Commodity Standards
Under a commodity standard, the monetary unit is defined as a certain weight and fineness of precious metal
Gold Flow
-higher real price (ppg) brings greater quantity supplied
-exploit sources with higher extraction / refining cost
-higher real price (ppg) reduces flow quantity consumed
-substitution into other metals for industrial use
Gold Stock Curves Shift
- Monetary stock demand curve for gold shifts out
- large country joings the international gold standard
- real income growth in gold-standard countries - Monetary stock demand curve for gold shifts in
- large country leaves the gold standard
- banks manage with even lower reserve ration
monetary stock supply shifts are reversed by assumulation
- Monetary stock supply curve for gold shifts out
- discovery and looting of Aztecs and sunken ship salvage - Monetary supply curve for gold shifts in
- sudden craze for genuine gold jewelry
- revolutionary semiconductor utilizing gold hits the market
Flow Shifts
- Flow demand curve shifts out
- new industrial use for gold - Flow demand curve
-shifts in
new industrial substitute for gold - Flow supply curve shifts out
-new gold mines opened (California 1849-59)
-cyanide process invented - Flow supply curve shifts in
- existing mine collapses
- exogenous miner’s wage increase
Commodity Standards and the macroeconomy
- Lower average inflation and corresponding inflation expectations
- Lower deadweight costs on money-holders and savers - Lower price level uncertainty in the long-run
- Thicker bond markets
- Price level fluctuations and the Fischer effect - Network benefits
- Lower transaction costs
- Negligible exchange rate risk - Lower resource costs of gold mining
- Gold price has risen drastically since the end of the gold standard. - Fiscal and monetary discipline
Bimetallism
case where the monetary unit is defined by two precious metals (silver and gold), with the two’s exchange rate being fixed to a definite proportion
Issues with Bimetallism
- It requires the fixing of exchange rates between two commodities (silver and gold)
- Eventually, the real exchange rate moves far enough from the one set by edict, and one of the two metals becomes undervalued, ceases to circulate.
- Over a long-enough time span, de jure bimetallism becomes de facto monometallism.
Financial Market
Borrowing and lending of funds
Bank Balance Sheet
Assets: Loans
Liabilities: Deposits (demand, savings, time)
Equity Capital: Funds put forth by the owners of shareholders of the bank to serve as a cushion in the event of illiquidity, runs, or panics. Can be used to compensate depositors.
