Question

#2.  Explain the gold standard and why the U.S. stopped using it.   Your answer must a) identify at least one advantage and disadvantage to the gold standard, b) talk about convertibility of dollars to gold, and c) identify at least one key event and year of a change relating to the use of the gold standard. HINTS: There were several events that weakened how the gold standard was used before It was totally abandoned. Other hints: Bretton Woods and foreign exchange)

Answer 1

a) One advantage of gold standard is that making use of gold can provide fixed international rates and reduce the uncertainty in the international trade.

One disadvantage of Gold standard is that gold would be used to determine the money supply in the economy. This means that monetary policy will become ineffective for correcting and stabilising the economy.

b) Under gold standard, the currency of the United States, Dollars were converted into a fixed amount of gold which was equivalent to the value of dollars.

Beginning in 1879, people in the US could trade in $20.67 for an ounce of gold.

A number of countries after the World war II paid the US the amount of debt in terms of gold. This helped the countries to have stability in exchange rates.

c) Gold standard was abandoned by the US in the 1930s. The main reason for this was to fight depression. Since during the time of depression, the consumption expenditure and employment level were very low, the US government had to deter people from cashing into deposits. Also the supply of gold was depleting at a very high rate to meet the expenses of the economy.

So to stop cashing into deposits and to maintain some supply of gold in the country, the government had to keep the interest rates very high. This led to discourage of investors to borrow money for investment purposes. So in 1933, US had to cut the Dollars ties with gold.