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The Case:

Suppose you have been given the responsibility of introducing a new currency for a newly established country. You call a meeting of renowned economist, bankers and financial experts of the country in order to decide whether the currency should be backed by equivalent gold reserves or not? During the meeting, you observe that there is a difference of opinion among the experts. Some of the experts are of the view that the currency should be backed by equivalent gold reserves while others think opposite.

 

Required:

What do you think regarding this particular issue? Whether the currency should be backed by equivalent gold reserves or not? In either case (yes or no), support your comments with logical rationale.


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Views: 1188

Replies to This Discussion

Idea 1 :

Money has to be anchored to a fixed commodity in order to prevent rampant inflation. Simply printing money without anything backing it is simply dangerous and could detroy the value of people's savings. It is true that economies expand and their value should increase as new products are created, a gold backed currency prevents asset bubbles as credit is limited based on the available gold or silver to back the printing of new bank notes. During an economic expansion, the limited amount of currency floating around the market prevents inflation by increasing how many more goods can a single note buy because it strengthens due to a limited supply of it. After the United States totally closed the gold window in 1971, the value of the dollar has steadily declined and it now takes more bank notes to buy the same items necessary for daily living.

 

mjhy nai lgta gold resrv rkhna chahey agr gold he na ho country mei to phr currency kase issue ho gi, m apki bt manti hun pr jb gold he na ho to tb kya hoga, i knw u give the right point k es s inflation nai ho gi pr ap meri bt ka ans den agr gold na hoga tb kya hoga

Opinion No 2 : (I think it would be helpful)

Absolutely not. One common misconception about money is that it has to be backed by a commodity such as gold or silver. Money is merely a representation of the perception of value. Instead of being backed solely by gold, money should only be backed by trust. Trust on which the note will be honored by a merchant in exchange for his merchandise or as payment for any debt. Another factor that backs the strength of money is confidence for those who use it. This confidence is imposed by governments through careful regulations preventing markets to succumb into irrationality which damages the value that money is supposed to physically represent. Gold is subject to hoarding that could result in serious shortage. If the economy demands more money to represent the value created, it will result in a shortage and thus a liquidity crisis will emerge. The great depression is partly caused by the shortage of gold that supposed to back the enormous size the economy at that time has become after the first world war. Today's economic growth would never happen if credit is based on the gold available to satisfy it.

Many economists,  think that the solution is for all money to be backed by gold. By doing so, the ability of the government to print more money is limited by the supply of gold. Indeed, this is an admirable capability as fiat money damages an economy. But gold is a commodity that grows only about 2% a year (and declining). It also has commercial purposes so not all gold is available for backing money.

 

What this means is that if the economy is growing faster than the supply of gold, then prices of things will be forced down. A shortage of money causes deflation just like an abundance of money causes inflation.

 

Even worse, the gold already mined in the world does not come close to the amount of financial paper existing in one form or another. To match the amount of gold with paper would require a huge deflation of prices and not just a one-time event. It would continue to depreciate as the world’s economy grew faster than the production of gold.

 

 what u think about this statement, r u agree?

Ya agree but if u read the economists opinion u will get 50 , 50 idea for yes and no....

so its upto u now that how would you take their ideas and how would you create your own opinion....

Adeel Ahmed gud keep it up & thanks 

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thanks adeel for idea

thenx adeel

Thanx ADEEL AHMED!!!

Thanks A Lot...

i think ais ka ans yes he

q k gold pe issue hone chahiye.

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