The Evolution of Global Monetary System
What is Gold Standard?
Source: https://www.educba.com/gold-standard/
Mint Parity Theory
• The mint parity theory explains the determination of foreign exchange rate between
the currency units of the gold standard countries.
• When the two countries are on the gold standard, their currency units are either
made of gold of specified purity and weight or are freely convertible into gold
of given purity at fixed rate.
• Under the gold standard, countries maintain the value of their currencies in a fixed
relationship to the value of gold by committing themselves to buy and sell gold at
fixed prices.
• A nation' s currency is said to be fully on the gold standard if the government of
that country (i) buys and sells gold in unlimited quantity at an officially fixed
price, and (ii) permits unrestricted gold flows into and out of the country.
• The practical meaning of (i) and (ii) is that an individual who holds domestic
currency knows in advance how much gold he can obtain in exchange for it and
how much foreign currency this gold will buy when exported to another country.
• By mint parity is meant that the foreign exchange rate is determined on the weight-
to-weight basis of the metallic contents of the two money units, allowance being
given to the purity of the metallic contents.
Continue..
• Condition:- Only applicable Before world War I and during the later 1920s, England and
when the countries are on the United States of America were simultaneously on the gold
the same metallic standard. standard.
• The British sovereign contained 113.0016 grains and the
– either the gold or the
US gold dollar consisted of 23.2200 grains of gold of
silver standard. standard purity.
– Thus, there can be no • The exchange rate between the US dollar and the British
fixed mint parity sovereign based on the mint parity was 113.0016/ 23.2200,
between a gold and a i.e., 4.866 showing that 4.866 US dollars were equivalent to
silver standard country. one British gold sovereign.
• The export of gold, however, • If a American importer desiring to convert the US $ into
pound-sterlings to pay to his English counterpart can do this
involves certain expenses. in two ways.
Before gold can be exported
– He can either buy the pound-sterling foreign exchange
it incurred following cost: by tendering dollars in the foreign exchange market or
– Packing – He can export gold from America to England. If the
– Freight & insurance second method did not cause any expense in exporting
gold from America to England an effective foreign
– Interest loss
exchange rate of US $ 4.866 = 1 euro would be
– Mint charge by Central established in the free foreign exchange market
bank
Continue..
• The American importer will, therefore, export gold only if the market rate of
exchange is higher than the mint parity exchange rate plus the expenses of
exporting gold from America to England.
• If the cost of exporting gold from America to England and vice versa is 2 cents per
pound sterling, no gold would be exported from America for making foreign
payments if the exchange rate in the foreign exchange market was either lower than
or equal to US $ 4.886 = £1
• In other, words, so long as the American importer of British goods wishing to make
payment to his British counterpart can buy the sterling exchange in the foreign
exchange market either at or below an exchange rate of US $ 4.886 = £1
• He would not bother to export gold to make payment for his imports of goods from
England.
• Thus, there are the upper and lower limits determined by the cost of exporting and
importing gold between the gold standard countries within which the market rate of
foreign exchange will fluctuate.
Mint Parity Theory
£ 1 = $ 4.886
£ 1 = $ 4.866
£ 1 = $ 4.846/ £
