Introduction
Human beings have revolutionized the way they exchange goods and services and conduct other economic affairs. Barter trade had for a long period exposed people to numerous inefficiencies that made it difficult for them to do business (Eichengreen and Temin 1997). However, the introduction of paper and silver money did not come easily because people had to suffer serious economic, social and political issues before a standard currency was invented. The gold standard was invented to help nations to participate in international trade without inconveniencing others (Mankiw 1997). They were pushed to do this because there was no standard measure of value between currencies. This essay explores the conflicts that faced the gold standard, moral lessons, and the possibilities of reintroducing it in modern societies.
The Gold Standard Conflict
Barry Eichengreen and Peter Temin define the gold standard practice as a way of doing business where participating nations equated their currencies to a specified amount or size of gold. Therefore, gold was used as a reference item that determined the value of goods and services. They claim that no country was willing to trade with those that had high valued currencies; therefore, they had to seek ways of ensuring that they solved using a standard mode of payment and currency evaluation (Eichengreen and Temin 1997). They argue that this was a better way of determining the value of different currencies compared to other traditional methods like barter trade and silver money (Delong 1996). The debate on the suitability of the gold standard in the 1920s made some nations reject it even though others were reluctant to follow suit. The following are arguments presented by Barry Eichengreen and Peter Temin to discredit the need to use the gold standard practice.
They argue that the gold standard tradition was a major impediment to economic growth because it prevented federal reserves from expanding and supplying money to the public (Eichengreen and Temin 1997). Most insolvent banks were not funded because there was limited money in circulation. This was a serious threat to local investors that relied on loans and other financial assistance from commercial banks. States accumulated a lot of deficits and this made it impossible for them to expand the money supply to the public. These factors prolonged the Great Economic Depression of the 1920s-1930s that forced nations to increase their costs of capital and labor, limited the government’s contribution to income, and weakened security markets (Delong 1996). Some countries thought it would be wise to abandon the gold standard approach and re-introduce their currencies in the market.
Countries that had gold deposits enjoyed this practice and did not abandon it quickly. Australia took longer than other countries to abandon this practice because it had huge gold deposits that gave it a competitive currency value advantage over other nations. This means that countries that had limited gold could not compete with those that were endowed with this resource. The currency values of the former were lower than those of their counterparts and this led to an unfavorable balance of payment and trade. Some countries withdrew from participating in trade activities that involved countries like Australia, South Africa, Russia, China, and America. This explains why these five countries became economic giants during the gold standard era.
In addition, they claim that economic recessions are caused by inadequate money supply and central banks should control this aspect to ensure there is capital creation through expanding credit facilities and money circulation. This means that fiscal policies cannot control inflation if the value of currencies is fixed on the amount and ability of nations to produce gold. This tradition was a time bomb that spurred inflation and limited economic growth. Eichengreen and Temin argue that most developing nations suffered during this period because their currencies were valued lower than the standard price of a unit of gold. They had to pay a lot more than what developed nations spend to participate in international trade (Eichengreen and Temin 1997).
Moreover, most participants experienced financial volatility because of the high short-run price volatility of the gold standard procedures. This medium of exchange was good because gold was not an abundant mineral; therefore, its supply was limited and this ensured that there was price stability (Delong 1996). However, lenders and borrowers can’t determine the value of debts of their currencies and this may lead to financial instability. Eichengreen and Temin claim that this practice was an economic killer since people did not invest in economic activities because they did not know the future of their projects. The gross domestic product of most nations was reduced because lenders had a lot of money at their disposal yet borrowers had to sacrifice their spending to service their loans (Mankiw 1997). Eichengreen and Temin argue that this causes economic stratification by punishing debtors and rewarding creditors.
Lastly, they argue that fiat currencies have smooth declines that do not have serious economic consequences because they lead to a 2% inflation rate that is not bad for an economy that allows states to tighten their fiscal policies to avoid deflation (Mankiw 1997). Economists argue that inflation is not bad because it allows financial institutions to restructure their monetary policies to accommodate minor challenges that may lead to deflation. This explains why the gold standard tradition was not an effective way of managing minor effects of inflation that led to the Great Economic Crisis.
Countries that participated in the gold standard tradition realized the need to embrace standard procedures that ensured all nations had equal opportunities of participating in international trade (Eichengreen and Temin 1997). They experienced inflation that led to the Great Economic Recession which affected their projects. Therefore, they will not want to see this happen again and this forces them to embrace various approaches that will ensure the current currencies are stable.
A democratic country cannot introduce the gold standard tradition today because this practice gives its citizens an unfair advantage over others. In addition, it will limit its domestic gross product because of reduced investments. Lastly, gold is a very scarce natural resource and no country is ready to devalue its currency by introducing this practice in its economy. Moreover, this will affect its trade relations with other countries that use other currencies. There is no likelihood that a democratic country may consider re-introducing the gold standard tradition in its economy (Mankiw 1997).
Conclusion
Barry Eichengreen and Peter Temin believe that the gold standard ideology was propagated by wealthy investors, politicians, and banks that did not want to see an end to human suffering. They were determined to ensure the economies of their countries collapsed and their citizens pay for their debts. However, the new political and business leaders did not allow these capitalists to risk the lives and economies of civilians and nations respectively. Therefore, they abandoned this ideology and embraced modern currencies that promote local and international business activities.
References
Delong, B. (1996). Why Not the Gold Standard? New York: McGraw-Hill.
Eichengreen, B. and Peter Temin (2007). The Gold Standard and the Great Depression.Massachusetts: National Bureau of Economic Research.
Mankiw, G. (1997). The Free Silver Movement, the Election of 1896, and the Wizard of Oz. New York: Worth Publisher.