Gold standard system (金本位制)

Gold standard system is a monetary system that a fixed quantity of gold represents value of the currency in a country, and so the prices of goods also represent a certain value of gold. In this case, the currency of the country can be converted into the certain amount of gold, which is called mint parity of gold.

In a narrow sense, it is the system to regard gold as the standard money that forms basis of the monetary system in a country, giving the governmental recognition of free coinage and melting, and admitting unrestrained passableness.

This is especially called gold specie standard system. This actually means to circulate gold itself as currency. In practice, it often happens that gold coins are not suitable for circulation of currency due to the shortage of the reserved coin and its inconvenience of portability due to its value. To address such situation, the central bank issued convertible currency and subsidiary currency, which were guaranteed to be exchanged with gold bullion in order to support the value of the currency. This is called gold bullion standard system.

In general, a gold standard system included both gold specie standard and gold bullion standard system. Furthermore, it is called gold exchange standard system by considering a foreign exchange transaction as the currency is converted indirectly to gold in other countries, even if a country is unable to implement gold standard system domestically when a certain degree of the currency convertibility between countries is guaranteed. In a broader sense, gold standard system includes gold exchange standard system.

Equilibrium process
Gold standard system is considered to have an effect on providing equilibrium to international balance of payment. When there are several countries, which implement gold standard system, 'gold' is practically the universal currency even though their currencies in circulation are different.

For example, there is a country that maintains its balance of current account.

And if an economy of the country is booming as the capital investment increased.

If the amount of domestic savings stays unchanged, the country would post a current account deficit.

The current account deficit means that the amount of its home currency (gold) outflow exceeds that of the inflow.

This indicates decrease in domestic money stock.

The reduction of the money stock causes a rise in interest rates, which leads to the reduction in capital investment.

The economy will be depressed until the current account regain equilibrium, and then it will be balanced.

In the course of this process, if the foreign capital flows into the domestic market while interest rates are rising, capital investment will not be reduced and current account imbalance will continue. As long as the total amount of current account and the capital account is balanced, the amount of domestic gold will not fluctuate and international balance of payment will become equilibrium.

As a reverse process, the struggling economy will recover from the recession when the amount of gold inflow surpasses its outflow.

International gold standard system as recession regime (Golden Fetters)
Gold standard system is apprehended as one of the fixed exchange rate system. Once each country determines an exchange rate between home currency and gold, the parity of gold becomes automatically fixed, and the currency authority in each country introduces monetary policy, which is adjusted to the financial situation to sustain the parity of gold.

Gold standard system has a characteristic of fixed exchange rate system, which is different from dollar peg system, etc. That is the asymmetry property between the monetary policies in a gold-inflow country and a gold-outflow country. For example, gold flowing out of the home country means that the private sector is repurchasing gold through their requests for conversion, and the reduction of the supply of its home currency will eventually bring equilibrium to domestic economy. On the other hand, a gold-inflow country would purchase gold from the private sector and expand the money supply. However, if the country does not want to increase the money supply, it can control and hamper the expansion by disposing of state-owned assets to the private sector, and such gold sterilization policy will impose credit crunch on other countries. Gold standard system is a governmental policy that fundamentally has a strong financial tightening effect and restriction.

The idea of gold standard system is thought to have long been existed, but gold coins were too valuable to be circulated for practical purposes as a currency, so people hoarded gold for accumulation of wealth or spent it only for expensive payments. The first legal implementation of gold standard system was Coinage act (55 GeorgeIII.c.68) in 1816, England, in which the country gave the governmental recognition of free coinage and melting to the gold coin called sovereign (coined in 1817) and circulated the coin as the only unrestrained legal currency, one pound.

Later, European countries followed one after another, and gold standard system was established globally by the end of the 19th century. In 1871, Japan introduced gold standard system with a new currency unit, yen (circulated money), by enacting 'New Currency Act,' but vulnerable economic infrastructure in Japan at that time allowed gold coin, specie, to flow out continuously. Then Japan implemented interim silver standard system after the bimetallic standard system and returned to gold standard system after the Japanese-Sino War.

But, each nation had discontinued gold standard system due to the aftermath of World WarⅠand shifted to managed currency system. The government needed to collect gold coins to pay the increased external payment due to the war, and as a result, the government had to lay an embargo on the export of gold and suspend currency conversion to gold. The shift was also affected by London (the City), the world largest exchange settlement market, being forced to suspend its market transactions due to the development of the state of the war and disruption of the transportation of exchange bills between countries. For example, in Japan, at the end of December 1913, the gold reserve of Bank of Japan was 130 million yen and the overseas gold reserve that all was in London was 246 million yen. Japan also operated its 80-90% of foreign exchange settlements in London until the disruption of the transportation of exchange bills in August 1914 (Trans-Siberian Railway transported bills at the time).

Later, the countries returned to gold standard system, starting with the United States of America readopting the system in 1919, but as the system again became dysfunctional due to the outbreak of the Great Depression in 1929, all the countries abandoned gold standard system as France being the last one to abandon in June 1937.

Japan missed an opportunity to return to gold standard system since it had to deal with the aftermath of the Great Kanto Earthquake, and Osachi HAMAGUCHI cabinet announced 'the lifting of an embargo on the export of gold' in 1930, but the embargo again laid by Tsuyoshi INUKAI cabinet in the next year.

After World War II, IMF-led framework (International Monetary Fund led frame work; so-called the Bretton Woods system) was founded and gold and dollar standard system was established. While other countries were suffering from battered economies, the United States of America held the world largest amount of gold. This made each country adopt gold and dollar standard system in which its currency was indirectly linked to the gold through the fixed exchange rate system with US dollar, the currency of the United State of America convertible into gold.

However, after the so-called Nixon Shock on August 15, 1971, the United States of America announced the discontinuance of the conversion of US dollar into gold and each country shifted to floating exchange rate system by 1973, which brought the complete end to gold standard system.

Japanese standard gold coins (old 1, 2, 5, 10, 20 yen, and new 5, 10, 20 yen) withdrew from circulation on May 31, 1987, which was the beginning of the world with managed currency system both in name and in reality.

[Original Japanese]