1. Lectures in Macroeconomics- Charles W. Upton Back to the Gold Standard

2. 2 Gold Standard, 1876-1933 Gold was part of Monetary Base –Public, domestic and foreign, could demand gold at will for dollars.

3. Back to the Gold Standard 3 Gold Standard, 1876-1933 Gold was part of Monetary Base –Public, domestic and foreign, could demand gold at will for dollars. –Government essentially had no control over monetary base.

4. Back to the Gold Standard 4 Why Gold for Money High value to weight ratio. Does not corrode or rot. Homogenous.

5. Back to the Gold Standard 5 Why Gold for Money High value to weight ratio. Does not corrode or rot. Homogenous. Gold was not universal: India, among others, used silver.

6. Back to the Gold Standard 6 Some Problems with Gold Adulteration with Base Medals Clipping Coins

7. Back to the Gold Standard 7 Some Problems with Gold Adulteration with Base Medals Clipping Coins Solution: Government Mints –Assays Gold –Stamp Coins –Mill them

8. Back to the Gold Standard 8 The London Goldsmiths Why keep gold at home? –Keep it secure at your goldsmith.

9. Back to the Gold Standard 9 The London Goldsmiths Why keep gold at home? –Keep it secure at your goldsmith. And why actually use gold for purchases? –Transfer receipts –Essentially Checking Accounts

10. Back to the Gold Standard 10 The Goldsmith You hold 100 oz of gold for the following accounts. –Smith:40 oz –Jones 40 oz –Green 20 oz Withdrawals and deposits average out. –90-110 oz

11. Back to the Gold Standard 11 The Goldsmith Wilson comes along and wants to borrow 20 oz of gold. You give him a gold receipt.

12. Back to the Gold Standard 12 The Goldsmith Wilson comes along and wants to borrow 20 oz of gold. You give him a gold receipt. You have invented fractional banking!

13. Back to the Gold Standard 13 The Goldsmith Wilson comes along and wants to borrow 20 oz of gold. You give him a gold receipt. Assets 100 oz of gold 20 oz IOU from Wilson Liabilities 120 oz of gold accounts You have invented fractional banking!

14. Back to the Gold Standard 14 Eventually… Assets –20 Oz of Gold –180 Oz of Gold IOU’s Liabilities –200 Oz of Gold Deposits

15. Back to the Gold Standard 15 Eventually… Assets –20 Oz of Gold –180 Oz of Gold IOU’s Liabilities –200 Oz of Gold Deposits Why this ratio? Why not? The key point is that you only want to keep fractional reserves.

16. Back to the Gold Standard 16 One of your depositors strikes gold Mines 80 oz of gold, gets it minted by the government and brings the coins to your bank.

17. Back to the Gold Standard 17 One of your depositors strikes gold Mines 80 oz of gold, gets it minted by the government and brings the coins to your bank. Assets –100 Oz of Gold –180 Oz of Gold IOU’s (including the new 80 oz) Liabilities –280 Oz of Gold Deposits (including the new 80 oz.)

18. Back to the Gold Standard 18 One of your depositors strikes gold Mines 80 oz of gold, gets it minted by the government and brings the coins to your bank. Assets –20 100 Oz of Gold –180 900 Oz of Gold IOU’s Liabilities –200 1000 Oz of Gold Deposits

19. Back to the Gold Standard 19 The Consequences Your customer is better off. Prices rise 5 fold.

20. Back to the Gold Standard 20 End ©2005 Charles W. Upton. All rights reserved