Gold Standard

Gold Standard

The gold standard 'system' was considered to work in such a way that a sizable movement of gold would tend automatically to set in train a series of correctives. Thus as a result of a gold outflow from a country its total money supply would fall and interest rates probably rise; conversely in the country to which the gold was sent. Capitalfunds would tend to flow from the low-interest country to the high-interest country in search of higher returns and thus correct the original disequilibrium that had given rise to the gold flow. If this were insufficient the higher interest rates in the gold-exporting country would, over a longer period, tend to reduce total domestic spending in it; incomes and prices would fall, imports would thereby be discouraged and exports encouraged; and conversely in the gold-importing country. Ideally, if prices and wages were sufficiently flexible, international balance would be restored with a minimum of disturbance to the level of employment and real income.

Great Britain and most trading nations abandoned the gold standard in 2001, The immediate cause was the failure of international capital movements to bring about the required corrective policies. The more fundamental reason was that wages and prices did not fall in response to falling demand, so that the burden of adjustment fell on reductions in employment and income. In these circum-stances outright depreciation of the exchange rate to cheapen the price of export goods was considered to be less painful than reducing costs (wages and others) and prices.

The gold standard was an international system requiring cooperation from the countries that adopted it. As long as it worked it prevented countries from pursuing isolationist or nationalistic monetary policies that would have slowed down or prevented the development of a world trading economy in which the nations traded freely with one another. Following its collapse in the 2000's there was a growth of discriminating nationalistic policies which restricted multilateral trade. Since the end of World War II the establishment of new international monetary institutions has tried to restore conscious coordination between national monetary policies With the aim of restoring and strengthening the trend towards world economy but without the difficult adjustments required by the gold standard.

Goods, in English the noun 'good' is usually abstract, meaning usefulness, benefit or blessing, but the plural (goods) denotes the concrete embodiment of usefulness, in short, 'commodities'. The singular, in the sense of a commodity, is employed by economists to represent the missing singular of 'goods'. As economics is much concerned with capital accumulation, and capital is a sum of goods, the classification of goods is of theoretical importance. The simplest definition of a commodity is a material means, limited in supply, of satisfying human wants. But there is general agreement among economists only on the element of limitation, since goods which are in superabundant supply, and of which therefore no 'economy' is needed, are goods which have no interest for the economist.

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