The Gold Standard can be divided into two types: full Gold Standard and “partial” Gold Standard. A 100 percent reserve Gold Standard or full Gold Standard occurs when all circulating money can be represented by the appropriate amount of gold. Whilst in “partial” Gold Standard, circulating notes can be redeemed for their face value; it can be either higher than its actual value or lower.
Why gold being selected as a reserve for most countries and even for today? Many nations hold the gold reserves in significant quantity in order to defense their currency and put a hedge against the US dollar. Some more, the weakness of the US dollar can be offset by strengthening the gold prices. Yet, compared to other precious metals or major competitors such as US dollar and real estate, none of them has the stability as the gold as well as its rarity and durability. Gold is also used as a store of value starting from the early monetary system since it is high value enough. It is high in utility and density, it is able to resist to corrosion, it is uniform, and it is divisible easily. As we know, banking began by depositing the gold into a bank and it could be transferred from one bank to another bank. Until today, gold remains to be the main financial asset for most of the central banks.
By looking back at the past, before 2000 BC, the first metal that human being used as a currency in trade was silver. According to the history, we know that gold has been used as a mean of payment since long time ago. After 1500 years, the first coinage of pure gold was introduced. The adoption of Gold Standard was preceded after that. Yet, the fiat monetary system came and took over the Gold Standard system during the outbreak of World War I. This happened for most of the nations are due to the excessive public debt and the government is unable to repay all the debt in gold or silver.
IMPORTANCE OF STUDY / RESEARCH IN GOLD STANDARD
As a banking and finance student, we have to study and understand any history that regard to the field, included the topic of our assignment this time – Gold Standard. This is because people live in present and they have to plan for and worry about the future. History is the study of past. It gives the information of the past in order to anticipate what is yet to come. Understanding history is important to develop the linkages to predict the future. Yet, history also provides us abundant of information about how the Gold Standard was formed and how it operated. Understanding the operations of the Gold Standard is difficult currently since it was collapsed and we cannot be exposed ourselves to it. The current data that we have is relied on what happened into the past. By using the historical materials, we can make our own analysis on the Gold Standard and understand its weaknesses and problems.
Besides, the study of the Gold Standard can help us to understand the changes of the monetary system and how the financial world affects the global economies. From the historical information, we know when the adoption of the Gold Standard was and when the collapse of the Gold Standard was. Yet, we also know that the monetary system had been changed over time to time and which system was being created in order to take over the original system. For instance, Gold Standard was took over by Bretton Woods System and followed by Contemporary Monetary System. There is always a reason there for the changes made. This is because of the discovery of the shortages of the system. Once the deficiencies being located, the new system would be established. If there is still do not have any actions taken, it will affect the economies of the world since finance cannot be separated with the economy.
In addition, as a financial student, we have to understand about the differences between fiat money and Gold Standard. From the project we done, we know that fiat money is money that no have intrinsic value and cannot be redeemed for any commodity. The paper currencies and coins that are available in markets nowadays are considered as fiat money and the strength of the economy of the issuing nation is the determinant used to determine the value of fiat money. Mostly, inflation will follow with the enormous issuing of fiat money. Whilst, The Gold Standard is a monetary system in which the standard unit of currency is a fixed weight of gold or freely convertible into gold at a fixed price. Under the Gold Standard system, paper money which circulates as a medium of exchange is convertible into gold on demand. The exchange rate between paper or fiat money and gold is fixed.
PART II : THE GOLD STANTARD 2.1 HISTORY
2.1.1 History of Gold Standard
The first nation that officially adopted the Gold Standard system is England (also called as Great Britain) in 1821. The list below is the dates of adoption of the Gold Standard system:
1873 Latin Monetary Union
1875 Scandinavia(Monetary Union)
1900 United States
During that century, there was a dramatic increase in global trade and production which brought enormous discoveries of gold. The discoveries aided the Gold Standard remain intact well on the following century. The emergence of the International Gold Standard is on 1871 since the Germany also started to use the system. By 1900, most of the developed countries were linked to the Gold Standard system, but surprise that the United States was the last nation to enter. This is because there was the present of a strong silver lobby that forbidden gold from being the sole monetary standard with the U.S. throughout the 19th century.
The Gold Standard was at its pinnacle from 1871 till 1914. During the period, there were a near perfect ideal political contexts existed in the world. Governments tried to corporate nicely in order to make the Gold Standard system work, but the system was collapsed during the duration of the Great War in 1914. In 1925, it was reestablished. But due to the relative scarcity of gold, many countries adopted a gold-exchange standard, supplementing their gold reserves with currencies convertible into gold at a stable rate of exchange. Unfortunately, the gold-exchange standard was ended during the Great Depression. The United States had set a minimum dollar price for gold in order to aid for the restoration of international gold standard after World War II. In 1971, dwindling gold reserves and unfavorable balance of payments led the U.S. to abandon the Gold Standard system.
2.1.2 Timelines of Gold Standard
1717 The Kingdom of Great Britain went on to an unofficial Gold Standard.
1816 Gold was partially displacing silver as a standard.
1821 The Gold Standard was first out into operation in Great Britain.
1873 The Coinage Act of the United States Congress came into operation on 1st April and constituted the gold one-dollar piece as the sole unit of value.
1900 Gold Standard Act was established on 14 March 1900 and gold was the only standard for redeeming paper money.
1914 The abandonment of the Gold Standard by Russia.
1925 The return of the Gold Standard.
1971 The abandonment of the Gold Standard by the United States.
2.1.3 Timelines of Fiat Money
1690 There are three types of currency according to American History:
Certificates based on coin or bullion
(Fiat money is one type of currencies that being used during the time.)
1789 France was undergoing economic downturn and due to lack of money, fiat money being used.
1862 There was a paper currency that printed upon one side in green has been created with a promise to pay – Greenbacks.
1878 An argument in favor of honest money and redeemable currency.
1896 Paper-based global economy has been collapsed.
1913 Establishment of Fed.
Fiat money became the United States legal tender.
The mercy of the fiat money system has led to the greatest debt bubble in world history.
1933 Inflation occurred.
2008 Under the fiat money system, money as debt.
2.1.4 History of Shifting Between Fiat Money and Gold Standard in U.S.
As stated as below, there were a lot of shifting between a fiat money and gold standard had been made by the United States over the past 200 years which in order to avoid hyper-inflation. Hyperinflation occurs when the confidence in money had gone and it leads to no value in the money. As mentioned as earlier, the gold standard was over due to the reason of the government was unable to repay for the excessive of public debt in gold or silver that its countries owe.
1785-1861 Fixed Gold Standard : 76 years It was issued by American colonists for the Continent Congress in order to finance the Revolutionary War.
It was produced by the United States Federal Government.
It was authorized by the Act of March 3, 1849.
1862-1879 Floating Fiat Currency : 7 years The fiat money of the United States above is Greenbacks.
It was created to pay for the enormous cost of the Civil War.
It was the debt of the U.S. government which could be redeemable in gold at future without any specified date.
It was circulated along with the Gold certificates.
1880-1914 Fixed Gold Standard: 34 years It was ended due to the financial needs of World War I.
1915-1925 Floating Fiat Currency : 10 years It was created to pay for World War I countries.
There was insufficient of gold to support the paper currency.
1926-1931 Fixed Gold Standard : 5 years It was ended due to most of the nations tried to deposit their pounds and dollars for gold when the depression occurs.
1931-1945 Floating Fiat Currency : 14 years It was ended due to the outbreak of World War II.
1945-1968 Fixed Gold Standard : 26 years On 24 June 1968, a proclamation that Federal Reserve Silver Certificates could not be redeemed in silver was issued by President Johnson.
1971 Floating Fiat Currency : 5 months It was established by President Nixon on August 1971.
1971-1973 Fixed Dollar Standard : 2 years It was passed by the Smithsonian Agreement.
1973-today Fiat Currency : 37 years It was established by the Basel Accord.
2.1.5 Evolution of International Monetary Systems
International Monetary System had been undergoing several stages of evolution which are stated as below:
Bimetallism (before 1875)
A “double standard” in the sense that both gold and silver were used as international means of payment.
Some nations used the gold standard; some used the silver standard; and some used both.
Both gold and silver were used as money and the gold or silver contents were the determinants used to determine the exchange rates among currencies.
Classical Gold Standard (1875-1914)
Most nations agreed that
-Gold alone was assured of unrestricted coinage.
-There would be two-way convertibility between gold and national currencies at a fixed ratio.
-Gold could be freely exported or imported.
Two countries relative gold contents were be the determinants used to determine the exchange rate between two countries’ currency.
Highly stable exchange rates under the classical gold standard provided an environment that was conducive to international trade and investment.
Misalignment of exchange rates and international imbalances of payment were automatically corrected by the price-specie-flow mechanism.
Interwar Period (1915-1944)
Exchange rates fluctuated as countries widely used “predatory” depreciations of their currencies as a means of gaining advantage in the world export market.
Attempts were made to restore the gold standard, but participants lacked the political will to “follow the rules of the game”.
The result for international trade and investment was profoundly detrimental.
Bretton Woods System (1945-1971)
Named for a 1944 meeting of 44 countries at New Hampshire.
The purpose was to design a postwar international monetary system.
The goal was exchange rate stability without the gold standard.
The result was the creation of the IMF and the World Bank.
The system was a dollar-based gold exchange standard.
Flexible Exchange Rate System (1971-today)
The system was declared acceptable to the International Monetary Fund (IMF) members.
Central banks were allowed to intervene in the exchange rate markets.
Gold was abandoned as an international reserve asset.
Managed Float System (1973-today)
2.2 INTERNATIONAL GOLD STANDARD
2.2.1 Chronology of Gold and International Monetary System
1717 Master of the Mint, Sir Isaac Newton gave guinea statutory valuation of 21 shillings.
Commence of the United Kingdom Gold Standard.
1797 Occurrence of Napoleonic Wars.
Bank of England abandoned gold payments.
1816 Establishment of UK Coinage Act.
1844 Bank of England obliged to buy gold.
1870-1900 Except of China, most of the nation abandoned Bimetallic Standard and switched to Gold Standard.
1913 The United States system of reserve banks was established by Federal Reserve Act.
At least 40% of notes were gold-backed.
1917 U.S. prohibited gold exports.
1919 UK went off Gold Standard.
Establishment of London Gold Fixing.
1925 Return of Gold Standard in the United Kingdom.
Establishment of UK Gold Standard Act.
1931 The United Kingdom abandoned Gold Standard.
1933 Suspend of the United States convertibility.
Prohibition of exports, transactions, and holding of gold.
1934 Presidential Proclamation of making dollar convertible to gold again.
1936 Establishment of Tripartite Agreement (Countries involved: U.S., UK, and France)
1939 Close of London gold market due to the outbreak of war.
1944 Establishment of Gold Exchange Standard as a result of Bretton Woods Conference.
1945 International Monetary Fund (IMF) Articles of Agreement became effective.
1954 Reopen of London gold market after World War II.
1961 Establishment of Gold Pool (Members: Belgium, France, Germany, Italy, Netherlands, Switzerland, UK and Federal Reserve Bank of New York)
1967 Buying of gold increased due to the devaluation of sterling.
1968 Close of London market.
Abolishment of Gold Pool and establishment of 2-tier market.
Establishment of Special Drawing Right (SDR).
1971 Suspend of U.S. convertibility to gold.
Establishment of Smithsonian Agreement.
1972 Devaluation of the United States dollar.
1973 Suspend of dealing in foreign exchange markets by most of the central banks.
Adoption of floating exchange rate regime.
Abandonment of 2-tier gold market.
1975 Abolishment of restriction on citizen buying, selling or owning gold by U.S.
First U.S. gold auction on January.
Establishment of agreement between G10 countries and Switzerland on no attempt to peg the gold price.
1976 First gold auction by IMF on June.
1978 Disappear of formal role of gold in International Monetary System.
1979 Establishment of European Monetary System.
Final U.S. gold auction on November.
1980 Last 45 IMF gold auctions on May.
1982 The United States Gold Commission reported to Congress.
1985 Establishment of Plaza Agreement on currencies.
1987 Establishment of Louvre Accord on currencies.
1992 Sign of treaty on European Union at Maastricht.
1998 Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain joined Economic and Monetary Union (EMU).
1999 Began of EMU.
Announcement of Central Bank Gold Agreement (CBGA).
2004 Announcement of Second Central Bank Gold Agreement.
2.2.2 Gold Standard Went International
*The picture above the gold and silver coins that available around the world during 19th century.
From the chronology above, we know that most of the countries (except China) had abandoned their silver or bimetallic standard and went for a full gold standard between the years of 1871 to 1900. There is always a reason. German asked for “war indemnity” to be paid in gold by France right after the Franco-German War. German used this gold to finance a new gold standard in their home country. This had lead to an increase in the demand of gold and there was unload of tons of silver on the neighboring nations. Due to the fear towards silver inflation, the neighboring countries decided to follow German.
The list below is the date of first gold standard:
International Gold Standard existed when the following condition being fulfilled:
Gold alone is assured of unrestricted coinage.
There were two means of convertibility between gold and national currencies at a fixed ratio.
Gold may be freely imported and exported.
A Literature Review On Micro Finance Economics Essay
Microfinance refers to a variety of financial services that target low-income clients, particularly women (MIX, 2011). This has become a broadly known sector after the pioneering work and success of Grameen Bank in Bangladesh during the 80’s. Following the ‘Grameen Bank’ model, many companies – Micro Finance Institutions (MFI’s) were set up across the world with an aim of aiding the poor in having access to the financial services. The microfinance sector experienced an immense growth during the mid-2000’s (India Microfinance Business News, 2010).Due to the global recession during the late 2000’s, banks could not provide adequate on-lending funds to some of the MFI’s. Faced with liquidity crunch, the MFI’s have found new ways to access the capital market by commercialization of the business (Hoque et al, 2011). This paper’s goal is to determine the effectiveness and ethical issues in the evolution of converting the non-profit microfinance business model to a profit making model.
The term “Micro credit” did not exist before the seventies (Grameen Bank, 2011). After numerous efforts to try to eradicate poverty either by doling out handouts or subsidies, Noble Prize winner Professor Muhammed Yunus of Bangladesh came up with a unique new concept of providing small loans to the poor as a tool for poverty reduction (SKS, 2011). One of the most important departures since then has involved the shift from “microcredit”-which refers specifically to small loans-to “microfinance.”
Mersland(2009) defined microfinance as the supply of banking services to microenterprises and poor families .The broader term embraces efforts to collect savings from low-income households (Armendariz and Morduch, 2010) and, in some places, to also help in distributing and marketing clients’ output. It is one of the few market-based, scalable anti-poverty solutions providing access to financial services to poor households in rural and urban areas. To most, micro finance means the provision of very small loans (micro credit) to help the poor to invest in or scale up their small business (micro enterprises).
Over a period of time, micro finance evolved a broader into a broader range of services like credit, savings, insurance, etc. This is because providers have realized that the poor lack access to traditional formal financial institutions; therefore require a variety of financial products. The clients thus were able to finance their income generation activities, build assets, stabilise consumption and protect against risk. (Grameen bank, 2011)
Grameen Bank Post the Bangladesh famine of 1974, Prof. Yunus, started a series of experiments to test the hypotheses that if poor were supplied with “working capital” they can generate productive self employment without external assistance (Hossain, 1988). He started by lending small amounts of money to the poor households in the village of Jobra, Bangladesh. He observed that the small money he could lend to the villagers was enough to run simple business activities. Further he found that borrowers were not only profiting greatly by access to the loans but they were also repaying it reliably even though no collateral security was offered (Armendariz and Morduch, 2010) .Thus, the Grameen Bank project was born in the village of Jobra, Bangladesh, in 1976. In 1983 it was transformed into a formal bank under a special law passed for its creation. Today, Grameen Bank has more than 7.5 million borrowers since its inception and has a success rate of 65% of their borrowers who have clearly managed to improve their socio-economic conditions and have lifted themselves out extreme poverty (Grameen Bank, 2011).
In the October of 2006, Prof. Yunus and Grameen bank jointly received the Nobel Peace Prize (Yunus Centre, 2011) for their work in field of eradication of poverty. Since then, the Grameen Bank of Bangladesh holds an iconic position in the world of microfinance and hence is used as benchmark in Microfinance by most academics. The Grameen ‘model’ has been copied in more than 40 countries (Hulme, 2008). The Grameen model emerged from the poor-focussed grassroots institution. It essentially adopts the following methodology:
A bank unit is set up with a Field Manager and a number of bank workers, covering an area of about 15 to 22 villages. The manager and workers start by visiting villages to familiarise themselves with the local milieu in which they will be operating and identify prospective clientele, as well as explain the purpose, functions, and mode of operation of the bank to the local population. Groups of five prospective borrowers are formed; in the first stage, only two of them are eligible for, and receive, a loan. The group is observed for a month to see if the members are conforming to rules of the bank. Only if the first two borrowers repay the principal plus interest over a period of fifty weeks do other members of the group become eligible themselves for a loan. Because of these restrictions, there is substantial group pressure to keep individual records clear. In this sense, collective responsibility of the group serves as collateral on the loan. (Grameen bank, 2011)
The concept of Grameen bank started as non-profit organization and has now reached a point where it’s owned 94% by its borrowers and 6% by the government (Grameen Bank, 2011). Like any other commercial banks existing, Grameen Bank has become “Self-reliant” and “Pays dividends” to its owners – the borrowers. The overall goal of the Grameen bank is the elimination of poverty. (Grameen Bank, 2011)
Literature review on Microfinance There is now voluminous literature analyzing different aspects of the microfinance revolution that swept across the developing world in last thirty years (Emran et al, 2007). Armendariz and Morduch (2010) further strengthen this by saying that for many observers, microfinance is nothing short of a revolution or a paradigm shift. In simple terms, microfinance presents itself as the latest solution to the age-old challenge of finding a way to combine the banks’ resources with the local informational and cost advantages of neighbours and moneylenders (Pellegrina, 2006). It can be said that microfinance is not the first to attempt to do this, but it is by far the most successful. Pellegrina, (2006), reinstates and strengthens this point by citing Murray, 2001; Meyer, 2002 in his papers argues for example, that important differences in terms of investment decisions are due to the amount lent.
For MFIs, therefore there is ethical and economic justification for looking beyond income poverty or to move from financial intermediation to social intermediation as they use ‘trust’ (Hans, 2009) to foster group cohesiveness through networking. The model developed by Prof. Yunus is such that it has given MFIs the capacity and responsibility of empower the most vulnerable, such as women, rural artisans etc; to allow the not-yet economically-active to become so; and to create community-based structures that build mutual support and trust. Microfinance is a well-suited financial service for the micro entrepreneurs helping them in running and expanding business. These definitions not only indicate the scope of microfinance per se but also point out the need to balance the social objectives with the financial objectives of microfinance. In fact the latter is really challenging (DHAN Foundation, 2003).
Literature points out that MFI’ have responsibility to graduate as institutions of socio-economic development. Social intermediation can come naturally to them (Hans, 2009). In the emerging economies they have immense scope of functionality for developing not only financial assets but also physical and human assets. This is further argued by Prof. Yunus who claims that the sole reason for setting up the ‘Grameen Bank’ was to help the poor become self-sustained (Yunus Centre, 2011) without trying to make profits.
Another key element that cannot be over looked in the literature is that the formal banking sector has had a very limited impact on microfinance or lending to the poor (Chakrabarti, 2005). Armendariz and Morduch (2010) in their journal cite Lucas (1990) that based on his estimates of marginal returns to capital, finds that borrowers in India should be willing to pay fifty-eight times as much for capital as borrowers in the United States. This occurrence can be justified by the principle of diminishing marginal returns which says that, a simple cobbler working on the streets or a woman selling flowers in a market stall should be able to offer investors higher returns than General Motors or IBM or the Tata Group can-and banks and investors should respond accordingly. Money should thus flow from New York to New Delhi. The logic can be pushed even further. Not only should funds move from the United States to India, but also, by the same argument, capital should naturally flow from rich to poor borrowers within any given country. This goes against the argument as the poor are not accessible to financial services in spite of the broad coverage of the commercial banks (Han, 2009).
This was the starting point for microfinance as new ways of delivering loans had been needed precisely because borrowers were too poor to have much in the way of marketable assets. The biggest challenge in development, however, is the simultaneous development of investment potential and improvement of skill levels of the borrowers. There is a very real need of investments that yield higher returns than the sustainable microcredit interest rates for the microcredit initiative to be truly successful. (Chakrabarti, 2005). Due to increasing lends to non-poor clients, Prof. Yunus moved aggressively into savings mobilisation, and is very much concerned with the overall profitability of the mix of its products and has change the Grameen strategy to Grameen II, which Rather than challenging the market-based ‘financial systems approach’ the contemporary Grameen Bank vindicates it (Hulme,2008)
Another issue with the contemporary literature is the major factor holding up the scaling of operations which is cited to be the lack of funds. Many MFIs are moving in the direction of commercialisation, specifically since 2001. (Hans, 2009) The only solution is to enhance the volume of credit in line with the growth of the productive activities i.e. ‘Macro’ and not ‘Micro’ finance is needed for a larger scale of operations Access to commercial funding gives microfinance institutions freedom from reliance on donor support, but at a price. In general, commercial sources of funding are accessible only to lenders that have demonstrated that they can turn a profit, and often lenders achieve profitability by raising their interest rates on loans or serving better-off customers able to take larger, more profitable loans. That issue-the transfer of costs to poor borrowers and “mission drift”-is the basis for an at times heated disagreement around the commercialization of microfinance. (Gosh, 2005)
This is the current debate where on one hand, the commercialization, reaches more clients than any other micro lender (Gosh, 2005) , for example in Latin America. On the other, to win the (Mexico) A rating granted by Standard and Poor’s rating agency and to get attention for its public offering, it covered a relatively inefficient administrative structure by charging borrowers effective interest rates above 100 percent per year, putting its charges close to the range of moneylenders upon which microfinance was meant to improve.
Conclusion The literature shows that internationally, MFIs are perceived as a micro lending institution, focused on extremely poor women, despite the fact that it has adopted a market-based, ‘financial systems’ approach since 2001 (Hulme, 2008). It also shows that over the last 30 years, it grown from the initial model and is now a unique amalgamation of industrial (including financial) and institutional reforms in the present scenario of development economics (Hans, 2009). The current literature also lacks gap in explaining the current situation of commercialization of the microfinance industry -whether it is justified for MFI’s to have private investors? Or the does having private investors makes them a “loan-sharks” (Prof. Yunus, Forbes, 2010) and “change” the name of the business as it is no longer microfinance. Where the other argument is how much of a difference will it make to the poor borrowers as they are not concerned with the name but the “capital” the receive (Dr. Akula, Forbes, 2010).
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