Gold Standard

The United States remained on a gold standard guaranteeing a price of $20.67 an ounce of gold until 1933. After President Franklin D. Roosevelt’s inauguration in that year, transactions in gold were prohibited. All gold coins, bullion, and gold certificates had to be surrendered at Federal Re­serve banks and exchanged for notes or deposits. Gold certificates were issued by the treasury as receipts for gold purchases. Until 1933 they could be redeemed on demand for gold at the official gold price. On January 31, 1934, the United States adopted a gold exchange standard at $35 an ounce. This meant that the dollar was convertible into gold for purposes of for­eign transactions, but private gold ownership in the United States was still prohibited. Even this limited convertibility was suspended in 1971.

Seigniorage The first source of revenue from monopoly supply of paper money is seigniorage, the term applied originally to the mint’s charges for coinage. Seigniorage is also the difference between the face value and the intrinsic value of a monopoly supplied money. For example, if gold dollars had been debased to only 40 percent of their original gold content but their supply held constant through monopoly control, then the seigniorage would have been 60 percent. The monopoly profit or seigniorage is all the gold left over after the recoinage. It could have been used, for example, to import guns and ammunition from abroad. Indeed, increased military expenditure was usually the reason for extracting more seigniorage. Great­est seigniorage accrues, of course, from substituting paper currency notes for precious metal coins. Provided the supply of paper money equals the quantity of coins withdrawn in exchange, the revenue from monopoly supply of paper notes equals the value of the gold acquired minus the relatively small costs of note production and forgery prevention.

Government monopoly in the money supply process is not always necessary. The government could be responsible for defining the monetary standard but not for supplying any money under it. If the government defines the monetary unit in terms of gold, silver, or some foreign curren­cy, the supply of money could be left entirely to the private sector. For example, Panama defines its monetary standard as one U.S. dollar. The supply of U.S. dollars in Panama is left entirely to the private sector. Pan­ama has no central bank and the Panamanian government can collect no revenue from seigniorage or the inflation tax. Similarly, a gold standard might be established with government defining the dollar in terms of so many grains of gold. Then just as banks supply deposit money with guar­anteed convertibility into paper dollars, so could the private sector supply deposit money with convertibility into gold.

From a gold standard, it is a simple logical step to a composite com­modity standard. In practice, banks would not redeem deposits with a shopping basket containing the exact items in their specified proportions; however, if a generally acceptable price list was available, redemption could be made in one or a small number of commodities, such as gold and silver.

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