Three Pillars Of The Classical Gold Standard

In the past, the system of monetary policy is based on the Classical Gold Standard. In the article, “Review of: European monetary union: Lessons from the classical gold standard”, Stanley W stated how the gold standard lasted from the periods of 1880 to 1913. In the beginning, central banks used interest rates to drive short term capital inflows, which avoided gold movements and made sure that the prices adjust relatively. However, this adjustment process didn’t work. The author then argued that long term international capital flows, migration, and differences in tariff barriers, also known as the “Three Pillars of the Classical Gold Standard”, contributes to the reason why developing countries were able to maintain their current account deficits until they could face the competition with the modernized countries. However, in accordance to the article “Interest rate interactions in the classical gold standard, 1880-1914: Was there any monetary independence?” by Bordo and Macdonald, the Classical Gold Standard is not a sustainable monetary system because it required some countries to be independent when monetary policy operates. This is especially conflicting in the modern day structure in which central banks need to use a targeting zone to achieve their purpose. In the modern era, quantitative easing (QE) is an unconventional type of monetary policy used by the Federal Reserve to respond to the deep recession. According to the article “Quantitative easing and Proposals for Reform of Monetary Policy Operations: by authors Scott and L.Randall, the impact of conducting QE on interest rates is lower long term yields when compared to the short term ones. As noted by authors Bora, Omar and Georges in their article “Financial Crisis and...

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In conclusion, it is certainly a debatable issue whether quantitative easing is an effective policy by the Federal Reserve to bring down US from recession. First, it is questionable on whether an increase in the monetary base would pick up the current state of the recession. In addition, it is open to discussion whether quantitative easing supports spending. As well low long term interest rates provide both opportunities and risks for the US economy. Finally, QE has many potential risks for developing countries, and this may have a negative impact on US’s economy. As one can see, there are many critics and supporters of QE. As proved by Ncube, monetary policy itself is not enough to solve a fiscal issue such as a recession. Therefore, there needs to be a combination of monetary and fiscal policy measures to solve the issue of US’s recession completely.