costs of investments. These actions by investors lead to the absorption of more people into the labor market. Labor was also well rewarded as investors bid on quality work force. Jobs and employment with good rewards was therefore not a problem in the gold standard age. Governments were therefore reluctant to leave this system as it solved unemployment. On the contrary, the flat currency system has caused massive unemployment due to the existence of cheap capital. Investors acquire capital at very low interest rates and in return pay low wages as they are sure of recovering their investments. They also do not require many employees as just a few can work with machines to maximize utility.
The Gold Standard Protects Savings
The gold standard was much preferred by various nations as it protected the government as well as individuals' savings from devaluation. Governments used to store their wealth in terms of real gold. These reserves were impossible to change drastically as proper mechanisms of increase or reduction had to be dully followed. Devaluation occurs when a currency losses its value in the currency exchange markets. Storing wealth in flat money therefore carries the risk of loss of value and hence loss to savers. Gold was therefore a more secure way of storing savings as the changes in the value of a country's gold reserves was not possible to alter drastically. Any changes in the value of gold and consequently in the value of currency was difficult to come by and if otherwise it was well predicted and systematic.
Gold Standard Eliminates Credit Booms
Credit booms are very disruptive to the economy. In US for instance, credit booms have caused other booms such as mortgage booms leading to loss of housing by individuals. Credit booms occur when there are cheap alternative sources of credit loosely available in the economic system. Consumers take up these easy to access credit facilities without proper considerations of the costs and benefits that they accrue. The gold standard eliminates this risk by making it difficult for nation's central banks to print money carelessly. This makes different currencies to have value such that banking agents such as lending institutions access limited credit which they lend strictly to qualified borrowers only. These restrictions help to ensure that credit facilities get into the hands of debtors who can comfortably afford and service the loans. Credit booms are hence difficult to occur under the gold system. This system hence saves nations large debts as the one currently being experienced in US and other developed countries. According to research in US every citizen is able to access an average of three credit facilities. These range from credit cards from different providers, mortgages and loans. Citizens including underage are lured by various lending companies to sign up for these facilities without proper information of the accrued costs and benefits that accompany them.
After 1st world war, the Bretton Woods standard was acquired for international transactions."" "This was done amid strong oppositions from different nations who felt that by tying the value of money to the US dollar, the world was taking a big financial risk. The gold system was still preferred and some countries including the US have been consulting on possibilities of reverting to the gold system. This is because the gold system encourages economic stability and growth. This is because governments cannot print excess notes to meet their wants. The inflation rates are also kept at minimum under the gold system as changes in the amount of gold in country's reserves are well monitored and increases are properly monitored. This helps to avoid credit booms such that everyone accesses more credit facilities than they can afford. The gold standard was also preferred for its ability to protected savers from losing the value of their savings. This is possible as the rate of change of the value of gold is very low as compared to change in value of flat currency. These were the reasons why nations were reluctant to move from the gold standard to back their currencies.