Question

1. Monetary Operations Under a Gold Standard. It is 1900 and most of the world is operating under the gold standard. In Pogo, the central bank starts 1900 with 120 M in gold reserves and 80M in domestic assets consisting of Pogo Treasury Bills and perhaps loans made to member commercial banks (domestic assets).   It has 200M in liabilities in the form of deposits made by its member banks as well as Pogo Reserve Notes held by the non-banking public. The Pogo Reserve Act, which established the Pogo Reserve, requires the central bank to hold at least 40% in gold reserve (in other words, its liabilities – deposits by member commercial banks and currency in the hands of the public – are back by a reserve requirement of 40% gold).

During the year, Pogo runs a current account surplus of 85M. Private Citizens of Pogo start 1900 with 200M in Foreign assets, and ends the year with 350M. Foreign Citizens, on the other hand, start 1900 with 100 M in Pogo assets and end the year with 115M in Pogo assets.   

Given this information, please answer the following question

A.         From this information, what should be the central bank’s gold position at the end of the year? Be sure you explain how you got this answer. What will happen to the stock of high-powered money?

B.         What is the (theoretical) change in prices that the economy of Pogo should experience as a result of the information above? Express in percentage terms. Explain your reasoning.

C.         Suppose the central bank of Pogo attempts to completely sterilize these gold flows. Can Pogo do it? Why or why not? Precisely what must it do if it does completely sterilize? If it can’t completely sterilize the gold flows, how much can it sterilize? What will happen to prices in this situation? (you can speak in general terms here, or for extra credit, give me a specific amount).

D.         Keynes, when reflecting back on the Classical Gold Standard Era of 1870 – 1914, noted that one problem of the system was that many of the world’s countries failed to follow ‘the rules of the game’ whereby countries could use monetary policy to correct imbalances on the trade accounts. How should Pogo, in this situation, respond to these gold flows if it were to follow the rules? Do these follow along the same lines described by Keynes? (Be careful here… you’ve got to think). Explain exactly what would happen if we followed Keynes’ rules. Why (or why not) are your rules different?

E.         Suppose, instead of running a current account surplus of 85M, that current account surplus was 55M. All other information given up top is the same.   Argue that Pogo is now has a big problem. What is it? Can it still sterilize the gold flows? Why or why not.

Answer 1

a) Central banks had two overriding monetary policy functions under the classical Gold Standard: Maintaining convertibility of fiat currency into gold at the fixed price and defending the exchange rate. Speeding up the adjustment process to a balance of payments imbalance, although this was often violated.In 1900 the gold dollar was declared the standard unit of account and a gold reserve for government issued paper notes was established. Greenbacks, silver certificates, and silver dollars continued to be legal tender, all redeemable in gold.Gold plays an important part in central banks’ reserves management, and they are significant holders of gold. This gold reserve data – compiled using IMF IFS statistics – tracks central banks’ reported purchases and sales along with gold as a percentage of their international reserves.

Quarterly official gold holdings from 2000, as well as the latest available month-end data for the Top 100 holders.

Monthly and annual detailed changes in gold reserves from January 2002.

Annual sales by CBGA signatories from 1999.

b) The pogo has a major impact in the prices of the economy . The impact that a change in value has on the consumer demand for a product or service in the market. The price effect can also refer to the impact that an event has on something's price. The price effect consists of the substitution effect and the income effect.

Changes in the price level (inflation or deflation)

When there is an increase in the price level, the demand for money increases. Conversely, when there is a decrease in the price level, the demand for money decreases.

Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of a product in relation to its price change. Expressed mathematically, it is: Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

20 Years of Price Changes in the United States how much-

At the individual level, higher gas prices mean that each of us will pay more at the gas pump, leaving less to spend on other goods and services. But higher gas prices affect more than just the cost to fill up at the gas station; higher gas prices have an effect on the broader economy.

c) Gold plays an important part in central banks' reserves management, and they are significant holders of gold. This gold reserve data – compiled using IMF IFS statistics – tracks central banks' reported purchases and sales along with gold as a percentage of their international reserves.

Mapping the world's central-bank gold, GDP, population & capital flows...

COMPARE THE WORLD's gold reserves, population and gold per capita with our sortable table.

How much gold does the US have? Which countries have the most gold per capita and how have countries gold reserves changed in the past decade?

Simply click in the column headings of the table below to sort the data.

Central Bank Gold Reserves

Country	Population 2018	Gold reserves 2009 (tonnes)	Gold reserves 2019 (tonnes)	Gold reserves % change	Gold reserves per head (grams)
United States	327,167,434	8,133	8,133	0%	25.01
Germany	82,927,922	3,407	3,370	-1%	40.75
Italy	60,431,283	2,452	2,452	0%	40.50
France	66,987,244	2,435	2,436	0%	36.30
Russia	144,478,050	649	2,113	226%	14.62
China	1,392,730,000	1,054	1,853	76%	1.34
Switzerland	8,516,543	1,040	1,040	0%	123.06
Japan	126,529,100	765	765	0%	6.04
Netherlands	17,231,017	612	612	0%	35.75
India	1,352,617,328	558	600	8%	0.45
Portugal	10,281,762	383	383	0%	37.14
Uzbekistan	32,955,400	175	355	103%	10.95
Kazakhstan	18,276,499	70	350	397%	19.43
Saudi Arabia	33,699,947	323	323	0%	9.81
United Kingdom	66,488,991	310	310	0%	4.70
Lebanon	6,848,925	287	287	0%	47.16
Spain	46,723,749	282	282	0%	6.04
Austria	8,847,037	280	280	0%	31.83
Turkey	82,319,724	116	254	118%	3.14
Belgium	11,422,068	228	227	0%	19.98
Philippines	106,651,922	155	198	28%	1.89
Algeria	42,228,429	174	174	0%	4.20
Venezuela	28,870,195	361	161	-55%	5.04
Thailand	69,428,524	84	154	83%	2.23
Poland	37,978,548	103	129	25%	3.39
Singapore	5,638,676	127	127	0%	22.70
Sweden	10,183,175	126	126	0%	12.50
South Africa	57,779,622	125	125	0%	2.21
Mexico	126,190,788	9	120	1301%	0.93
Libya	6,678,567	144	117	-19%	18.30
Greece	10,727,668	112	113	1%	10.52
South Korea	51,635,256	14	104	624%	2.03
Romania	19,473,936	104	104	0%	5.30
Iraq	38,433,600	6	96	1541%	2.52
Kuwait	4,137,309	79	79	0%	19.09
Indonesia	267,663,435	73	79	8%	0.30
Egypt	98,423,595	76	78	4%	0.80
Australia	24,992,369	80	69	-14%	2.79
Brazil	209,469,333	34	67	100%	0.32
Denmark	5,797,446	67	67	0%	11.54
Pakistan	212,215,030	65	65	-1%	0.33
Argentina	44,494,502	55	55	0%	1.24
Finland	5,518,050	49	49	0%	8.92
Belarus	9,485,386	23	47	103%	4.94
Jordan	9,956,011	13	44	241%	4.49
Bolivia	11,353,142	28	43	50%	3.85
Bulgaria	7,024,216	40	40	1%	5.71
Malaysia	31,528,585	36	39	7%	1.23
Burundi	11,175,378	0	38	128492%	3.54
Peru	31,989,256	35	35	0%	1.08
Slovakia	5,447,011	32	32	0%	5.83
Hungary	9,768,785	3	32	924%	3.22
Qatar	2,781,677	12	31	152%	11.84
Syria	16,906,283	26	26	0%	1.41
Ukraine	44,622,516	27	24	-10%	0.54
Tajikistan	9,100,837	2	22	868%

The United States holds the number one spot with over 8,000 tonnes of gold in its vaults – nearly as much as the next three countries combined. For seven consecutive years the Russian Central Bank has been the largest purchaser of gold, increasing its holdings by 274 tonnes in 2018

Sterilization under a gold standard So if one country enjoys a trade surplus, this results in it enjoying a net inflow of gold from its deficit trading partners. The automatic balancing mechanism is then for the surplus nation's money supply to be expanded by the inflowing gold.

d) The most perfect monetary system humans have yet created was the world gold standard system of the late 19th century, roughly 1870-1914. We don’t have to hypothesize too much about what a new world gold standard system could look like. We can just look at what has already been done.Contrary to popular belief, people generally did not conduct commerce with gold coins. Yes, gold coins existed, but people mostly used paper banknotes and bank transfers, just as they do today. In 1910, gold coins comprised $591 million out of total currency (base money) of $3,149 million in the United States, or 18.7%. These gold coins were probably not used actively, and served more as a savings device, in a coffee can for example.

Silver coins were also used, but by then they had become token coins, just like our token coins today. By 1910, most countries in the world officially had “monometallic” monetary systems, with gold alone as the standard of currency value. This eliminated many of the difficulties of bimetallic systems, which had caused minor but chronic problems in the earlier 19th century.

Also contrary to popular belief, there was no “100% bullion reserve” system, in which each banknote was “backed” by an equivalent amount of gold bullion in a vault. In the United States in 1910, gold bullion reserve coverage was 42% of banknotes in circulation.

For other countries, we can refer to Monetary Policy Under the International Gold Standard: 1880-1914, by Arthur Bloomfield. It was published in 1959. Bloomfield provides references to major central bank balance sheets around the world. He summarizes various “reserve ratios,” but includes not only gold bullion but also foreign exchange reserves (i.e., bonds denominated in foreign gold-linked currencies). The “reserve ratios,” on this basis for 1910, were 46% in Britain, 54% in Germany, 60% in France, 41% in Belgium, 73% for the Netherlands, 68% for Denmark, 80% for Finland, 75% for Norway, 75% for Switzerland, 55% for Russia, and 62% for Austro-Hungary. Reserve ratios for gold bullion alone would be, naturally, less than these numbers.

e) A current account surplus means an economy is exporting a greater value of goods and services than it is importing. A country with a current account surplus will have a deficit on the financial/capital account. ... Lower import spending may mean people are spending more on domestic goods rather than buying foreign goods.In 2016, according to the World Bank, the ten countries with the largest current account surpluses were Germany, China, Japan, South Korea, the Netherlands, Switzerland, Singapore, Italy, Thailand and Russia. These current account surpluses finance current account deficits in other nations . Sterilization is a form of monetary action in which a central bank seeks to limit the effect of inflows and outflows of capital on the money supply. Sterilization most frequently involves the purchase or sale of financial assets by a central bank, and is designed to offset the effect of foreign exchange intervention.