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monetary system where a country’s currency is directly linked to the value of gold. Between 1870 and 1879 numerous countries embraced gold monometallism. It was Germany’s switch to the gold that prompted the United States to demonetize silver and adopt gold. The US, interestingly, was the last country to adopt the gold standard. The period between 1871-1914 was the pinnacle for the standard owing to near-ideal political conditions. However due to World War I, political alliances changed, international indebtedness increased and government finances deteriorated. With the stock market crash of 1929 and subsequent collapse of commodity prices, gold standard disabled the government’s discretion of regulating money supply according to its own convenience. Faced with mounting unemployment and spiralling deflation in the early 1930s, the US government found it could do little to stimulate the economy. To deter people from cashing in deposits and depleting the gold supply, the US had to keep interest rates high but that made it too expensive for people and businesses to borrow. In 1933, President Franklin Roosevelt cut the dollar’s ties with gold, allowing the government to pump money into the economy and lower interest rates. In the early 1940s, British and American policy-makers (notably John Maynard Keynes and Harry Dexter White) began to draw up plans for a post-war international monetary system. This culminated in the Bretton Woods Conference of 1944. The Bretton Woods arrangement was backed by the creation of two new institutions, the IMF and the World Bank, which were established to help build a framework for economic cooperation designed to avoid a repetition of the vicious cycle of competitive devaluations of the 1930s. Indeed, policy-makers learned one of the key lessons of the inter-war years: they set as a major objective of the Bretton Woods agreement the establishment of a new monetary system capable of preventing the ‘beggar-your-neighbour’ policies that had contributed to the breakdown of the Gold Standard and had prolonged the Great Depression. The system did not provide for any revaluation of parities due to which surplus countries such as West Germany and Japan continued to enjoy export competitiveness against the US economy. This aggravated the US trade deficit. Ultimately in August 1971, President Richard Nixon suspended the gold convertibility of the dollar, thereby closing the gold window. It is being widely felt nowadays that returning to the Gold Standard is not feasible owing to a variety of reasons some of which are stated as follows:

-The value of gold fluctuates widely and would not provide the price stability necessary for a healthy economy.

-It would increase the environmental harms created by gold mining.

-It makes the supply of money vulnerable to the ups and downs of gold production.

-It creates periodic deflation and economic contractions.

Even if the above-mentioned limitations are overcome, Gold Standard has little chances of standing the challenges of the 21st century political influences. Drawing on the lessons of the Gold Standard Era and Bretton Woods experience, the reintroduction of gold as an anchor would not only be impractical but also damaging, given its deflationary bias.

By Mannat Luthra and Rubina Boparai


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