Chapter 2: Findings and Analysis- Price Stability - National Reserve Currency

2.7.3    Price Stability

Price Stability

Inflation would not occur to the same scale as it does if a nation adopted the Gold Standard. One need not look further than the price of gold as a commodity over the last few years. This is a symptom of people losing confidence in Fiat currencies and also the weakening in the purchasing power of such currencies. The real evil of the system behind the endless manufacturing of money becomes evident in the next section where the real motives of increasing money in all its forms are explored. The net effect of the endless creation of money is a transfer of wealth to the elite factions in society and this is done under the false pretext of price stability.

The risk of hyperinflation is significantly increased under a system of unrestrained money supply as evident in the recent hyperinflation in Zimbabwe were the annual inflation rate in 2008 reached over 200 million per cent. A similar fate could befit the US dollar if the world loses confidence in the ability of the US government to pay back its debts. China has already started to move away from buying US debt in the form of long-term government bonds and Treasury bills, which could act as a catalyst to create a run on US debt and a similar fate for the dollar under this regime of Fiat money creation backed by nothing of value unlike the Gold Standard.

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Chapter 2: Findings and Analysis- Usury & Fiat Money - National Reserve Currency

2.7.2    Usury & Fiat Money

Fiat Money

Central banks perform various actions to encourage borrowing and investment especially when markets are in recession. These include increasing the money supply in circulation and also by setting a very low interest rate which is then a basis for banks to conduct inter-bank lending and lending to eager consumers of such easily accessible credit.

These are amongst the host of internal factors that are responsible for causing the business cycle and they clearly emanate from the monetary system of the current order. The culture of consumerism fuelled by unrestrained credit creation at low interest rate leads to a false and unsustainable boom that leads to an inevitable bust or recessionary phase of the cycle.

Once the inevitable excessive demand from the manufactured credit causes general price increases and in some cases inflated prices, a phenomena often referred to as a bubble, such as the 2008 housing bubble in the US, then banks tend to respond by raising interest rates to control inflation.

Usually at around this peak point, credit becomes too expensive for many and defaults start to occur coupled with a realization by the market agents that prices have peaked and the time to sell such assets has materialized. This leads to the inevitable contraction in prices and in many cases price crashes thus terminating the false boom phase.

Once the market clears from such excessive behavior through a recession, the whole process starts again and this phenomenon repeats itself in a perpetual cycle. The key point here is that such false booms would be replaced with sustainable growth through a monetary standard that is anchored to gold and silver, which are not subject to such manipulation. Any deviation from a general growth trajectory would be driven by external market factors such as oil crisis that could slow output growth.

Therefore to level the charge that only the Fiat monetary approach, with its cheap credit and endless currency creation, can mitigate the business cycle is a disingenuous argument given that it is one of its primary causes.

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Chapter 2: Findings and Analysis- Maneuverability Problems with the Gold Standard-Inability to influence the Business cycle- National Reserve Currency

2.7     Maneuverability Problems with the Gold Standard

2.7.1    Inability to influence the Business cycle

Influence the Business cycle

The business cycle is considered by most mainstream capitalist schools of thought to be integral to the functioning of a free market. It is asserted that with the Gold Standard, various policy tools, such as the use of Fiscal and Monetary Policy, cannot be used to mitigate the negative phase of such cycles. The business cycle is characterized by periods of accelerated growth in output, followed by a period of slowdown and then contraction in output often called a recession.

It is argued that the central banks, some of which are independent of direct government control, can help to lessen the impact of such cycles and by so doing extend the period of the boom and minimize the bust phase of the cycle. This goal, it is claimed, can be achieved through various monetary policy tools such as the raising of interest rates and increasing the money supply. Such actions would not be possible under a fully backed Gold Standard where Gold would act as a limiting factor to the supply of money within the economy.

The business cycle is a product of external and internal factors. There can be cases where a downward trend or recession can be caused by external factors such as the 1970s oil price shocks; however such external or exogenous factors are beyond the scope of this paper. Internal factors that cause recession tend to be related to monetary tightening (usually rising interest rates) policies to restrain an over-heating economy and accelerating inflation.

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Chapter 2: Findings and Analysis- Money, Metallic money - National Reserve Currency

2.2     Money

Money is the standard by which we measure the benefit found in the commodity and in the effort i.e. goods and services. Therefore, money is defined as being the medium by which all goods and services are measured. Hence the price of a commodity and the wage of a worker for instance, each represents the society’s estimate of the value of that commodity and the effort of that worker. Bonds, shares and the like are not considered money. This estimation of the value of goods and services is, in all countries, expressed by units. These units become the measure by which the benefit obtained from a commodity and the benefit obtained from a service is measured. These units would act as a medium of exchange, and these units are money.

2.2.1    Metallic money

Economists divide the types of metallic currencies in to two main types: the single metallic standard and the dual metallic standard. The first is where the main currencies are restricted to one single metallic coinage. As for the latter i.e. the dual standard, both the gold and silver coins represent the main currency.

The dual metallic standard requires the existence of three qualities:

1. Gold coins must have an unrestricted legal tender (no fixed purchasing power).
2. There should be no restrictions on minting from the bullion of both metals.
3. An official rate between the values of the gold and silver coins must be established.

The dual metallic standard is characterized by the huge amount of money it puts into circulation, due to the simultaneous use of the metallic coins as main currencies. Therefore, prices remain high and this would lead to an increase in production. This would also make the value of money more stable and prices would be less likely to undergo major fluctuations which usually lead to economic unrest. It is therefore clear that operating a dual metallic standard is better than the single metallic standard.

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Chapter 1: Introduction - National Reserve Currency

         1.1          Purpose of the Study

The main purpose of the study is to understand the theories and practices of Macroeconomics for acquiring in-depth knowledge on Economics.

1.2            Scope of the Study

The study focuses on a specific topic of “Macroeconomics” which is “National Reserve Currency (A Comparative Study on Fiat vs. Gold)”.

1.3            Limitations

The report does not contain any primary data. The report is solely based on secondary data which are collected from different source. Time constraint has also prevented the assignment to widen its scope.

1.4            Methodology

The information of the report has been collected from different sources. Firstly the information has been compiled. Secondly the information has been sorted. Thirdly the information has been analyzed. Fourthly the information has been presented.

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Table of Content

Chapter - 1: Introduction                                                                                      

                                                                                  

1.1       Purpose of the Study                                                                                  

1.2       Scope of the Study                                                                              

1.3       Limitations                                                                                         

1.4       Methodology                                                                                                       

                                                                                                           

Chapter - 2: Findings and Analysis

2.1       Introduction                                                                                               

2.2       Money                                                                                                           

2.3       Issuing of Currency                                                                                    

2.4       The Gold Standard                                                                                      

2.5       Benefits of the Gold Standard                                                                  

2.6       Problems facing the Gold Standard                                                          

2.7       Maneuverability Problems with the Gold                                             

2.8       Supply of Gold Problem - Fear of Deflation                                          

2.9       Price Instability Problem                                                                           

2.10     Growth Problem                                                                                        

2.11     The High cost of Production: Specie as a Waste of Production          

2.12     Compatibility difficulty                                                                             

2.13     Monitoring of Gold Standard                                                                         

2.14     Global asymmetry crisis                                                                            

2.15     Transition dilemma                                                                                    

Chapter - 3: Recommendations and Conclusion                                             

                                                                                                           

Reference & Bibliography                                                                                   

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