Discussion: Financial Markets / Monetary Systems / Regional Economic Integration Replies

Gold Standard

Key Term

             The gold standard is the key term I have chosen to focus on for my discussion post. I picked the gold standard because the relevance of a currency backed by gold relates to the massive inflation that has occurred over the past year. As most currencies are no longer backed by gold, inflation is likely to occur more rapidly as governments can essentially print money with no value behind it. This dilution of the currency has occurred since the onset of the pandemic as the US government looked to aid unemployed workers during the shutdowns across the country. The gold standard is relevant as countries wouldn’t be able to print money without the price of gold being diluted as well.

Term Overview

             Saterlee (2019) explains that the gold standard occurred “when governments started issuing currency in the form of paper money, it was usually convertible into a predetermined amount of gold” (p. 146). The gold standard spread across the world and was the major backing of most currencies into the 20th century. The onset of World War I in combination with the later Great Depression eventually led to the end of the Gold Standard, with the United States among the last to keep it in practice until the mid-1930s (Saterlee, 2019). The gold standard was eventually replaced by a currency exchange system, which we still utilize today.

Article Overview

Cutsinger (2020) focuses on how feasible it is to return our modern economic systems to the antiquated gold standard. This question is raised due to the massive inflation that has been occurring in the past few years across the globe and discussions in previous administrations on returning to a gold standard (Cutsinger, 2020). Cutsinger (2020) argues that returning to the gold standard is feasible and there is enough gold for it to be a realistic option.

Many economists argue that returning to the gold standard is unrealistic and “is a relic of a past marred by macroeconomic instability that central banks helped to alleviate” (Cutsinger, 2020, p. 88). Cutsinger (2020) demonstrates that while significant hurdles may exist, the gold standard would offer advantages like lower inflation levels, a common currency, increased international trade, and lower price-level uncertainty. One of the major questions on returning to the gold standard is the availability of above-ground gold. While a need to convert non-monetary uses of gold would be needed to support a fully backed currency, a realistic reserve ratio can be utilized reducing the need by a factor of ten (Custinger, 2020). Overall, the need to mine more gold is not necessary for a full conversion as “Australia, Brazil, Canada, China, the Eurozone, Great Britain, India, Japan, Russia, South Korea, and the United States” own about 80% of all gold (Custinger, 2020, p. 89). While additional costs for maintenance and conversion would exist, conversion to the gold standard is still possible even as its merits continue to be argued.

Discussion

            Cutsinger (2020) directly addresses the gold standard and discusses the reasons outlined by Satlerlee (2019) relating to why the gold standard was replaced. This article furthers understanding of how the gold standard was implemented and why it is still a reasonable monetary system, despite years of dismissal. Overall monetary policy is discussed by both Custinger (2020) and Saterlee (2019), but Cutsinger (2020) focuses on the merits and disadvantages of the gold standard. Understanding the gold standard is fundamental to this module as it provides an outline for how monetary policy was dictated before the modernized economy and how central banks have picked up the pieces since.

            Many other supporting articles provided overviews on the gold standard and other monetary policies. Dorn (2020) discussed how the gold standard has many misguided criticisms and could be an answer for current inflation and price uncertainty. Lennard (2018) explores the causal effects of monetary policy on economies including the British economy during the gold standard. Othman et al. (2020) determine how macroeconomic policies affect income inequality and wealth distribution. Both the gold standard and cryptocurrency contribute positively to government promotion of social welfare, while centralization may lead to more inequalities (Othman et al., 2020). Finally, Teupe (2020) explores the historical significance of the gold standard with case studies on Germany and the United States and the relation their monetary systems had on inflation and wage negotiation.

References

Cutsinger, B. P. (2020). On the feasibility of returning to the gold standard. The Quarterly Review of Economics and Finance, 78, 88–97. https://doi.org/10.1016/j.qref.2020.03.002

Dorn, J. A. (2020). How the classical gold standard can inform monetary policy. Cato Journal, 40(3), 777-790. http://dx.doi.org/10.36009/CJ.40.3.11

Lennard, J. (2018). Did monetary policy matter? Narrative evidence from the Classical Gold Standard. Explorations in Economic History, 68, 16–36. https://doi.org/10.1016/j.eeh.2017.10.001

Othman, A. H., Musa Alhabshi, S., Kassim, S., Abdullah, A., & Haron, R. (2020). The impact of monetary systems on income inequity and wealth distribution. International Journal of Emerging Markets, 15(6), 1161–1183. https://doi.org/10.1108/ijoem-06-2019-0473

Teupe, S. (2020). Inflation and the negotiation of wages. comparative responses to monetary changes in Germany and the United States during the Gold Standard Era, 1876–1926. Labor History, 62(1), 1–22. https://doi.org/10.1080/0023656x.2020.1844875

Satterlee, B. (2019). International Business with Biblical Worldview. McGraw-Hill.

Federal Reserve Bank

My key term for this week’s Discussion Board is Federal Reserve Bank. The reason that I chose the Federal Reserve Bank is academic curiosity and potential career opportunities. I currently work as an accountant for a large Oil company in San Antonio, Texas. I would like to switch career paths, so once I finish up my courses for my MBA I want to look into a career in banking. I believe that banking would be a good career opportunity for me so I would like to know as much about the banking industry as possible. I have been trying to do as much research on this topic as possible, and now that I have this as a topic for school, I feel like this is an added bonus in learning.

Explanation

Satterlee’s definition of the Federal Reserve Bank is “responsible for regulating the growth of the economy, which is accomplished by the increase or decrease of money supply” (Satterlee, 2018, p.136). Other countries and economies also have similar financial institutions such as the Bank of England, the European Central Bank, and the Bank of Japan. The Federal Reserve Bank is a central banking system that was created on December 23, 1913 along with the Federal Reserve Act. The Great Depression in the 1930’s and the Great Recession in the 2000’s has increased the duties and responsibilities of the Federal Reserve System.

There are twelve Federal Reserve Banks spread across the United States and serve many districts and territories. The Federal Reserve system also has 5 major functions that helps to stimulate the United States economy. The Federal Reserve handles the nations monetary policy, fosters the stability of the financial system, ensures the safety and security of individual financial institutions, provides services to the banking industry that ensures payment and clearing house transactions occur safely, Ensures consumer protection through numerous programs (Federal Reserve, 2022).

Summary

The article I chose for my key term the Federal Reserve Bank is an article published by Kimberly Amadeo. This article was fascinating, it spoke about how the Federal Reserve works and who owns it. The Federal Reserve is the central bank for the United States and is there to regulate the economy. President Woodrow Wilson was the president at the time that the Federal Reserve Bank and the Federal Reserve Act were enacted in 1913. This article also spoke about funding and the bank members on its board. The funding does not come from Congress as one might think, funding actually comes from investments.

The Federal Reserve is also made up of twelve banks across the United States and each bank services certain states. To become a member of the Federal Reserve banks must own shares of stock in the twelve regional Federal Reserve Banks across the country.

But owning Federal Reserve bank stock is nothing like owning stock in a private company. It cannot be traded and does not give the member banks voting rights. These pay out dividends, mandated by law to be 6%. But the banks must return all profits, after paying expenses, to the U.S. Treasury (Amadeo, 2022, para. 9).

In summary, the Federal Reserve Bank was established to help regulate the economy. After the Great Depression in the 1930’s and the Great Recession of the 2000’s, the Federal Reserve has been in more demand and has had more responsibilities such as reducing inflation and trying to cut interest rates.

Discussion

The Federal Reserve plays an important role in the United States Economy. It will adjust the monetary policy as needed to help stabilize prices, interest rates, and help the unemployment rate. It does this by either stimulating demand by reducing interest rates or and constricting the policy by increasing interest rates. “How does the Fed cut interest rates? It lowers the target for the fed funds rate. Banks usually follow the Fed’s lead, cutting benchmark rates such as the prime rate” (Amadeo, 2022, para.18). With inflation starting to increase in the United States over the last few months the Federal Reserve is starting to implement higher interest rates in hopes to lower inflation. 

The article I cited is similar as all the articles talk about the monetary policy of the Federal Reserve. The Federal Reserve is responsible for setting the monetary policy for the United States. At times the policy set by the Federal Reserve and other central banks of other countries have an impact on international financial markets. With the global economy the Federal Reserve bank’s policy has more impacts on other countries and currencies. “More specifically, the monetary policy of a center country could be transmitted to the periphery economies via the exchange rate, trade, credit, and risk-taking channels” (Inoue & Okimoto, 2022, p.2). 

This can sometimes lead to the United States receiving criticism from other countries due to the fact that the dollar is a dominant currency in the global market. Due to these concerns the Federal Reserve attends meetings with other central banks during the year in order to allow other central banks the opportunity to question and respond to the Federal Reserve Bank (Bernanke, 2017). With continued globalization of the economy the monetary policy of the United States will become increasingly important to other nations.

References

Amadeo, K. 2022. Who Really Owns the Federal Reserve? The Balance. https://www.thebalance.com/who-owns-the-federal-reserve-3305974#:~:text=The%20Federal%20Reserve%20is%20the%20central%20bank%20for,agency.%20Its%20leader%20is%20not%20an%20elected%20official.

Bernanke, B. S. (2017, April). Federal Reserve Policy in an international context. IMF Economic Review, 65(1), 5+. Retrieved from https://bi-gale-com.ezproxy.liberty.edu/global/article/GALE|A494741776?u=vic_liberty&sid=summon

Federal Reserve. (2022) Board of Governors of the Federal Reserve System. About the Fed.

https://www.federalreserve.gov/aboutthefed.htm

Inoue T & Okimoto T. (2022) International spillover effects of unconventional monetary policies of major central banks. International Review of Financial Analysis.  Volume 79 ISSN 1057-5219, 1-19. (https://www-sciencedirect-com.ezproxy.liberty.edu/science/article/pii/S1057521921002854?via%3Dihub).

Satterlee, Brian. (2018) International Business with Biblical Worldview. McGraw Hill Publishing

Discussion Thread: Financial Markets, Monetary Systems, and Regional Economic Integration

Key Term and Why You Are Interested in It

Kaufmann, R. K., Bradford, A., Belanger, L. H., Mclaughlin, J. P., & Miki, Y. (2008). Determinants of OPEC production: Implications for OPEC behavior. Energy Economics, 30(2), 333-351. 
https://doi.org/10/1016/j.eneco.2007.04.003

Kaufmann, R. K., & Cleveland, C. J. (2001). Oil production in the lower 48 states: economic, geological, and institutional determinates. The Energy Journal, 22(1), pp. 27-49.

Ratti, R. A., & Vespignani, J. L. (2015). OPEC and non-OPEC oil production and the global economy. Energy Economics, 50, 364-378. 
https://doi.org/10.1016.j.eneco.2014.12.001

Scatterlee, B. (2018). International Business: with Biblical Worldview. 1st Edition. McGraw Hill.