Transcript postdevaluation monetary policy

GOLD,MONETARY
POLICY, AND INFLATION
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MUSTAFA ERGAZİLİ 108592
SÖZALP KAHVALTICI 108697
ANGE AKONO 109345
GOLD,MONETARY POLICY, AND
INFLATION
INTRODUCTION
 GOLD STANDARD
 MONEY AND PRICES in US
 ESTABLISHMENT OF FEDERAL RESERVE
 POSTDEVALUATION MONETARY POLICY
 INFLATION
 CONCLUSION
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DEFINITION OF 'GOLD STANDARD'
Gold Standard : Monetary system in which a
country's government allows its currency unit to be
freely converted into fixed amounts of gold and vice
versa. The exchange rate under the gold standard
monetary system is determined by the economic
difference for an ounce of gold between two
currencies. The gold standard was mainly used
from 1875 to 1914 and also during the interwar
years.
GOLD STANDARD (CONT.)
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On September 20, 1931, the British government
announced that England was going off the gold
standard. It would no longer exchange gold for an
account at the Bank of England or for British
currency, the pound sterling.The government
said this is a temporary action but it was the
mark of the beginning of the end of gold
standard.
GOLD STANDARD (CONT.)
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Most of the government officials were thinking
that quitting from gold would be very harmful for
the government and for the economy but despite
the dire predictions of government officials,
shareholders viewed casting off the gold standard
as good for the economy and even better for
stocks.
GOLD STANDARD (CONT.)

The stock market gave a ringing endorsement to
the actions that shocked conservative world
financiers. In fact, September 1931 marked the
low point of the British stock market, while the
United States and other countries that stayed on
the gold standard continued to sink into
depression.As a result of this depression a year
and half later US joined Britain in giving up gold
standard and finally every nation started to use
paper money standard.
MONEY AND PRICES
Why is the quantity of money so closely connected to
the price
level?
FEDERAL RESERVE
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The Federal Reserve System was created on
December 23, 1913,largely in response to a series
of financial panics.
The U.S. Congress established three key
objectives for monetary policy in the Federal
Reserve Act: Maximum employment, stable
prices, and moderate long-term interest rates
THE FALL OF GOLD STANDARD

To prevent a steep loss of gold, Great Britain took
the first step and abandoned the gold standard
on September 20, 1931, suspending the payment
of gold for sterling.18 months later, on April 19,
1933,the US also suspended the gold standard as
the Depressionand financial crisis worsened.
THE FALL OF GOLD STANDARD
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The financial markets loved the government’s
new-found flexibility,and the reaction of the U.S.
stock market to gold’s overthrow was even more
enthusiastic than that in Great Britain. Stocks
soared over 9 percent on April 19 and almost 6
percent the next day.
POSTDEVALUATION MONETARY
POLICY
As the part of the Bretton Woods agreement, U.S.
government promised to exchange all dolars for gold
held by foreign central banks at the fixed rate of $35
per ounce.
 In the postwar period, inflation increases and the
dollar bought less and less, gold seemed more
attractive to foreigners. U.S. gold reserves began to
decrease.
 As the gold reserves decreased Congress removed
the gold-backing requirement for U.S. currency in
1968.
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1.
Government admitted that domestic monetary
policy would not be the subject to the discipline of
gold.
On August 15,1971 President Nixon announced the
« New Economic Policy » which was;
Freezing wages and prices and closing the «gold
window» that was enabling foreigners to exchange
U.S. currency for gold. The link of gold to money
was permanently broken.
POSTGOLD MONETARY POLICY
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With the dismantling of the gold standard, there was no
longer any constraint on monetary expansion, either in
U.S. or in foreign countries.
In 1975 U.S. Congress obliged the central bank to
announce monetary growth targets. Three years later
Congress passed the Humphrey-Hawkins Act.
But unfortunately the FED largely ignored the money
targets it set in 1970s because surge of inflation in 1979
brought increased pressure on the Federal Reserves to
change its policy.
In 1979 Paul Volcker announced radical change in the
implementation of monetary policy. No longer Federal
Reserve set interest rate to guide the policy. Instead it
would exercise to control the money supply.
THE FEDERAL RESERVE AND
MONEY CREATION
When the Fed wants to increase the money supply it
buys a government bond in the open market. What
is unique about Fed is that when it buys
government bonds it pays for them by crediting the
reserve account of the bank of the customer from
whom the Fed bought the bond and thereby creating
the money.
 If the Fed wants to reduce the money supply, it sells
government bonds from its portfolio.
 Open Market Sale
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HOW THE FED’S ACTIONS AFFECT
INTEREST RATES
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Federal Funds Market and Federal Funds Rate
If the Fed buys securities, then the supply of reserves
is increased and the interest rate on federal funds goes
down because banks then have ample reserves to lend.
If the Fed sells securities the supply of reserves is
reduced and the federal funds rate goes up because
banks scramble for the remaining supply.
Interest rates are an extremely important influence on
stock prices because interest rates discount the future
cash flows from stocks. Therefore bonds compete with
stocks in investment portfolios.