Home
Investing in Sovereigns
The Sovereign
Sovereigns on Ebay
How to Sell Gold
Fixing the Gold Price
Methods of Investing
Gold Standard
Silver Standard
Precious Metals
Collecting Coins
Coin Terms
Half Sovereigns
Gold Coins
Silver Coins
Price of Gold
Live Gold & Silver Prices
Historic Gold Prices
Historic Silver Prices
Gold Bullion
Sterling Silver
Royal Mint London
Perth Mint Australia
Canadian Mint
Mint Marks
Benedetto Pistrucci
Trial of the Pyx
Crown Gold
US Gold Eagle
US Silver Eagle
Gold Maple Leaf
Silver Maple
Krugerrand
Selling your Gold
Gold Price Manipulation?
Silver Price Manipulation?
Advertisers
Links
Terms of Use
Search
Store

Why a Gold Standard keeps your wealth safe?

The Gold Standard is a monetary system in which a region's common media of exchange are paper notes which are freely convertible into fixed quantities of gold. Under a gold standard, money issuers normally stand willing to redeem their notes, upon demand, for gold. The gold standard is not currently used by any government, having been replaced completely by fiat currency, and private currencies backed by gold are rare. For further information, please see: http://www.how-to-invest.co.uk/gold.htm

Gold standards should not be confused with their historical predecessor, "gold-coin standards," wherein taxes are payable in either gold coins or overvalued, government-minted, less expensive, coins.

The main purpose of either government money system has historically been to provide seigniorage, or money-creation profit, to governmental leaders in order to provide them with general purchasing power during emergencies, especially those leaders who are legislatively constrained and therefore unable to raise taxes in order to execute the defence commitments that are required for the survival of their states. There is a good argument that governments who operate fiat currencies are more likely to waste money on public expenditure; and are more likely to get involved in wars abroad, than countries with no currency other than gold.

Gold standards replaced gold-coin standards in the 17th-19th centuries in the West as the extent of defensive warfare expanded to where the gold-coin standards were no longer sufficient to the task. A similar history generated a gold standard in China from the 9th through the early 17th century.

Returning to the gold standard could make the world a safer place because it would mean that governments would have to justify their expenditure to their population.

History
Government-minted gold and silver coins were first were used in ancient Lydia in the late 7th century B.C. The burgeoning democratic city-states of Classical Greece soon thereafter introduced similar gold-coin standards, which rapidly spread Westward to most of the city-states republics, including Rome. In the heyday of the Athenian empire, the city's silver tetradrachm was the first coin to achieve "international standard" status in Mediterranean trade. Silver remained the most common monetary metal used in ordinary transactions until the 20th century.

Aureus minted in 193 by Septimius Severus. The Persian Empire collected taxes in gold and minted its own gold coin, known in the West as the δαρεικός, dareikos in Greek, or daricus in Latin. When Persia was conquered by Alexander the Great, this gold became the basis for the gold coinage of Alexander's Macedon Empire and those of his Diadochi. The vast gold hoard of the Persian kings was put into monetary circulation, triggering the first known "worldwide" inflation event.

Solidus of Justinian II, ca. 705 Ancient Rome minted two important gold coins: the aureus, which was ~7 grams of gold alloyed with silver, and the smaller solidus, which weighed 4.4 grams, of which 4.2 was gold. Roman and Byzantine coins were frequently alloyed with other metals of much lower value to create the seigniorage necessary for a rational system of government money.

After the Roman Emperor Gallienus, who ruled from 253 to 268 introduced a monetary reform in which surface-overvalued coins were no longer accepted for tax payments, war inflation became symptomatic of the Empire's new and fatal flaw. For the surface overvaluation of an emergency coinage would soon degenerate to where the coinage simply traded for its metallic value, thereby eliminating the ability of the senate-constrained government to collect seigniorage at critical times. Remarkably, the flaw was not repaired until after the fall of the Empire and the times of Justinian in the East and Theodoric the Great, the first of the Germanic Ostrogothic emperors in the West.

The dinar and dirham were gold and silver coins, respectively, originally minted by the Persians. The Caliphates in the Islamic world adopted these coins, starting with Caliph Abd al-Malik (685–705).

In 1284 the Republic of Venice coined the ducat, its first solid gold coin. Other coins, the florin, noble, grosh, złoty, and guinea, were also introduced at this time by other European states to facilitate growing trade.

Beginning with the conquest of the Aztec and Inca Empires, Spain had access to stocks of new gold for coinage in addition to silver. The wide availability of milled and cob gold coins made it possible for the West Indies to make gold the only legal tender in 1704. The circulation of Spanish coins was later to create the unit of account for the United States, the "dollar", based on the Spanish silver real, and Philadelphia's currency market was to trade in Spanish colonial coins.

The Crisis of Silver Currency and Bank Notes (1750–1870)
In the late 18th century wars and trade with China, which sold many trade goods to Europe but had little use for European goods, drained silver from the economies of Western Europe and the United States. Coins were struck in smaller and smaller amounts, and there was a proliferation of bank and Demand Notes used as money.

In the 1790s Britain suffered a massive shortage of silver coinage and ceased to mint larger silver coins. It issued "token" silver coins and overstruck foreign coins. With the end of the Napoleonic Wars, Britain began a massive recoinage program that created standard gold Sovereigns and circulating crowns, half-crowns, and eventually copper farthings in 1821. In 1833, Bank of England notes were made legal tender, and redemption by other banks was discouraged. In 1844 the Bank Charter Act established that Bank of England notes, fully backed by gold, were the legal standard. According to the strict interpretation of the gold standard, this 1844 Act marks the establishment of a full gold standard for British money.

There were 113 grains (7.32g) of gold to one pound sterling.

The U.S. adopted a silver standard based on the "Spanish milled dollar" in July 1785. This was codified in the 1792 Mint and Coinage Act. This began a long series of attempts for United States to create a bimetallic standard for the US Dollar, which was to continue until the 1930s. Because of the huge debt taken on by the US Federal Government to finance the Revolutionary War, silver coins struck by the government left circulation, and in 1806 President Jefferson suspended the minting of silver coins. The US Treasury was put on a strict "hard money" standard, doing business only in gold or silver coin as part of the Independent Treasury Act of 1846, which legally separated the accounts of the Federal Government from the banking system. Following Gresham's law, silver poured into the US, which traded with other silver nations, and gold moved out. In 1853, the US reduced the silver weight of coins, to keep them in circulation.

Establishment of the International Gold Standard
When Germany became a unified country following the Franco-Prussian War; it established the mark. Rapidly most other nations followed suit. Gold became a transportable, universal and stable unit of valuation, and the world's dominant economy, the United Kingdom, had a longstanding commitment to the gold standard.

Throughout the U.S. post-Civil War decade of the 1870s the unstable economic environment created periodic demands for silver currency. However, such attempts generally failed, and continued the general pressure towards a gold standard. By 1879, only gold coins were accepted through the Latin Monetary Union, composed of France, Italy, Belgium, Switzerland and later Greece, even though silver was, in theory, a circulating medium.

Gold Standard from peak to crisis (1901–1932)
As in previous major wars under its gold standard, the British government suspended the convertibility of Bank of England notes to gold in 1914 to fund military operations during World War I. By the end of the war Britain was on a series of fiat currency regulations, which monetized Postal Money Orders and Treasury Notes. The government later called these notes Banknotes, which are different from US Treasury Notes. The United States government took similar measures. After the war, Germany, having lost much of its gold in reparations, could no longer coin gold "Reichsmarks" and moved to paper currency. This caused a currency crisis, hyperinflation followed, and, although the Weimar Republic later introduced the "rentenmark" and later the gold-backed reichsmark in an effort to control hyperinflation, it was too late. The middle class was wiped out; and the scene was set for the rise of Adolf Hitler.

Also as in previous major wars under the gold standard, the UK was returned to the gold standard in 1925, by a somewhat reluctant Winston Churchill, who was not an expert in monetary history. However, Churchill appears to have set it too low. Although a higher gold price and significant inflation had followed the wartime suspension, Churchill similarly followed tradition by resuming conversion payments at the pre-war gold price. It is a mystery as to why this was done.

The brief benefit was that for five years prior to 1925, the gold price had been managed downward to the pre-war level, causing deflation throughout those countries of the British Empire and Commonwealth using the Pound Sterling. But the rise in demand for gold for conversion payments that followed the similar European resumptions from 1925 to 1928 meant a further rise in demand for gold relative to goods and therefore the need for a lower price of goods because of the fixed rate of conversion from money to goods.

Because of these price declines and predictable depressionary effects, the British government finally abandoned the gold standard on September 20, 1931. Sweden abandoned the gold standard in October 1931; and other European nations soon followed. Even the U.S. government, which possessed most of the world's gold, moved to cushion the effects of the Great Depression by raising the official price of gold (from about $20 to $35 per ounce) and thereby substantially raising the equilibrium price level in 1933-4.

But the question remains: why did the British government not change the Gold Standard rather than abandon it? The impact of John Maynard Keynes was important because he provided an intellectual framework for doing away with gold and silver. Keynesian economics appealed to politicians who wanted an endless supply of currency to fund their aspirations for bigger government, welfare states, endless wars, space programs, and the like. Inflation seemed like a small price to pay.

Depression and World War II
During the 1939–1942 period, the UK depleted much of its gold stock in purchases of munitions and weaponry on a "cash and carry" basis from the U.S. and other raw materials from Canada and Australia and other nations. This depletion of the UK's gold reserve convinced Winston Churchill of the impracticality of returning to a pre-war style gold standard. John Maynard Keynes, who had argued against such a gold standard, became increasingly influential. Nevertheless, his theories were rejected in 1944 Bretton Woods Agreement, which established the IMF and an international gold standard based on convertibility of the various national currencies into a U.S. dollar that was in turn convertible into gold.

Advantages of a Gold and Silver Standard
Without a gold standard, governments can print as much money as they want, destroying wealth through inflation. The history of money consists of three phases: commodity money, in which actual valuable objects are bartered; then representative money, in which paper notes (often called 'certificates') are used to represent real commodities stored elsewhere; and finally fiat money, in which paper notes are backed only by use of' "lawful force and legal tender laws" of the government, in particular by its acceptability for payments of debts to the government (usually taxes).

Commodity money is inconvenient to store and transport and is subject to hoarding. It also does not allow the government to control or regulate the flow of commerce within their dominion with the same ease that a standardized currency does. As such, commodity money gave way to representative money, and gold and other specie were retained as its backing.

Gold was a common form of representative money due to its rarity, durability, divisibility, fungibility, and ease of identification, often in conjunction with silver. Silver was typically the main circulating medium, with gold as the metal of monetary reserve. The primary advantage of gold or silver backed currency is it self regulates. Therefore there is no government tinkering with the boom and bust business cycles that accompany fiat-based currency.

The Gold Standard variously specified how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself is just paper and so has no innate value, but is accepted by traders because it can be redeemed any time for the equivalent specie. A US silver certificate, for example, could be redeemed for an actual piece of silver.

Representative money and the Gold Standard protect citizens from hyperinflation and other abuses of monetary policy, as were seen in some countries during the Great Depression.

However, they were not without their problems and critics, and so were partially abandoned via the international adoption of the Bretton Woods System. That system eventually collapsed on August 15th 1971, when President Nixon took the U.S. out of the Bretton Woods system.

For the first time in history, all nations of the world had fiat currency as money.

Former US Federal Reserve Chairman Alan Greenspan argued that before the advent of monetarism:

Greenspan famously argued the case for returning to a gold standard in his 1966 paper "Gold and Economic Freedom", in which he described supporters of fiat currencies as "welfare statists" hell-bent on using monetary printing presses to finance deficit spending. He has argued that the fiat money system of today has retained the favourable properties of the gold standard because central bankers have pursued monetary policy as if a gold standard were still in place.

About twenty years' later, Greenspan then went on to head the Federal Reserve, and massively increased the US dollar supply of currency, from the late 1980's through to the early part of the 21st century. Ben Bernanke followed in his stead, to create the biggest fiat currency expansion the world has ever seen.

Arguments against a Gold Standard

Argument 1: There aint enough Gold to go around
The total amount of gold that has ever been mined has been estimated at around 142,000 tons. Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4 trillion. This is less than the value of circulating money in the U.S. alone, where more than $7.6 trillion is in circulation or in deposit (although international banking currently practices fractional reserves). Therefore, a return to the gold standard would result in a significant increase in the current value of gold, which may limit its use in current applications. For example, instead of using the ratio of $1,000 per ounce, the ratio can be defined as $2,000 per ounce (or $1,000 per 1/2 ounce) effectively raising the value of gold to $8 trillion dollars. Gold standard advocates consider this to be an acceptable and necessary risk.

This sort of argument is wrong for at least two reasons. The first reason is that it assumes that a rising gold price in relation to all fiat currencies is a bad thing. However, if you own gold, it is a good thing. Moreover, no one would suggest that if house prices double, it is a bad thing. The second reason why this sort of argument is wrong forgets that we now have $1,000 to an ounce of Gold is because of the devaluation of the U.S. dollar, which has lost 97% of its value since 1913, as a result of the Federal Reserve system, uncontrolled  currency creation, and the use of fiat currency.

Argument 2: Governments need to have the ability to respond to economic crises and the Gold Standard may prevent them from doing it
It is difficult for a government to manipulate a gold standard to tailor to an economy’s demand for money, giving central banks fewer options to respond to economic crises. For central banks to operate they need to be able to create or reduce the money supply. Put simply, in a recession, the central bank increases the growth of the money supply to create an inflationary boom; and in an inflationary period, the central bank reduces the growth of the money supply to create a recession or depression.

The problem with this argument is that in practise things do not work out like this. No Government will willingly create a recession or they will lose the next election. Moreover, reducing the growth of the money supply affects the government's own ability to spend, and as a consequence the central banks are unlikely to bring down a government by the creation of a recession. Therefore there will always be a temptation for central bankers to deal with all crises by increasing the growth of the money supply. Since the Great Depression, which was extenuated by the Federal Reserve policy to reduce the money supply, this seems to be what is most likely to happen.

If a country has a financial crises, the only solution politicians understand is to create another boom based upon a massive easing of the currency supply, and by increasing government spending. This reduces the value of the currency or money in your pocket; but you do not notice it because the inflation tax is hard to spot.

Argument 3: The Gold Standard may make a government's position weaker
Some have contended that the gold standard may be susceptible to speculative attacks when a governments financial position appears weak. For example, some conspiracy theorists believe the United States was forced to raise its interest rates and reduce its money supply in the middle of the Great Depression to defend the credibility of its currency.

However, the currency of the U.S. was not under attack and could have been defended easily by the U.S. because it had such enormous Gold reserves. And yet it is possible that this argument might be right in the case of a government who spends more than it collects in taxes, and saves nothing for a rainy day. With a gold standard, there is no where for a profligate government to hide.

Differing definitions of Gold Standard
If the monetary authority holds sufficient gold to convert all circulating money, then this is known as a 100% reserve gold standard, or a full gold standard. In some cases it is referred to as the Gold Specie Standard to more easily separate it from the other forms of gold standard that have existed at various times. The 100% reserve standard is generally considered unworkable because the quantity of gold in the world is too small a quantity of money to sustain current worldwide economic activity and the "right" quantity of money (i.e. one that avoids either inflation or deflation) is not a fixed quantity, but varies continuously with the level of commercial activity. This is wrong, of course, because it assumes that the price of gold cannot or should not rise in relation to the expansion or contraction of the fiat money supply. However, if gold became valued at, say, $6,000 to $12,000 an ounce, then there would be more than enough gold.

Stability offered by Gold Standard
The gold standard limits the power of governments to inflate prices through excessive issuance of paper currency. It is also creates more certainty in international trade by providing a fixed pattern of exchange rates. Under the classical international gold standard, disturbances in the price level in one country would be wholly or partly offset by an automatic balance-of-payment adjustment mechanism called the "price specie flow mechanism." At the time of the Bretton Woods agreement, it was believed that markets were always internally clear; this is called Say's Law.

Mundell-Fleming
According to modern neo-classical synthesis economics, the Mundell-Fleming Model describes the behaviour of currencies under a gold standard. Since the value of the currencies is fixed by the par value of each currency to gold, the remaining freedom of action is distributed between free movement of capital, and effective monetary and fiscal policy. One reason that most modern macro-economists do not support a return to gold is the fear that this remaining amount of freedom would be insufficient to combat large downturns or deflation, and therefore prohibit government spending.

Advocates of a renewed Gold Standard
The return to the gold standard is supported by many followers of the Austrian School of Economics, objectivists and libertarians largely because they object to the role of the government in issuing fiat currency through central banks. U.S. Congressman Ron Paul is the leading advocate of a return to the gold standard (or at least the legalization of competing currencies which would include gold and silver) in the Western world.

However, many prominent economists have also expressed sympathy with a hard currency basis, and have argued against fiat money, including former US Federal Reserve Chairman Alan Greenspan.

In 2001 Malaysian Prime Minister Mahathir bin Mohamad proposed a new currency that would be used initially for international trade between Muslim nations. The currency he proposed was called the islamic gold dinar and it was defined as 4.25 grams of 24 carat (100%) gold. Mahathir Mohamad promoted the concept on the basis of its economic merits as a stable unit of account and also as a political symbol to create greater unity between Islamic nations. This move would be to reduce dependence on the United States dollar as a reserve currency, and to establish a non-debt-backed currency in accord with Islamic law. However, to date, Mahathir's proposed gold-dinar currency has failed to happen.

Gold as a Reserve Today
Gold ingots still form an important currency reserve and store of private wealth. During the 1990s Russia liquidated much of the former USSR's gold reserves, while several other nations accumulated gold in preparation for the Economic and Monetary Union. The Swiss Franc left a full gold-convertible backing. However, gold reserves are held in significant quantity by many nations as a means of defending their currency, and hedging against the U.S. Dollar, which forms the bulk of liquid currency reserves. Weakness in the U.S. Dollar tends to be offset by strengthening of gold prices. Gold remains a principal financial asset of almost all central banks alongside foreign currencies and government bonds. It is also held by central banks as a way of hedging against loans to their own governments as an "internal reserve". Approximately 25% of all above-ground gold is held in reserves by central banks.

Both gold coins and gold bars are widely traded in deeply liquid markets, and therefore still serve as a private store of wealth. Some privately issued currencies, such as digital gold currency, are backed by gold reserves.

In 1999, to protect the value of gold as a reserve, European Central Bankers signed the "Washington Agreement," which stated that they would not allow gold leasing for speculative purposes, nor would they "enter the market as sellers" except for sales that had already been agreed upon.

Gold Sovereigns

Gold can be purchased by individuals in the form of Gold Sovereigns.

PLEASE SEEK PROFESSIONAL ADVICE BEFORE YOU BUY OR SELL GOLD, SILVER & COINS.

 

Ads by Adserve     How to Invest in Gold in 2010 how-to-invest.co.uk     How to Invest in Silver in 2010 how-to-invest.co.uk     Today's Gold & Silver Prices - NOW! how-invest.co.uk     Buy Gold on Ebay how-to-invest.co.uk     Buy Silver on Ebay how-to-invest.co.uk