Good Essay On Gold Standard

In the 19th century, most industrialized countries backed their currencies with gold. The US adopted gold standard in 1900 and finally abandoned its late version under Bretton Woods system in 1971. There are different types and variations of gold standard, but all of them are based on a notion of gold acting as money or money, backed by gold. Gold standard was the foundation of the first modern international monetary system and throughout existence its flaws became evident. It was these flaws that ultimately caused abandonment of golden standard all over the world. While there are range of disadvantages related to traditional gold standard, stemming from its inflexible nature and need of fixed exchange rate, the most critical disadvantage is impossibility to use monetary expansion as anti-crisis measure.
According to the main principle of the gold standard, paper money must be backed by gold. It means that a state can not increase money supply in the ways, other than acquiring additional gold. In fact, such strict peg of money supply to gold reserves renders any monetary policy impossible. Traditional economic crises in the times of gold standard were caused by overproduction and overheat of economy. These processes were supplemented with disproportionate growth of bank lending, which caused financial crisis. Most economic crisis developed from bank crisis, when after several big bankruptcies and hike in default rates credit quality of bank assets deteriorated. Then run on banks began, decreasing bank liquidity and eventually causing transformation of bank crisis into full-scale economic crisis. That`s why intervention of central bank at the stage of early bank crisis by the means of monetary expansion through decrease of refinancing rate can provide bank with financing, which banks are usually unable to obtain from the market. So such expansionary monetary policy, if utilized in timely manner, can stop bank crisis and prevent more serious economic crisis.