1

Complementary currency
From Wikipedia, the free encyclopedia
Jump to: navigation, search
Complementary community currency (CCC) is a hypernym (superordinate) of local
currency (also referred to as community currency) and sectoral currency.
Complementary communiity currencies describe a wide group of currencies or scrips
designed to be used in combination with standard currencies or other complementary
currencies. They can be valued and exchanged in relationship to national currencies but
also function as media of exchange on their own. Complementary currencies lie outside
the nationally defined legal realm of Legal tender and are not used as such. Rate of
exchange, scope of circulation and use in combination with other currencies differs
greatly between complementary currency systems, as is the case with national currency
systems.
Some complementary community currencies incorporate value scales based on time or
the backing of real resources (gold, oil, services, etc). A Time-based currency is valued
by the time required to perform a service in hours, notwithstanding the potential market
value of the service.
Some complementary community currencies take advantage of demurrage fees, an
intentional devaluation of the currency over time, like negative interest. This stimulates
market exchanges in the devaluating currency, propagates new participation in the
currency system and forces the storage of wealth (hoarding) ability usually reserved for
currency into more permanent and better value holding tools like (property, improvement,
education, technology, health, etc) all of which are sheltered from the currency based
demurrage fees.
Other experimental complementary community currencies use high interest fees to
promote heavy competition between participants, and the removal of wealth from long
term wealth holding structures (natural/material wealth, property, etc) to aid in the
process of rapid industriaization, mass production, automation and competitive
innovation.
Monetary speculation and gambling are usually outside the design parameters of
complementary currencies. Complementary currencies are often intentionally restricted in
their regional spread, time of validity or sector of use and may require a membership of
participating individuals or points of acceptance.
COMPLEMENTARY COMMUNITY CURRENCIES (CCC's) It is important to
understand that there is evidence that, beginning in the 1960's, the first advocates of
complementary community currencies (CCC's), especially in Canada, did not think of

2
CCC as working contra to our national currencies. This is why certain leaders of this
movement were careful to use the term 'complementary'. They used it to emphasize the
importance of working in cooperation with governments and the tax system, businesses,
unions, associations, charities, the banks and all forms of democratic capitalism--as
partners in the above-ground economy.
EXAMPLE OF A FULLY FUNDED CCC. For example, The Toronto Dollar system, is
a system which is fully funded by Canadian dollars. In other words, the system is backed
by Canadian dollars. Participating merchants are free to exchange the toronto dollars for
Canadian dollars. While the system will work better when more and more of the CCC is
kept in circulation, no one needs to feel trapped by the system.
In addition to being supported by any number of social activists, including philosophers,
clergy, artists, etc., it is fully supported by a growing number of political leaders, past and
present, including, over the years, several mayors of Toronto. For details, check out:
http://www.torontodollar.com

ALTERNATIVE CURRENCY

Alternative currency is a term that refers to any currency used as an alternative to the
dominant national or multinational currency systems (usually referred to as national or
fiat money). Alternative currencies can be created by an individual, corporation, or
organization, they can be created by national, state, or local governments, or they can
arise naturally as people begin to use a certain commodity as a currency. Mutual credit is
a form of alternative currency, and thus any form of lending that does not go through the
banking system can be considered a form of alternative currency.
When used in combination with or when designed to work in combination with national
or multinational fiat currencies they can be referred to as complementary currency. If the
use of an alternative currency is limited to a certain region, it is called a local currency.
Often there are issues related to paying tax. Some alternative currencies are considered
tax-exempt, but most of them are fully taxed as if they were national currency, with the
caveat that the tax must be paid in the national currency. The legality and tax-status of
alternative currencies varies widely from country to country; some systems in use in
some countries would be illegal in others.

Examples of alternative currencies

WIR Bank - One of the oldest and most successful complementary currencies,
founded in 1934, oriented towards small and mid-sized corporations, with 62,000
members.
Category:Electronic currencies, such as digital gold currency.

Digital gold currency (or DGC) is a form of electronic money denominated in gold
weight. The typical unit of account for such currency is the gold gram or the troy ounce,

3
although other units such as the gold dinar are sometimes used. DGCs are backed by gold
through unallocated or allocated gold storage.
Digital gold currencies are issued by a number of companies, each of which provides a
system that enabled users to pay each other in units that held the same value as gold
bullion. These competing providers issue independent currency, which normally carries
the same name as their company. In terms of the most popular providers, e-gold has the
greatest number of users and GoldMoney holds the greatest quantity of bullion (as of
January 2007).
As of January 2007, DGC providers held in excess of 9.5 tonnes of gold as disclosed
reserves, which is worth approximately $184 million.

Features
[edit] Asset protection

e-gold is, according to their website, "100% backed by gold"

Unlike fractional-reserve banking, DGCs (such as e-gold and GoldMoney) hold 100% of
clients' funds in reserves with a store of value. Proponents of DGC systems contend that
deposits are protected against inflation, devaluation and other possible economic risks
inherent in fiat currencies. These risks include the monetary policy of countries or
territories, which are perceived by proponents to be harmful to the value of paper
currency. It is also theoretically much harder for governments and/or creditors to seize or
confiscate digital gold currency from someone, as most DGC companies are incorporated
in offshore financial centres.

[edit] Bullion investing

Main articles: Gold as an investment and Silver as an investment

4
Digital currencies backed by gold are the most popular, although e-gold, e-Bullion and edinar also provide digital currency backed by silver, while GoldMoney and Crowne Gold
also provide storage in silver. Other digital silver currencies include the eLibertyDollar
and Phoenix Silver. In addition to gold and silver, e-gold supplies digital currency backed
by platinum and palladium. Gold, silver, platinum and palladium each have recognised
international currency codes under ISO 4217.

[edit] Exchanging fiat currency

Some providers, like e-gold, do not sell DGC directly to clients. In the case of an e-gold
account, currency must be bought and sold via a digital currency exchanger (DCE).
According to their website the reason they do this is so there can be no debt or contingent
liabilities associated with the business, making e-gold Ltd. absolutely free of any
financial risk. DGCs are known as private currency as they are not issued by
governments.

] Non-reversible transactions
Unlike the credit card industry, DGC issuers generally do not bundle services such as
repudiation. Thus having transactions reversed, even in case of a legitimate error,
unauthorized spend, or failure of a vendor to supply goods is not possible. In this respect,
a DGC spend is more akin to a cash transaction while PayPal transfers, for example,
could be considered more similar to credit card transactions.

Universal currency
Proponents claim that DGC offers a truly global and borderless world currency system
which is independent of exchange rate variations. Gold, silver, platinum and palladium
each have recognised international currency codes under ISO 4217.
Comparison of DGCs (as of January 2007):
Annu
Digital
Number DCE
Wire
Date
GDCA
al
gold
Bullion of user transfers transfers
founded member
stora
currency
stored accounts accepted accepted
ge
fee
c-gold

2007

Yes

200 oz Undisclos No
(as of 17 ed
July
2007)

No

1%

Processi
ng fee
(when
receivin
g from
another
user)
1 - 5%
(with
min. 5%
plus
0.0002
grams max.

5
0.05
grams)
Crowne
Gold

2002

No

e-Bullion

2000

No

e-dinar

2000

No

Undisclos Undisclos
No
ed
ed

Yes

1996

No

111,779
oz gold,
138,567
oz silver,
3,571,496 Yes
400 oz
platinum,
396 oz
palladium

No

GoldExcha
2006
nge

No

Undisclos Undisclos
No
ed
ed

Yes

GoldMoney 2001

No

193,921
oz gold, Undisclos
No
3,229,907 ed
oz silver

Yes

Liberty
Reserve

2005

Yes

Undisclos Undisclos
Yes
ed
ed

No

Pecunix

2002

Yes

2,375 oz Undisclos
Yes
gold
ed

No

VirtualGold 2006

No

e-gold

Undisclos Undisclos
No
ed
ed
Undisclos Undisclos
Yes
ed
ed

Undisclos Undisclos No
ed
ed

Yes
Yes

Yes

1%

0%

4 gold
0%
grams
1% (with
max.
1% 0.015
gold
dinar)
1 - 5%
(with
min. 5%
plus
0.0002
1%
gold
grams max.
0.05 gold
grams)
$0.35
1%
USD
1.2
1% (with
gold
min.
grams
0.01 ,
max. 0.1
0.986
gold
%
grams)
silver
1% (min.
$0.01 0% max.
$0.25
USD)
0.15 0.50%
(with
min.
0%
0.0001 max. 3.0
gold
grams)
0% 1% (with
min.

6
$0.10 max.
$2.00
USD)

The United States Private Dollar a unique currency backed by the total net worth
of the TUC The United Cities network.
Calgary Dollars and Ithaca Hours are two local currencies.
EarthE Money is used to reward environmental actions.
Toronto Dollars are an example of a backed local currency. Also GobeGold a new
approach with currency unit backed up by trees GobeGold
LETS, an example of Mutual credit, is a type of local currency used in a number
of small communities worldwide.

Local Exchange Trading Systems (LETS) also known as LETSystems are local, nonprofit exchange networks in which goods and services can be traded without the need for
printed currency.
LETS networks use interest-free local credit so direct swaps do not need to be made. For
instance, a member may earn credit by doing childcare for one person and spend it later
on carpentry with another person in the same network. In LETS, unlike other local
currencies, no scrip is issued, but rather transactions are recorded in a central location
open to all members. As credit is issued by the network members, for the benefit of the
members themselves, LETS are considered mutual credit systems.
Michael Linton originated the term "Local Exchange Trading System" in 1982 and, with
his wife Shirley, for a time ran the Comox Valley LETSystems in Courtenay, British
Columbia. The system he designed was intended as an adjunct to the national currency,
rather than a replacement for it, although there are examples of individuals who have
managed to replace their use of national currency through inventive usage of LETS.[citation
neede

Criteria
LETS are generally considered to have the following five fundamental criteria:[1]

Cost of service - from the community for the community

Consent - there is no compulsion to trade
Disclosure - information about balances is available to all members
Equivalence to the national currency

No interest

Of these criteria, "equivalence" is the most controversial. According to a 1996 survey by

LetsLink UK, only 13% of LETS networks actually practice equivalence, with most
groups establishing alternate systems of valuation "in order to divorce [themselves]
entirely from the mainstream economy."[2][3] Michael Linton has stated that such systems
are "personal money" networks rather than LETS.[4]

Benefits of LETS
LETS can help revitalise and build community by allowing a wider cross-section of the
communityindividuals, small businesses, local services and voluntary groupsto save
money and resources in cooperation with others and extend their purchasing power. Other
benefits may include social contact, health care, tuition and training, support for local
enterprise and new businesses. One goal of this approach is to stimulate the economies of
economically depressed towns that have goods and services, but little official currency:
the LETS scheme does not require outside sources of income as stimulus.

Europe
In the United Kingdom, an estimated 40,000 people are now trading in around 450 LETS
networks in cities, towns and rural communities across the UK.[6] LETS currencies have
their own local names

In the Great Depression, people and corporations used gift certificates as a form
of currency.
The Time Dollar is a state-sponsored alternative currency in the U.S, designed to
encourage the independence and productivity of welfare recipients.
Liberty Dollar is a private currency backed by silver, and is designed to be the
nationwide alternative currency in the United States. In 2007 federal agents raided
its offices with a warrant[1] charging money laundering, mail fraud, wire fraud,
counterfeiting, and conspiracy.[2].
Millennium Dollars are a private currency backed by US Treasury bills and cash
investments, designed to have a constant "real" value and hence act as a hedge
against inflation or deflation.
Barter clubs or corporate barter organizations are an example of alternative
currency systems.
BerkShares
Fourth Corner Exchange
Ripple monetary system

BERNARD LIETAER
CALGARY DOLLARS
CHIEMGAUER
DIGITAL GOLD CURRENCY
PRIVATE CURRENCY
SILVIO GESELL
TERRA
WIR BANK

Private currency
Sectoral currency
Bearer instrument
Local Exchange Trading Systems (LETS)
Time-based currency
Flex dollar
Local currency
Credit Money
Money
Private bank
Commodity money
Digital cash
Electronic money

Store of value
To act as a store of value, a commodity, a form of money, or financial capital must be
able to be reliably saved, stored, and retrieved - and be predictably useful when it is so
retrieved.
This is distinct from the standard of deferred payment function which requires
acceptability to parties one owes a debt to, or the unit of account function which requires
fungibility so accounts in any amount can be readily settled. It is also distinct from the
medium of exchange function which requires durability when used in trade, and a
minimum of opportunity to cheat others.
When currency is stable, money can serve all four functions. When it isn't, such as during
times of hyperinflation or when complex and volatile forms of financial capital are
involved, it becomes important to identify alternative stores of value, of which common
ones are:

real estate - actual deeds in protectible land

gold - once the basis of the gold standard
silver - once the basis of the silver standard
precious stones, and precious metals

collectibles, e.g. original art by a famous artist or antiques

livestock (see African currency)

While these items may be inconvenient to trade daily or store, and may vary in value
quite significantly, they rarely or never lose all value. This is the point of any store of
value, to impose a natural risk management simply due to inherent stable demand for the
underlying asset. It need not be a capital asset at all, merely have economic value that is
not known to disappear even in the worst situation. In principle, this could be true of any
industrial commodity, but gold and precious metals are generally favored because of their
demand and rarity in nature, which reduces the risk of devaluation associated with
increased production and supply.
Gresham's law is commonly stated: "Bad money drives out good." Or, more precisely:
"When there is a legal-tender currency, bad money drives good money out of circulation."
Or, more accurately: "Money overvalued by the State will drive money undervalued by
the State out of circulation."
Gresham's law applies specifically when there are two forms of commodity money in
circulation which are forced, by the application of legal-tender laws, to be respected as
having the same face value in the marketplace.
Gresham's law is named after Sir Thomas Gresham (1519 1579), an English financier
in Tudor times.

heory
Gresham's law says that any circulating currency consisting of both "good" and "bad"
money (both forms required to be accepted at equal value under legal tender law) quickly
becomes dominated by the "bad" money. This is because people spending money will
hand over the "bad" coins rather than the "good" ones, keeping the "good" ones for
themselves.
Consider a customer purchasing an item which costs five pence, who has in their
possession several silver sixpence coins. Some of these coins are more debased, while
others are less so but legally, they are all mandated to be of equal value. The customer
would prefer to retain the better coins, and so offers the shopkeeper the most debased
one. In turn, the shopkeeper must give one penny in change and has every reason to
give the most debased penny. Thus, the coins that circulate in the transaction will tend to
be of the most debased sort available to the parties.
If "good" coins have a face value below that of their metallic content, individuals may be
motivated to melt them down and sell the metal for its higher bullion value, even if such
defacement is illegal. For an example of this, consider the 1965 US Half-dollars which
were made from only 40% silver. The previous year the half-dollar was 90% silver. With
the release of the 1965 half, which was legally required to be accepted at the same value
as the previous year's 90% halves, the older 90% silver coinage of the US quickly

10
disappeared from circulation, and the debased money was allowed to circulate in its
stead. As the price of bullion silver rose above the face value of the coins, many of those
old half-dollars were melted down. With the 1971 issue the government gave up on
including any silver in the half dollars. A similar situation is currently (2007) occurring
with the rising price of zinc and copper, and has led the U.S. government to ban the
melting or mass exportation of one and five cent coins, respectively.
In addition to being melted down for its bullion value, money that is considered to be
"good" tends to leave an economy through international trade. International traders are
not bound by legal tender laws the way citizens of the country are, so they will offer
higher value for good coins than bad ones, and thus higher value than can be obtained
within the country. The good coins may leave their country of origin to become part of
international trade. Thus, the good money is driven out of the country of issue, escaping
that country's legal tender laws and leaving the "bad" money behind. This occurred in
Britain during the period of the Gold Exchange Standard.

[edit] History of the concept

According to George Selgin in his paper "Gresham's Law":
As for Gresham himself, he observed "that good and bad coin cannot circulate
together" in a letter written to Queen Elizabeth on the occasion of her accession
in 1558. The statement was part of Gresham's explanation for the "unexampled
state of badness" England's coinage had been left in following the "Great
Debasements" of Henry VIII and Edward VI, which reduced the metallic value of
English silver coins to a small fraction of what that value had been at the time of
Henry VII. It was owing to these debasements, Gresham observed to the Queen,
that "all your ffine goold was convayd ought of this your realm."
Gresham made his observations of good and bad money while in the service of Queen
Elizabeth, with respect only to the observed poor quality of the British coinage. The
previous monarchs, Henry VIII and Edward VI, had forced the people to accept debased
coinage by means of their legal tender laws. Gresham also made his comparison of good
and bad money where the precious metal in the money was the same. He did not compare
silver to gold, or gold to paper.
An early form of Gresham's Law was described by Nicolaus Copernicus in the treatise
Monetae cudendae ratio, first drawn up in the year (1519) that Thomas Gresham was
born. Copernicus wrote that "bad (debased) coinage drives good (un-debased) coinage
out of circulation."[1]

[edit] Origin of the name

George Selgin in his paper "Gresham's Law" offers the following comments:

11
The expression "Gresham's Law" dates back only to 1858, when British
economist Henry Dunning Macleod (1858, p. 4768) decided to name the
tendency for bad money to drive good money out of circulation after Sir Thomas
Gresham (15191579). However, references to such a tendency, sometimes
accompanied by discussion of conditions promoting it, occur in various medieval
writings, most notably Nicholas Oresme's (c. 1357) Treatise on money. The
concept can be traced to ancient works, including Aristophanes' The Frogs, where
the prevalence of bad politicians is attributed to forces similar to those favoring
bad money over good.
The passage from The Frogs referred to is as follows; it is usually dated at 405 B.C.:
The course our city runs is the same towards men and money.
She has true and worthy sons.
She has fine new gold and ancient silver,
coins untouched with alloys, gold or silver,
each well minted, tested each and ringing clear.
Yet we never use them!
Others pass from hand to hand,
sorry brass just struck last week and branded with a wretched brand.
So with men we know for upright, blameless lives and noble names.
These we spurn for men of brass....

[edit] The law in reverse

In an influential theoretical article, Rolnick and Weber (1986) argued that bad money
would drive good money to a premium rather than driving it out of circulation. However
their research did not take into account the context in which Gresham made his
observation. Rolnick and Weber ignored the influence of legal tender legislation which
requires people to accept both good and bad money as if they were of equal value. They
also focused mainly on the interaction between different metallic moneys, comparing the
relative "goodness" of silver to that of gold, which is not what Gresham was speaking of.
The experiences of dollarization in countries with weak economies and currencies (for
example Israel in the 1980s, Eastern Europe and countries in the period immediately after
the collapse of the Soviet bloc, or South American countries throughout the late twentieth
and early twenty-first century) may be seen as Gresham's Law operating in its reverse
form (Guidotti & Rodriguez, 1992), since in general the dollar has not been legal tender
in such situations, and in some cases its use has been illegal.
These examples show that in the absence of legal tender laws, Gresham's law works in
reverse. If given the choice of what money to accept, people will transact with money
they believe to be of highest long-term value. However, if not given the choice, and
required to accept all money, good and bad, they will tend to keep the money of greater
perceived value in their possession, and pass on the bad money to someone else. Said in
another way, in the absence of legal tender laws, the seller will not accept anything but

12
money of real worth (good money), while the existence of legal tender laws will force the
seller to accept money with no commodity value (bad money). Thus, the buyer will
always try to spend his bad money first, but in the absence of legal tender laws, the seller
will not accept money with no real worth.

[edit] The law in other fields

The principles of Gresham's Law can sometimes be applied to different fields of study.
Gresham's Law generally speaks to any circumstance in which the "true" value of
something is markedly different from the value people must accept, due to factors such as
lack of information or governmental decree.
In the market for second hand cars, lemon automobiles (analogous to bad currency) will
drive out the good cars. The problem is one of asymmetry of information. Sellers have a
strong financial incentive to pass all cars off as "good" cars, especially lemons. This
makes it chancy to buy a good car at a fair price, as the buyer risks overpaying for a
lemon. The result is that buyers will only pay the fair price of a lemon, so at least they
won't be ripped off. High quality cars tend to be pushed out of the market, because there
is no good way to establish that they really are worth more. The Market for Lemons is a
work that examines this problem in more detail.
Gresham's Law poses a similar trap in education.[2] For instance, The Economist, writing
on the No Child Left Behind act's effect on U.S. schools, said:
Joel Klein, the man in charge of public schools in New York City, lists other
perverse incentives. States are rewarded for increasing the proportion of students
who pass their exams, but not for raising a child's score from abysmal to nearlygood-enough-to-pass, or from just-passed to brilliant. So they are tempted to
lavish attention on those on the cusp of passing, while neglecting both the weakest
and the strongest students.[3]
Schools that respond to these incentives (and focus all their attention on those at the cusp
of passing) in locations which allow easy switching of schools will tend to drive away the
ignored students for whom the value of their education is not adequately captured by the
Pass/Fail grade, as Gresham's Law predicts.
A case in education where Gresham's Law generally does not apply is with "diploma
mills," schools that offer diplomas even to those with very low qualifications for a price.
It may seem that according to Gresham's law these "bad" diplomas ought to drive out the
"good" diplomas. However, unlike money, most countries have no law requiring
employers to accept all diplomas as being of equal value. Each employer is free to assess
the value of qualifications as they see fit. In those nations or governmental organizations
where the law does require blindness, this effect does occur

Gold standard

13

From Wikipedia, the free encyclopedia

Jump to: navigation, search
For other uses, see Gold standard (disambiguation).
The gold standard is a monetary system in which the standard economic unit of account
is a fixed weight of gold. Under the gold standard, currency issuers guarantee to redeem
notes, upon demand, in that amount of gold. Governments that employ such a fixed unit
of account, which will redeem their notes to other governments in gold, share a fixedcurrency relationship. The gold standard is not currently used by any government or
central bank, having been replaced completely by fiat currency. However, private
currency, backed by gold, is in use.

Contents
[hide]

1 Why gold?
2 Disadvantages
3 History
o 3.1 Early coinage
o 3.2 The crisis of silver currency and bank notes (17501870)
o 3.3 Establishment of the international gold standard
o 3.4 Dates of adoption of a gold standard
o 3.5 Gold standard from peak to crisis (19011932)
3.5.1 Abandoning the standard to fund the war
o 3.6 Depression and World War II
3.6.1 British hesitate to return to gold standard
o 3.7 Post-war international gold standard (19461971)
4 Theory
o 4.1 Differing definitions of gold standard
4.1.1 Perceived stability offered by gold standard
4.1.2 Mundell-Fleming model
5 Advocates and opponents of a renewed gold standard
6 Gold as a reserve today
7 See also
8 References

9 External links

[edit] Why gold?

The history of money consists of three phases: commodity money, in which actual
valuable objects are bartered; then representative money, in which paper notes (often
called 'certificates') are used to represent real commodities stored elsewhere; and finally

14
fiat money, in which paper notes are backed only by the traders' "full faith and credit" in
the government.
Commodity money is inconvenient to store and transport and is subject[citation needed] to
hoarding. It also does not allow the government to control or regulate the flow of
commerce within their dominion with the same ease that a standardized currency does.
As such, commodity money gave way to representative money, and gold and other specie
were retained as its backing.
Gold was a common form of representative money due to its rarity, durability, easy
divisibility ('fungibility'), and the general ease of identification, [1] often in conjunction
with silver. Silver was typically the main circulating medium, with gold as the metal of
monetary reserve.
The Gold Standard variously specified how the gold backing would be implemented,
including the amount of specie per currency unit. The currency itself is just paper and so
has no innate value, but is accepted by traders because it can be redeemed any time for
the equivalent specie. A US silver certificate, for example, could be redeemed for an
actual piece of silver.
Representative money and the Gold Standard protect citizens from hyperinflation and
other abuses of monetary policy, as were seen in some countries during the Great
Depression. However, they were not without their problems and critics, and so were
partially abandoned via the international adoption of the Bretton Woods System. That
system eventually collapsed in 1971, at which time all nations had switched to full fiat
money.
Former US Federal Reserve Chairman Alan Greenspan has argued that
"under the gold standard, a free banking system stands as the protector of an economy's
stability and balanced growth... The abandonment of the gold standard made it possible
for the welfare statists to use the banking system as a means to an unlimited expansion of
credit... In the absence of the gold standard, there is no way to protect savings from
confiscation through inflation."[2]

[edit] Disadvantages
Beyond the difficulty in transporting, storing, and preventing the debasement of gold, one
of the main disadvantages of a gold standard is that it might artificially inflate gold's
value, increasing the cost of items and industrial processes in which it is used.[3] The total
amount of gold that has ever been mined is estimated at about 142,000 tonnes.[4] At a gold
price of US$800 per Troy ounce, or around $26,000 per kilogram, the value of this entire
planetary stock would be $3.65 trillion, which is less than the value of cash circulating. In
the U.S. alone, more than $7.3 trillion is in circulation or on deposit.[5] Under a U.S. gold
standard, the price of gold would be more than proportionally higher, because all the gold
in the world can not be brought in to U.S. bank vaults.

15
Under the gold standard, gold mined at a different rate than the economy grows can
produce both inflation, when deposits are discovered and extracted, and deflation when
they are mined to exhaustion.[6] In practice, the production of gold has usually trailed
economic growth, resulting in periods of deflationary pressure, including contributing to
the cause of the Great Depression[7] and events during it.[3] During the gold rushes in
California and Australia, soaring gold output contributed to a 5% yearly increase in
wholesale prices during the period between 1850 and 1855.[8][9]
Using a fixed commodity as a monetary standard gives central banks fewer options with
which to respond to economic crises and stimulate economic growth.[10] In particular,
gold-backed currencies prevent tailoring the money supply to the economy's demand for
money, and are subject to speculative attacks when the government's financial position
looks weak; attacks which often require punitive economic measures to counter. Such
measures exacerbated the Great Depression when the U.S. raised interest rates in the
middle of a recession in order to defend the credibility of its currency.[7] Finally, since
commodity currency devaluations produce sharp changes in their values, rather than
smooth declines, their effects are magnified.[11]

[edit] History
See also: History of the English penny

[edit] Early coinage

Gold coin of Alexander the Great, ca. 330 B.C.E.

The first metal used as a currency was silver more than 4,000 years ago, when silver
ingots were used in trade. Gold coins first were used from 600 b.c.e. However, long
before this time, gold, as per silver, was used as a store of wealth and the basis for trade
contracts in Akkadia, and later in Egypt. During the heyday of the Athenian empire, the
city's silver tetradrachm was the first coin to achieve "international standard" status in
Mediterranean trade. Silver remained the most common monetary metal used in ordinary
transactions until the 20th century.

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Aureus minted in 193 CE by Septimius Severus.

The Persian Empire collected taxes in gold and issued its own gold coin, known in the
West as the , dareikos in Greek, or daricus in Latin. When it was conquered by
Alexander the Great, this gold became the basis for the gold coinage of Alexander's
empire and those of his Diadochi. The vast gold hoard of the Persian kings was put into
monetary circulation, triggering the first known "worldwide" inflation event.

Solidus of Justinian II, ca. 705 CE

The Roman Empire minted two important gold coins: the aureus, which was ~7 grams of
gold alloyed with silver, and the smaller solidus, which weighed 4.4 grams, of which 4.2
was gold. These values applied only to the early Empire. Later Roman and Byzantine
coins were frequently debased by being alloyed with other metals of much lower value.
The dinar and dirham were gold and silver coins, respectively, originally minted by the
Persians. The Caliphates in the Islamic world adopted these coins, starting with Caliph
Abd al-Malik (685705).

Sequin (Venetian ducat), 1382 CE

In 1284 the Republic of Venice coined the ducat, its first solid gold coin. Other coins, the
florin, noble, grosh, zoty, and guinea, were also introduced at this time by other
European states to facilitate growing trade.

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Beginning with the conquest of the Aztec and Inca Empires, Spain had access to stocks of
new gold for coinage in addition to silver. The wide availability of milled and cob gold
coins made it possible for the West Indies to make gold the only legal tender in 1704. The
circulation of Spanish coins would create the unit of account for the United States, the
"dollar", based on the Spanish silver real, and Philadelphia's currency market would trade
in Spanish colonial coins.

[edit] The crisis of silver currency and bank notes (17501870)

In the late 18th century wars and trade with China, which sold many trade goods to
Europe but had little use for European goods, drained silver from the economies of
Western Europe and the United States. Coins were struck in smaller and smaller amounts,
and there was a proliferation of bank and stock notes used as money.
In the 1790s Britain suffered a massive shortage of silver coinage and ceased to mint
larger silver coins. It issued "token" silver coins and overstruck foreign coins. With the
end of the Napoleonic Wars, Britain began a massive recoinage program that created
standard gold sovereigns and circulating crowns, half-crowns, and eventually copper
farthings in 1821. In 1833, Bank of England notes were made legal tender, and
redemption by other banks was discouraged. In 1844 the Bank Charter Act established
that Bank of England notes, fully backed by gold, were the legal standard. According to
the strict interpretation of the gold standard, this 1844 Act marks the establishment of a
full gold standard for British money.
There were 113 grains (7.32g) of gold to one pound sterling.
The U.S. adopted a silver standard based on the "Spanish milled dollar" in July 1785.
This was codified in the 1792 Mint and Coinage Act. This began a long series of attempts
for America to create a bimetallic standard for the US Dollar, which would continue until
the 1930s. Because of the huge debt taken on by the US Federal Government to finance
the Revolutionary War, silver coins struck by the government left circulation, and in 1806
President Jefferson suspended the minting of silver coins. The US Treasury was put on a
strict "hard money" standard, doing business only in gold or silver coin as part of the
Independent Treasury Act of 1846, which legally separated the accounts of the Federal
Government from the banking system. Following Gresham's law, silver poured into the
US, which traded with other silver nations, and gold moved out. In 1853, the US reduced
the silver weight of coins, to keep them in circulation.

[edit] Establishment of the international gold standard

Germany was created as a unified country following the Franco-Prussian War; it
established the mark. Rapidly most other nations followed suit. Gold became a
transportable, universal and stable unit of valuation, and the world's dominant economy,
the United Kingdom, had a longstanding commitment to the gold standard.[12] See
Globalization.

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[edit] Dates of adoption of a gold standard

1717: United Kingdom[13] at 1 to 113 grains (7.32g) of gold

1818: Netherlands at 1 guilder to 0.60561 g gold
1854: Portugal at 1000 ris to 1.62585 g gold
1871: Germany at 2790 Goldmarks to 1 kg gold
1873: Latin Monetary Union (Belgium, Italy, Switzerland, France) at 31 francs to
9 g gold
1873: United States de facto at 20.67 dollars to 1 troy oz
1875: Scandinavian monetary union: (Denmark, Norway and Sweden) at 2480
krone to 1 kg gold
1876: France internally
1876: Spain at 31 pesetas to 9 g gold
1878: Finland at 31 marks to 9 g gold
1879: Austria (see Austrian florin and Austrian crown)
1893: Russia at 31 roubles to 24 g gold
1897: Japan at 1 yen to 1.5 g gold
1898: India (see Indian rupee)
1900: United States de jure.

Throughout the decade of the 1870s deflationary and depressionary economics created
periodic demands for silver currency. However, such attempts generally failed, and
continued the general pressure towards a gold standard. By 1879, only gold coins were
accepted through the Latin Monetary Union, composed of France, Italy, Belgium,
Switzerland and later Greece, even though silver was, in theory, a circulating medium.

[edit] Gold standard from peak to crisis (19011932)

[edit] Abandoning the standard to fund the war
The British government ended the convertibility of Bank of England notes to gold in
1914 to fund military operations during World War I. By the end of the war Britain was
on a series of fiat currency regulations, which monetized Postal Money Orders and
Treasury Notes. The government later called these notes banknotes, which are different
from US Treasury notes. The United States government took similar measures. After the
war, Germany, losing much of its gold in reparations, could no longer coin gold
"Reichsmarks," and moved to paper currency, although the Weimar Republic later
introduced the "rentenmark," and later the gold-backed reichsmark in an effort to control
hyperinflation.
In the UK the pound was returned to the gold standard in 1925, by a somewhat reluctant
Winston Churchill. Although a higher gold price and significant inflation had followed
the WWI ending of the gold standard, Churchill returned to the standard at the pre-war
gold price. For five years prior to 1925 the gold price was managed downward to the prewar level, causing deflation throughout those countries using the Pound Sterling. This

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deflation reached across the remnants of the British Empire everywhere the Pound
Sterling was still used as the primary unit of account. The British government abandoned
the standard again on September 20, 1931. Sweden abandoned the gold standard in
October 1931, the U.S. in 1933, and other nations were, to one degree or another, forced
off the gold standard.

[edit] Depression and World War II

[edit] British hesitate to return to gold standard
During the 19391942 period, the UK depleted much of its gold stock in purchases of
munitions and weaponry on a "cash and carry" basis from the U.S. and other nations.
[citation needed]
This depletion of the UK's reserve convinced Winston Churchill of the
impracticality of returning to a pre-war style gold standard. John Maynard Keynes, who
had argued against such a gold standard, became increasingly influential. He proposed a
more wide ranging version of the "stability pact" style gold standard, later expressed in
the Bretton Woods Agreement.

[edit] Post-war international gold standard (19461971)

Main article: Bretton Woods system

[edit] Theory
The theory of the gold standard rests on the idea that inflation is caused by an increase in
the supply of money, an idea advocated by David Hume, and that uncertainty over the
future purchasing power of currency depresses business confidence and leads to reduced
trade and capital investment.

[edit] Differing definitions of gold standard

If the monetary authority holds sufficient gold to convert all circulating money, then this
is known as a 100% reserve gold standard, or a full gold standard. In some cases it is
referred to as the Gold Specie Standard to more easily separate it from the other forms of
gold standard that have existed at various times. The 100% reserve standard is generally
considered unworkable because the quantity of gold in the world is too small a quantity
of money to sustain current worldwide economic activity and the "right" quantity of
money (i.e. one that avoids either inflation or deflation) is not a fixed quantity, but varies
continuously with the level of commercial activity.
In an international gold-standard system, which may exist in the absence of any internal
gold standard, gold or a currency that is convertible into gold at a fixed price is used as a
means of making international payments. Under such a system, when exchange rates rise
above or fall below the fixed mint rate by more than the cost of shipping gold from one
country to another, large inflows or outflows occur until the rates return to the official
level. International gold standards often limit which entities have the right to redeem

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currency for gold. Under the Bretton Woods system, these were called "SDRs" for
Special Drawing Rights.
[edit] Perceived stability offered by gold standard
The gold standard, in theory, limits the power of governments to inflate prices through
excessive issuance of paper currency. It is also supposed to create certainty in
international trade by providing a fixed pattern of exchange rates. Under the classical
international gold standard, disturbances in the price level in one country would be
wholly or partly offset by an automatic balance-of-payment adjustment mechanism called
the "price specie flow mechanism." At the time of the Bretton Woods agreement, it was
believed that markets were always internally clear; Say's Law. However, in practice,
wages, not capital, depreciate in price first.
.
Few lawmakers[attribution needed] today advocate a return to the gold standard, other than
adherents the Austrian school and some supply-siders. However, many prominent
economists have expressed sympathy with a hard currency basis, and have argued against
fiat money, including former US Federal Reserve Chairman Alan Greenspan and macroeconomist Robert Barro. Greenspan famously argued the case for returning to a gold
standard in his 1966 paper "Gold and Economic Freedom", in which he described
supporters of fiat currencies as "welfare statists" hell-bent on using monetary printing
presses to finance deficit spending. He has argued that the fiat money system of today has
retained the favorable properties of the gold standard because central bankers have
pursued monetary policy as if a gold standard were still in place.
The current monetary system relies on the US Dollar as an anchor currency which
major transactions, such as the price of gold itself, are measured in. Currency
instabilities, inconvertibility and credit access restriction are a few reasons why the
current system has been criticized. A host of alternatives have been suggested, including
energy-based currencies, market baskets of currencies or commodities; gold is merely
one of these alternatives.