The Freeman 1972 - The Ludwig von Mises Institute

6 THE FREEMAN Januarybetween the various currencyunits consisting of gold thus weredetermined by their relative measuresof gold.International AcceptabilityThe world had an internationalcurrency while on the classicalgold standard. It evolved withoutinternational treaties, conventionsor institutions. Noone had tomake the gold standard work asan international system. When theleading countries had adoptedgold as their standard money theworld had an international currencywithout problems of convertibilityor even parity. Thefact that the coins bore differentnames and had different weightshardly mattered. As long as theyconsisted of gold, the nationalstamp or brand did not negatetheir function as an internationalmedium of exchange.The purchasing power of gold,tended to be the same the worldover. Once it was mined, it renderedexchange services throughoutthe world market, moving backand forth and thereby equalizingits purchasing power except forthe costs of transport. It is true,the composition of this purchasingpower differed from place toplace. A gram of gold would buymore labor in Mexico than in theU.S. But as long as some goodswere traded, gold, like any othereconomic good, would move to seekits highest purchasing power andthereby equalize its value throughoutthenworld market. As an coinsand bullion were traded in termsof weight of gold, there were no"exchange rates" such as thosebetween gold and silver, or variousfiat monies.The Exchange-Rate DilemmaThe departure from the goldcoinstandard, set the stage forthe present exchange-rate dilemma.At first, governments beganto restrict the actual circulationof gold. They gradually establishedthe gold-bullion standard inwhich government or its centralbank was managing the country'sbullion supply. Gold coins ,verewithdrawn from individual cashholdings and national currencywas no longer redeemable in goldcoins, but only in large, expensivegold bars. This standard then gaveway to the gold-exchange standardin which the gold reserveswere replaced by trusted foreigncurrency that was redeemable ingold bullion at a given rate. Theworld's monetary gold was held bya few central banks, such as theBank of England and the FederalReserve System, that served as thereserve banks of the world. 3 But3 Cf. Leland B. Yeager, InternationalMonetary Relations (New York: Harper& Row, Publishers, 1966), p. 251 et seq.