Theme 5 Currency market and currency system 1

Theme 5. Currency market and currency system 1

1. The world monetary system and its evolution 2. The Paris system of gold coin standard. 3. The Genoese system of gold exchange standard. 4. The Bretton Woods monetary system. 5. The Kingston monetary system. 6. Currency market. 2

1. The world monetary system and its evolution The international monetary system has come a long way over the last 200 years. It's history includes the rise of central banks, world wars, and ad-hoc exchange rate mechanisms that have all shaped the system we have today. 3

Currency system is a form of organization of monetary relations, fixed by national legislation (national system) or by international agreement (global and regional system). 4

The world economy is presented by set of national facilities and economic interrelations between them. Its structure joins currency system which is formed owing to internationalization of productive forces, patterns of ownership and economic mechanism. 5

The world currency system affects all elements of the world economy, in particular on foreign trade, formation and development of the international markets of the capital, a labour, intellectual property. 6

International monetary relations are the social relations developing in the operation of currency in the world economy and by mutual exchange of the results of the national economies. 7

The evolution of the international monetary relations: appeared in ancient world in Ancient Greece and Ancient Rome in the form of promissory notes and money-changing business 8

The evolution of the international monetary relations: medieval “promissory fair" in Lyons, Antwerp, and other trade centers in Western Europe payments by bills of exchange (draft) 9

The evolution of the international monetary relations: feudal era emergence of capitalist mode of production develop a system of international payment through banks 10

Types of currency systems: • National; • World; • International (Regional). 11

National currency system is a form of organization of economic relations of the country which conducts international settlements, creates and uses foreign currency. 12

World currency system is a form of organization of international currency relations, which was made historically and is secured by international agreements. 13

The world currency system arises in the end of XIX, during these period stable gold currencies and other international liquid resources took place. In the majority of the developed countries there was a precise mechanism of definition of mutual currency parities of rates, the international currency market, the coordinated order of international payments on the basis of the bill reference (it was carried out by bank translations) and gold. 14

Gold carried out all functions of money that provided stability of currency system, free having poured the capital between the countries, an unlimited exchange of national currencies. 15

Regional currency system represents the form of the organization of currency attitudes between group of the countries. Examples of such systems are the European currency system, the West-African currency union, the currency union of the Central Africa. 16

Development of goods exchange between the countries in many respects is defined by a condition of world currency system which is the form of the organization of monetary calculations. 17

The international currency attitudes is a set of economic relations between the countries, legal and private persons, the international economic and financialcredit organizations in occasion of formation and movement of currency. 18

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2. The Paris system of gold coin standard. The Paris system of gold coin standard was legally issued by the International Conference in Paris in 1867. 36

The Paris system of gold coin standard -the role of the general equivalent is assigned to gold, -gold coins and bank signs functioned in circulation -these signs is exchanged for gold. 37

The era of the classical gold standard started in 1821 in the UK and it has spread in the last quarter of the 19 th century: • in Germany in 1871 - 1873, • in France in 1878, • in Japan in 1897. Gold standard system acquired highest prevalence during the years 18801914, to the beginning of World War I. 38

There were three forms of the gold standard: • Gold-coin; • Gold-bullion; • Gold-currency. 39

The advantages of the gold coin standard: 1) The price of the metal exchange was established on the basis of the law of value: price = production + transportation 2) There are no restrictions on the state operations with the payment documents, on the export of capital and the transfer of profits abroad. 3) exchange rate stability. 40

Disadvantages of gold coin standard: 1) a direct relationship of money from the mining and production of gold; 2) exclude the possibility that individual states own monetary and exchange rate policies to solve domestic problems; 3) war --- shortage of military vehicles --- decrease of gold stocks --- gold goes out of the country. 41

Gold ingot standard system is a transitional form of gold standard. Existed since the early 20 th century before the First World War. 42

Gold ingot system The national currencies of the leading Western countries (UK, France, Belgium, Netherlands) were equal to a certain amount of gold, that is, had a gold content; - Exchanged for monetary metal - gold ingots weighing not less than 12. 4 kg each; - The exchange of the national currency for gold was limited to large amounts (in France a gold ingot worth 215 thousand francs). - 43

Distinction between world and national currency systems consist in basic that gold as means of payment in the world market was accepted on weight, and the rate of exchange of national paper money was defined by a parity of their gold maintenance which was established by the state on the basis of a standard of price. 44

So, the pound sterling was equated to 7, 3224 gr of pure gold, and US dollar - to 1, 5046 gr. Therefore at calculations between the Great Britain and the USA it was necessary to compare with their monetary units that meant an establishment of monetary parity (7, 3224: 1, 5046). 45

The countries should provide a firm parity between an available gold and quantity of the money which is being in circulation. Thus full convertibility of world money, stability of their purchasing capacity, stability of rates of exchange, stability of the world prices was provided. 46

Domination of the gold standard excluded carrying out by the separate country of independent currency-monetary policy as the increase in volumes of issue and inflationary depreciation of national money led to outflow of gold abroad and to reduction of gold reserves of the country. 47

In 1922 of the country of the West at the international Genoa conference have entered into the agreement that alongside with gold, function of the international payment means will be carried out also with some currencies of the leading countries. This system has received the name of the gold exchange standard. 48

3. The Genoese gold exchange standard system. The Genoese gold exchange standard system was signed at the Genoa International Economic Conference in 1922. 49

There were slogans - a payment in foreign currency, which were used at the level of gold in international payments. 50

World War II led to a deepening of the crisis of the Genoese currency system: - currency restrictions have entered all of the country; 51

- gold was further transfing to the United States, since the supply of raw materials and food products from the United States were paid in gold; - during the war Germany seized 1. 3 tonnes of gold in the occupied countries (before the war it has 26 thousand tons of gold, in the U. S. 12 thousand tons and in the UK 3. 6 thousand tons). 52

Stages of the gold standard failure: 1) The first in 1929 -1930 abandoned agricultural and colonial states; 2) 1931 - Germany, Austria and UK; 3) 1933 - United States; 4) 1936 - the gold standard was almost completely destroyed, as it was canceled in France. 53

An idea of French inflation is given by the following table of devaluations of the French Franc since Napoleon's "franc Germinal" 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. French devaluations 1803 -1969 Franc mg of gold 9/10 th purity 1803 Germinal 322, 58 1928 Poincaré 65, 50 1936 Auriol 49, 00 1937 Bonnet 43, 00 1939 Reynaud 23, 34 1945 Pleven 7, 60 1948 Meyer 4, 14 1949 Petsche 2, 54 1958 Pinay 1, 80 1969 Pompidou ("old franc") 1, 60 54

In the period of the gold standard there are three currency blocs: - sterling; - dollar; - gold. 55

• Sterling: the countries of the Commonwealth (except Canada and Newfoundland), Hong Kong, Egypt, Iraq, Portugal, Denmark, Norway, Sweden, Finland, Japan, Greece. • Dollar: USA, Canada and Central and South America. • Gold: countries that want to save the gold standard - France, Belgium, Netherlands, Switzerland, Italy, Czechoslovakia, and Poland. 56

Factors of currency blocs creating: • trade; • financial; • economic; • political. 57

4. The Bretton Woods monetary system The Bretton Woods monetary system was established following the Bretton Woods monetary conference held in July 1944 in the U. S. 58

Basic principles of the Bretton Woods monetary system: • preservation of the role of gold; • fixed exchange rates; • equation of the dollar to gold by fixing the market price of gold (the price of one ounce (31. 1 grams) of gold was 35 dollars, and the gold content of the dollar amounted to 0. 888671 grams of pure gold); • the prohibition of free (private) purchase and sale of gold. 59

The modern world currency system is adjusted by the Charter of the International currency fund, and its principles and organizational bases have been certain by the agreement of the countries-members of the IMF, accepted in January, 1976 in capital of Jamaica the Valve. 60

In 1950 the gold reserves of the USA in 7 times exceeded dollar actives. During this period the USA took leading place in world trade and export of the capital, long time had positive balance of the balance of payments. But in the end of 50 - the beg. of 60 th of XX the situation has started to vary in connection with strengthening of economic power of Japan, the Western Germany and other countries of the Western Europe. 61

During this period there was an unreal official price of gold (in 1973 it made 42, 22 US dollars for ounce, and market - 122 dollars) Deficiency of the state budget of the USA accrued. In 1971 gold reserves of the USA were reduced up to 10, 5 million US dollar and made only 22 % of dollar actives. 62

The countries began to refuse dollar, demanding its exchange for gold as steadier currency. USA have cancelled an exchange of dollars for gold for the foreign governments. In 1969 of the country-participants of IMF have agreed about creation of the international monetary unit SDR (“the special drawing rights"). 63

Parity of SDR with currencies of other countries began to be defined on the basis of mutual exchange rates of five countries (the USA, Japan, Germany, England, France). The parity of a supply and demand of currencies of “floating rates" has received the name “baskets of currencies". 64

After the demise of the Bretton Woods monetary system, in 1971, the world entered a period of currency instability. It was still dominated by the economic and military power of the United States. Since the eighties, the Thatcher/Reagan revolution swung the western world back to societies with less welfare and more tough liberalism. 65

Currency zones The world is divided into currency zones, corresponding to developed countries and their areas of influence. There is the dollar zone, the yen zone of Japan, the yuan zone of China, the pound zone of Great Britain. Since 1999 several European countries created a new currency, the euro, and formed the eurozone. 66

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5. The Jamaica (Kingston) monetary system In January 1976 in Kingston (Jamaica) was adopted an agreement to Kingston (Jamaica) monetary system, which took power on April 1, 1978. 68

The main provisions of the Kingston monetary system (legally documented in a series of amendments to the Charter of IMF): • each country - a member of the IMF - in its sole discretion may choose the mode of the course of its own currency; • demonetization of gold; 69

• legal entitlement of each of the currencies of the countries - participants of the Kingston act as a reserve currency, but in the long term the advantage was given to the SDR; • providing the executive body of the IMF - Board - broad powers to oversee the implementation of the countries of their obligations under the agreement. 70

On March 13, 1979 was launched the European Monetary System between the eight countries of "Common Market" (Germany, France, Belgium, Netherlands, Luxembourg, Italy, Ireland, Denmark). 71

The world currency system includes a number of elements, each of which is legally defined by corresponding international contracts and agreements, in particular: - forms of the international means of the reference and payment (gold, national currencies, the international currencies); - structure of the international currency liquidity; 72

- the legalized mode of currency parities and rates; - the unified forms and rules of international payments; - conditions of mutual convertibility of currencies; - the status of the international organizations and another. 73

Today's situation is still unstable. Some important countries, like China, control the exchange rate between their currency and the dollar; they prevent by all available means foreigners from holding yuans and carrying transactions in yuans, and they prevent most Chinese citizens from holding foreign currencies; so they control the exchange market between the Chinese currency and the rest of the world currencies. Some others, like the eurozone, let their exchange rate evolve according to market forces. 74

6. Currency market 75

Essence of the modern currency market and its scales are closely connected with the international agreements providing: - export and import of the goods and payment to a foreign currency; - international services (granting of transport and financial services, tourism, trade in products of intellectual property, translations of wages of foreign workers, insurance) with payment in a foreign currency; 76

- export and import of the capital, granting and reception of the credits connected with an exchange of one currency to another; - calculations of the central banks with the international financial organizations, and also updating or an expenditure of gold and exchange currency reserves of the central banks; - purchase and sale of currency on various conditions; - charges and incomes of the state in a foreign currency. 77

At realization of these agreements between their participants the certain set of the international currency attitudes is formed. Therefore the currency market can be defined as system of the international currency attitudes in occasion of the organization and sale and purchase national and foreign currencies with the purpose of maintenance of the international payments. 78

The basic subjects of currency affairs are: - the physical and legal persons borrowed by foreign trade activities; - the noncommercial bank establishments which are carrying out currency service of external communications; - intermediaries (separate brokers, broker firms) which receive a commission for the operations; - official bodies - the central banks of different countries. 79

Among subjects of the currency market the dominating role belongs to transnational banks which carry out cash and non-cash interbank operations. These banks influence on rates of exchange, scales of the currency reference. Objects of the currency market are not only national monetary units, but also securities, payment documents (checks, bills, letters of credit) in a foreign currency. 80

The essences of the currency market, its structure are more full shown in its separate qualitative features: - it’s functioning on principles of a competition, which is influenced by supply and demand on currencies (national, collective), which aspirate to maximal income, - the competition is organically supplemented national and with supranational regulation. 81

Two basic kinds of operations in the currency market are operations “spot” and operations “forward”. 82

Operation “spot" (English spot - cash, immediately paid) provides currency agreements, according to which delivery of currency is carried out, as a rule, for 24 hours. According to it the rate of exchange “spot“, which is a base rate at the moment of the making of the agreement is established also. 83

The difference in time between delivery and payment of currency is caused by necessity of carrying out of bank operations by calculations. 84

Forward operations are off -exchange urgent agreements, calculations on which are carried out through the certain period of time for in advance coordinated date. 85

As a rule, forward are carried out by banks, the industrial and trading companies to avoid possible losses from fluctuations of rates of exchange. Forward rates of exchange differ from rates “spot" on size of the discount connected with a delay of payments. 86

Rate of exchange is the price of monetary unit of one country, expressed in monetary units of other countries. 87

Necessity of definition of a rate of exchange is caused by need of exchange of foreign currencies on national at export and import of the goods and services, receipt of capitals and their transferring abroad, granting of the international credits, transferring of monetary incomes. 88

The functions of exchange rate: - comparison of the national prices for the goods, services, a labour with the corresponding prices of other countries and the world prices; - comparison of expenses of manufacture, labour productivity, trading and balances of payments; - redistribution of the national income between the countries which are carrying out foreign trade activities. 89

The rate of exchange is influenced with a number of factors: - the condition of the balance of payments, - a rate of inflation, - political stability, 90

- parity between a supply and demand on each currency, - migration of capitals between the countries, - an economic conjuncture, - stability of currency and trust to it. 91

In conditions of demonetarization of gold a basis for definition of a rate of exchange is a parity of purchasing capacity of various national currencies (the sum of the goods and services which can be got for the certain monetary unit), and also an average parity of the prices on a long time interval. 92

Thus the current market rate of exchange can deviate on a long time interval relative purchasing capacity of currency, from the cost basis. 93

It is caused by the fact that in the different countries there are distinctions in interest rates which influence a parity of a supply and demand on this or that currency. As a result there is a discrepancy (non-synchronism) in course of a business cycle, and also influence of changes of a rate of exchange on foreign trade in the goods and services. 94

The rate of exchange tangible influences foreign trade activities of the country, on a choice of structure of manufacture and consumption, on competitiveness of the goods and services in the world market, on rates of economic growth. In a world practice the rate of exchange is defined on the basis of “parity of purchasing capacity". 95

This parity grows out comparison of the blessings entering into a conditional consumer's basket of those countries, whose currencies are compared, but complexity of definition of parity that there is no uniform way of definition of structure of a consumer's basket. In the different countries the structure of "baskets" is distinguished and to compare them very difficultly. 96

Change of the exchange rate of currencies is accompanied by action of the rule: at falling a rate of national currency in relation to currencies of other countries exporters of production win, and at increase of a rate importersmanufacturers are interested in stability and predicted change of a rate of exchange as it is necessary for planning their commercial activity. 97

Proceeding from it, the control over change of a rate of exchange and its regulation is one of the major purposes of economic policy of the states. 98

For regulation of a rate of exchange direct and indirect methods are used. The policy of a discount rate of the Central bank concerns to methods of direct regulation and currency interventions in the external currency markets. 99

The central bank, raising a discount rate, i. e. percent for the credit given to commercial banks, directly promotes increase of the exchange rate of national currency. In fact growth of the interest rate reduces demand of commercial banks for the credit that leads to reduction of demand by a foreign currency in the external currency markets. 100

As a result of reduction in demand for currency the exchange rate of national currency raises. Currency intervention is a purchase or sale by the Central bank of national currency in the external currency markets. 101

Sale of currency reduces the exchange rate, and purchase raises. Indirect influence on a rate of exchange is carried out by means of the monetary and credit and financial policy spent by the Central bank of the country. 102

So, the measures directed on decrease of inflation, stabilize the exchange rate of national currency. "Devaluation" (reduces a rate of national currency) also concerns to direct methods of regulation of a rate of exchange and "revaluation" (raises a rate of exchange). 103

Both devaluation and revaluation are carried out by a legislature of the country. Very much the great value for inclusion of national economy in world has convertibility of currency of the given country. 104

Convertible currency is the national monetary unit, which has ability freely (by means of sale and purchase) to exchange on foreign currencies to carry out functions of world money, i. e. freely to be used in the international payment reference for realization of international payments. 105

Two basic forms of convertibility of currencies are: - free, or completely convertible; - partially convertible. 106

Completely convertible currency means, that any person (foreign and domestic, physical and legal) has the right to exchange any quantity of the national currency on foreign, is hard currency to pay off her for exportimport transactions, to deposit it in national banks, to use for creation of different financial actives (securities) and to buy the state and private securities. 107

Partially convertible currency means only its external convertibility, that is free use of currency by foreign persons (legal and physical), and only in current, sometimes only in the foreign trade calculations. 108

The calculations connected with export and import of the goods and services concern to them, with incomes of foreign and domestic persons of investments (percent, dividends), from service of foreigners inside of the country, with expenses for services to the citizens outside the country, aviation and sea freight, insurance of cargoes. 109

Now in the world there are more than 300 names of national money, but only about 20 countries (the USA, Japan, Canada, England, the countries entering into EU and some countries rich with oil of the Near East) have completely convertible currency. Approximately 50 countries of the world have different forms of partially convertible currency. 110

Inconvertibility currencies means that the state completely forbids any operations of exchange of the currency on foreign or allows it to do with the consent of the authorized currency bodies. 111

External convertibility means that enterprises and citizens can transfer freely abroad the contributions made in national currency. This kind of convertibility is connected with operations of movement of capitals and credits. 112

Internal convertibility means the right of the enterprises and citizens freely to buy a foreign currency for carrying out of business operations. These operations can be both current and connected with movement of capitals or credits. 113

Foreign exchange markets are useful to a • • variety of players: exporters and importers: they need foreign currencies for their commercial operations investors: they try to invest their savings into currencies that will provide high yield (and/or high capital gains) speculators: they gamble on probable evolution of exchange rates (see Soros below) governments: they buy or sell foreign currency reserves in order to try and control the exchange rate of their national currency. 114

Even though there is no precise physical location, London and New York are the main financial places foreign exchange UK US Japan Singapore Germany Hong Kong Australia Switzerland France Canada Geographic distribution of traditional currency trading April 1989 April 1998 April 2004 Average daily Market turnover ($ share (%) billions) 184, 0 26 637, 3 32 753 31, 3 115, 2 16 350, 9 18 461 19, 2 110, 8 15 148, 6 8 199 8, 3 55, 0 8 139, 0 7 125 5, 2 n/a 94, 3 5 118 4, 9 48, 8 7 78, 6 4 102 4, 2 28, 9 4 46, 6 2 81 3, 4 56, 0 8 81, 7 4 79 3, 3 23, 2 3 71, 9 4 63 2, 6 15, 0 2 37, 0 2 54 2, 2 115

For exchange-rate futures contracts, the three main market places worldwide are the Bolsa de Mercadorias & Futuros, in Sãn Paulo, Brazil, the Chicago Mercantile Exchange and the Philadelphia Stock Exchange, both in the United States. 116

Playing with currency rates Covered interest arbitrage One arbitrage possibility to earn money on exchange markets is called the "covered interest arbitrage". It links spot rates, forward rates, and risk free interest rates in both countries. This is explained with the following illustration: 117

You are in the UK and have £ 100 to spare for one year. You want to "make it work" safely. A possibility is to invest your £ 100 in one year risk free British government bonds. Suppose they pay 5% (and suppose for simplicity there is no inflation in the UK, nor in the US). Another possibility is to exchange your £ 100 for dollars on the spot market and invest your dollars, and, in one year, do the reverse exchange. In some circumstances this may be advantageous. 118

If the spot exchange rate is £ 1 = $1, 60, and the dollar bonds yield 7%, and you can change your dollars back into pounds, in one year, at the rate £ 1 = $1, 61 (rate locked today, that is, this is the one year forward exchange rate), then you can get $160 dollars, have them produce $171, 20, and arrange today for the exchange back, in one year, to get $171, 20/1, 61 = £ 106, 34. 119

In this case, the arbitrage is profitable (and risk less, as an arbitrage, by definition, must be). Since the computers of all professionals in exchange markets worldwide scan permanently all markets for such arbitrage possibilities, it won't last more than a few minutes. The law of supply and demand will drive the spot price of dollars up, and the forward price of pounds up too. 120

For instance, after a little while, the pound may only buy, on the spot market, $1, 59. And the forward rate may climb to £ 1 = $1, 62. Then, the same calculations as above show that the operation is not longer profitable. 121

Carry trade A practice along the same line as this example bears the name of "carry trade" and is carried out on a regular basis by some operators: certain currencies are attractive as ways to park excess wealth into reserves, and also to speculate. For instance, for the last ten years, the Japanese yen has been very cheap in the sense that the interest rates to borrow yens are very low. 122

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"Carry trade" between yens and other currencies consists in borrowing Japanese yens, changing them into a currency yielding a high interest rate, earning money that way, then changing back part of the money into yens and refunding the lenders. It illustrates the limits of simple models to explain movements in exchange rates. 124

"Carry trade" between yens and other currencies consists in borrowing Japanese yens, changing them into a currency yielding a high interest rate, earning money that way, then changing back part of the money into yens and refunding the lenders. It illustrates the limits of simple models to explain movements in exchange rates. 125

Typical newspaper currency prices Exchange rate (dollar equivalent) Currency for one dollar Tuesday Monday Country Argentina (peso) 0, 5263 1, 9000 Australia (dollar) 0, 5195 0, 5152 1, 9249 1, 9410 Bahrain (dinar) 2, 6525 2, 6532 0, 3770 0, 3769 Brazil (real) 0, 4227 2, 3655 2, 3650 Canada (dollar) 0, 6215 0, 6203 1, 6090 1, 6121 1 -month forward 0, 6219 0, 6209 1, 6079 1, 6105 3 -months forward 0, 6217 0, 6207 1, 6084 1, 6112 6 -months forward 0, 6217 0, 6206 1, 6084 1, 6113 Chili (peso) 0, 001491 0, 001494 670, 55 669, 15 R. -U. (pound sterling) 1, 4288 1, 4373 0, 6999 0, 6957 1 -month forward 1, 4256 1, 4352 0, 7015 0, 6968 3 -months forward 1, 4205 1, 4299 0, 7040 0, 6993 6 -months forward 1, 4201 1, 4278 0, 7043 0, 7010 126

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Questions to test the learning material: 1. Explain, please, the essence of currency system. 2. Explain, please, the essence of international monetary relations. 3. Please list the stage ofe evolution of the international monetary relations. 4. Please list the types of currency systems. 5. Please give a characteristic of the Paris system of gold coin standard. 128

Questions to test the learning material: 1. Please list the forms of the gold standard. 2. Please give a characteristic of the Genoese gold exchange standard system. 3. Please list the Stages of the gold standard failure. 4. Please list the countries which belong to sterling currency bloc. 5. Please list the countries which belong to dollar currency bloc. 129

Questions to test the learning material: 1. Please list the countries which belong to gold currency bloc. 2. Please give a characteristic of the Bretton Woods monetary system. 3. Please list the basic principles of the Bretton Woods monetary system. 4. Please give a characteristic of the Jamaica (Kingston) monetary system. 5. Please list the main provisions of the Kingston monetary system. 130

50 Random Facts About Gold 131

• The term “gold” is the from the Proto-Indo. European base *ghel / *ghol meaning “yellow, ” “green, ” or possibly “bright. ” • Gold is so rare that the world pours more steel in an hour than it has poured gold since the beginning of recorded history. • Gold has been discovered on every continent on earth. • Gold melts at 1064. 43 Centigrade. It can conduct both heat and electricity and it never rusts. 132

• Due to its high value, most gold discovered throughout history is still in circulation. However, it is thought that 80% of the world’s gold is still in the ground. • Seventy-five percent of all gold in circulation has been extracted since 1910. • A medical study in France during the early twentieth century suggests that gold is an effective treatment for rheumatoid arthritis. 133

• Gold is so pliable that it can be made into sewing thread. An ounce of gold can be stretched over 50 miles. • Gold is edible. Some Asian countries put gold in fruit, jelly snacks, coffee, and tea. Since at least the 1500 s, Europeans have been putting gold leaf in bottles of liquor, such as Danziger Goldwasser and Goldschlager. Some Native American tribes believed consuming gold could allow humans to levitate. 134

• The largest gold nugget ever found is the “Welcome Stranger” discovered by John Deason and Richard Oates in Australia on February 5, 1869. The nugget is 10 by 25 inches and yielded 2, 248 ounces of pure gold. It was found just two inches below the ground surface. • Amid recession fears in March 2008, the price of gold topped $1, 000 an ounce for the first time in history. 135

• Traditionally, investors try to preserve their assets during hard economic times by investing in precious metals, such as gold and silver. The World Gold Council released a report in February 2009 that indicated the demand for gold rose sharply in the last half of 2008. • The Dow/Gold ratio, which shows how much gold it would take to buy one share of the Dow, is a good indicator of how bad a recession is. In early 2009, the Dow/Gold ratio appeared to be heading toward the same low ratios that occurred during the 1930 s and 1980 s. 136

• Gold is chemically inert, which also explains why it never rusts and does not cause skin irritation. If gold jewelry irritates the skin, it is likely that the gold was mixed with some other metal. • One cubic foot of gold weighs half a ton. The world’s largest gold bar weighs 200 kg (440 lb). • In 2005, Rick Munarriz queried whether Google or gold was a better investment when both seemed to have equal value on the stock market. h By the end of 2008, Google closed at $307. 65 a share, while gold closed the year at $866 an ounce. 137

• The Olympic gold medals awarded in 1912 were made entirely from gold. Currently, the gold medals just must be covered in six grams of gold. • The Incas thought gold represented the glory of their sun god and referred to the precious metal as “tears of the Sun. ” Because gold was not yet used for money, the Inca’s love of gold was purely aesthetic and religious. 138

• Around 1200 B. C. , the Egyptians used unshorn sheepskin to mine for gold dust from the sands of the Black Sea. This practice is most likely the inspiration for the “Golden Fleece. ” • In ancient Egypt, gold was considered the skin or flesh of the gods, particularly the Egyptian sun god Ra. Consequently, gold was unavailable to anyone but the pharaohs, and only later to priests and other members of the royal court. The chambers that held the king’s sarcophagus was known as the “house of gold. ” 139

• The Turin Papyrus shows the first map of a gold mine in Nubia, a major gold producer in antiquity. Indeed, the Egyptian word for gold was “nub, ” from gold-rich Nubia. While Egyptian slaves often suffered terribly in gold mines, Egyptian artisans who made gold jewelry for the nobles enjoyed a high, almost priestly status. 140

• Though the ancient Jews apparently had enough gold to create and dance around a golden calf while Moses was talking to God on Mt. Sinai, scholars speculate that it never occurred to the Jews to bribe themselves out of captivity because gold was not yet associated with money. • There are more than 400 references to gold in the Bible, including specific instructions from God to cover furniture in the tabernacle with “pure gold. ” Gold is also mentioned as one of the gifts of the Magi. 141

• The Greeks thought that gold was a dense combination of water and sunlight. • In 560 B. C. , the Lydians introduced the first gold coin, which was actually a naturally occurring amalgam of gold and silver called electrum. Herodotus criticizes the materialism of the Lydians, who also were the first to open permanent retail shops. When the Lydians were captured by the Persians in 546 B. C. , the use of gold coins began to spread. 142

• Before gold coins were used as money, various types of livestock, particularly cattle, and plant products were used as currency. Additionally, large government construction projects were completed by slave labor due to the limited range of money uses. • The chemical symbol for gold is AU, from the Latin word aurum meaning “shining dawn” and from Aurora, the Roman goddess of the dawn. In 50 B. C. , Romans began issuing gold coins called the Aureus and the smaller solidus. 143

• When honking geese alerted the Romans that the Gauls were about to attack the temple where the Romans stored their treasure, the grateful Roman citizens built a shrine to Moneta, the goddess of warning. The link between rescued treasure and Moneta led many centuries later to the English words “money” and “mint. ” 144

• Between A. D. 307 and 324, the worth of one pound of gold in Rome rose from 100, 000 denarii (a Roman coin) to 300, 000 denarii. By the middle of the fourth century, a pound of gold was worth 2, 120, 000 denarii—an early example of runaway inflation, which was partly responsible for the collapse of the Roman Empire. a 145

• The Trial of the Pyx (a public test of the quality of gold) began in England in 1282 and continues to this day. The term “pyx” refers to a Greek boxwood chest in which coins are placed to be presented to a jury for testing. Coins are currently tested for diameter, chemical composition, and weight. • During the fourteenth century, drinking molten gold and crushed emeralds was used as a treatment for the bubonic plaque. 146

• In 1511, King Ferdinand of Spain coined the immortal phrase: “Get gold, humanely if possible—but at all hazards, get gold. ” • Both Greeks and Jews begin to practice alchemy in 300 B. C. The search to turn base metals into gold would reach its pinnacle in the late Middle Ages and Renaissance. 147

• In 1599, a Spanish governor in Ecuador taxed the Jivaro tribe so excessively that they executed him by pouring molten gold down his throat. This form of execution was also practiced by the Romans and the Spanish Inquisition. 148

• Venice introduced the gold ducat in 1284 and it became the most popular gold coin in the world for the next 500 years. Ducat is Latin for “duke. ” It is the currency used in Shakespeare’s Romeo and Juliet and is referenced in The Merchant of Venice. In his song “I Ain’t the One, ” rapper Ice Cube sings that “he’s getting juiced for his ducats. ” The ducat is also used in the “Babylon 5” sci-fi series as the name of the Centauri race’s money. 149

• Originally the U. S. mint made $2. 50, $10, and $15 coins of solid gold. Minting of gold stopped in 1933, during the Great Depression. • The San Francisco 49 ers are named after the 1849 Gold Rush miners. • Gold and copper were the first metals to be discovered by humans around 5000 B. C. and are the only two non-whitecolored metals. 150

• The value of gold has been used as the standard for many currencies. After WWII, the United States created the Bretton Woods System, which set the value of the U. S. dollar to 1/35 th of a troy ounce (888. 671 mg) of gold. This system was abandoned in 1971 when there was no longer enough gold to cover all the paper money in circulation. 151

• The world’s largest stockpile of gold can be found five stories underground inside the Federal Reserve Bank of New York’s vault and it holds 25% of the world's gold reserve (540, 000 gold bars). While it contains more gold than Fort Knox, most of it belongs to foreign governments. 152

• The “troy ounce” of gold comes from the French town of Troyes, which first created a system of weights in the Middle Ages used for precious metals and gems. One troy ounce is 480 grains. A grain is exactly 64. 79892 mg. 153

• The gold standard has been replaced by most governments by the fiat (Latin for “let it be done”) standard. Both Thomas Jefferson and Andrew Jackson strongly opposed fiat currency. Several contemporary economists argue that fiat currency increases the rate of boom -bust cycles and causes inflation. 154

• The Mines of South Africa can descend as far as 12, 000 feet and reach temperatures of 130°F. To produce an ounce of gold requires 38 man hours, 1400 gallons of water, enough electricity to run a large house for ten days, and chemicals such as cyanide, acids, lead, borax, and lime. In order to extract South Africa’s yearly output of 500 tons of gold, nearly 70 million tons of earth are raised and milled. 155

• Only approximately 142, 000 tons of gold have mined throughout history. Assuming the price of gold is $1, 000 per ounce, the total amount of gold that has been mined would equal roughly $4. 5 trillion. The United States alone circulates or deposits over $7. 6 trillion, suggesting that a return to the gold standard would not be feasible. While most scholars agree a return to a gold standard is not feasible, a few gold standard advocates (such as many Libertarians and Objectivists), argue that a return to a gold standard system would ease inflation risks and limit government power. 156

• The first recorded gold ever discovered in the United States was a 17 -pound nugget found in Cabarrus, North Carolina. When more gold was discovered in Little Meadow Creek, North Carolina, in 1803, the first U. S. gold rush began. • In 1848, while building a saw mill for John Sutter near Sacramento, California, John Marshal discovered flakes of gold. This discovery sparked the California Gold Rush and hastened the settlement of the American West. 157

• In 1933, Franklin Roosevelt signed Executive Order 6102 which outlawed U. S. citizens from hoarding gold. Owning gold (except for jewelers, dentists, electricians, and other industry workers) was punishable by fine up to $10, 000 and/or ten years in prison. • Tiny spheres of gold are used by the Amersham Corporation of Illinois as a way to tag specific proteins to identify their function in the human body for the treatment of disease. 158

• The purity of gold is measured in carat weight. The term “carat” comes from “carob seed, ” which was standard for weighing small quantities in the Middle East. Carats were the fruit of the leguminous carob tree, every single pod of which weighs 1/5 of a gram (200 mg). • Carat weight can be 10, 12, 14, 18, 22, or 24. The higher the number, the greater the purity. To be called “solid gold, ” gold must have a minimum weight of 10 carats. “Pure gold” must have a carat weight of 24, (though there is still a small amount of copper in it). Pure gold is so soft that it can be molded by hand. 159

45 Important Facts About The European and U. S. Debt Crisis 160

• The euro is the sole currency of 17 European Union members and six non-EU members. • The Eurozone or euro area is a fiscal union made up of 17 EU countries that have adopted the euro as their national currency. • The biggest single-day loss ever in the history of the Dow occurred on September 29, 2008, when it dropped 777. 68 points, or approximately $1. 2 trillion in market value. 161

• The European Union is a political union of 27 European countries with the goal to create a single market for goods and service without economic barriers. Ten members of the EU do not use the euro. • The United States has $2. 7 trillion as its monetary base. This amount would be able to pay off only a small fraction of the over $15 trillion of U. S. debt. 162

• If a person spent $1 every second, that would equal to $1 million dollars in 12 days. At this rate, it would take 32 years to spend $1 billion dollars. It would take 31, 000 years to spend $1 trillion dollars. • In 1971, the national debt was $75 million. In 2010, the debt rate rose that much once an hour. 163

• In 2008, U. S. households lost an estimated 18% of their net worth, equaling approximately an $11. 2 trillion loss. This collapse was the largest since the Federal Reserve began tracking household wealth after WWII. • Five years prior to 2008, 11 banks failed. In 2008, 25 banks failed and were taken over by the FDIC. In 2009, 140 failed. 164

• Today the national debt is $15. 2 trillion. This amounts to $48, 380 for every person living in the U. S. , or $127, 431 for every household in the U. S. • As of September 30, 2010, the federal government has $56. 5 trillion ($56, 529, 800, 000) in debt, liabilities, and unfunded obligations. 165

• On August 3, 2011, the national debt rose $238 billion, the largest one-day increase in the history of the U. S. The previous one-day record increase was on June 30, 2009, when the debt increased $186 billion. • The U. S. government borrows approximately $5 billion every business day. 166

• A trillion $10 bills end to end would wrap around the globe 380 times. This would still not be enough pay off the national debt. • The youth unemployment rate in the EU is extremely high at 20%. In Spain, it is 48%. The European Commission said that not only do young people remain the hardest hit by the crisis and its aftermath, but also that “income shocks may prove permanent”. 167

• In context to the Eurozone crisis, the “contagion effect” refers to the fear that one country’s financial problems will cause financial crisis in another country. • For the first time since WWII (1947), U. S. debt reached 100% of the country’s GDP (gross domestic product, the measure of the entire economy) after the debt ceiling was lifted in August 2011. After WWII, the debt equaled 122% of the GDP. In the 1970 s it was 38%. 168

• The IMF claims that China will overtake the U. S. as the world’s leading economic power in 2016. • When the U. S. debt reached 100% of its GDP in 2011, it joined Japan (229%), Greece (152%), Jamaica (137%), Lebanon (134%), Italy (120%), Ireland (114%), and Iceland (103%) as other countries whose public debt exceeds their GDP. 169

• China, the largest foreign holder of U. S. debt, chastised the U. S. on August 6, 2011, admonishing the United States to cure its “addiction to debts” and “live within its means. ” A Chinese newspaper said that the issue of the U. S. dollar needed international supervision and questioned whether the U. S. dollar should continue to be the global reserve currency. 170

• At $400 billion, Apple’s market cap is higher than the entire domestic product (GDP) of Greece. • The U. S. government pays more than $1 billion each day just on interest on its debt. It spends $10 billion a day for all the services it provides. • Over the next 10 years, the U. S. government expects to pay out $45. 7 trillion; however, it expects to bring in only $39 trillion. To make up this difference, the government will likely need to raise taxes on much of the population, cut its spending, and cut back on Medicare and Social Security. 171

• The U. S. debt ceiling was created in 1917 at a limit of $11. 5 billion during WWI to allow greater simplicity and flexibility during the war by allowing the Treasury to borrow any amount it needed as long as the amount was below this limit. Prior to this, Congress had to approve each issuance of debt. To change the debt ceiling, Congress needs to enact specific legislation and the President must approve the legislation. 172

• During the 2011 fiscal year, the U. S. government brought in $2. 4 trillion. However, it spent $3. 7 trillion. • The U. S. was in debt even in its first yearly report on January 1, 1791, in the amount of $75, 463, 476. 52. Every president since Truman has added to the national debt. The debt ceiling has been raised 72 times since 1962, including 18 times under Reagan, eight times under Clinton, seven times under Bush and, as of August 2011, three times under Obama. 173

• The only democratic country besides the U. S. with a debt ceiling is Denmark. However, it’s ceiling is so high it is it unlikely to ever be reached. The Danish set the ceiling so high to avoid slowing the process of borrowing money and to avoid political conflicts similar to those current in the U. S. 174

• Many economists consider the global financial crisis (GFC), or the late-2000 s financial crisis, to be the worst financial crisis since the Great Depression. The crisis was caused by a complex interplay of subprime lending, growth of the housing bubble, easy credit conditions, poor underwriting practices, predatory lending (e. g. , Countrywide Financial would swap a low interest rate for a more expensive one the day of closing), deregulation, and increased debt. The immediate trigger, however, was the bursting of the housing bubble, which had peaked between 2005 and 2006. 175

• Time Magazine identified 25 people who are at most to blame for the U. S financial crisis, including Alan Greenspan, George W. Bush, Bill Clinton, the CEO of Merrill Lynch, and the American consumer. • It is estimated that Bill Gates and Warren Buffet lost a collective $43 billion in 2008. However, they were not the only billionaires to have a rough year. The number of billionaires dropped from 1, 125 in 2008 to 793 in 2009. 176

• From August 2007 to October 2008, an estimated 20%, or $2 trillion, disappeared from Americans’ retirement plans. • The 2011 debt ceiling crisis, which nearly brought the U. S. to the brink of default, has sent disapproval of Congress to the highest levels on record. An estimated 82% of Americans disapprove of the way Congress is handling its job. 177

• Simply put, the European debt crisis happened because some countries in Europe have too much debt and are at risk of not being able to pay it back. If one or more of the Eurozone countries defaults on its debt or pulls out of the Eurozone, it may cause investors to panic, triggering a massive banking shock in Europe and possibly the U. S. 178

• Portugal, Ireland, Italy, Greece, and Spain have been assigned the acronym “PIIGS” and are some of the most indebted Eurozone countries. Researchers note that if a disaster happens, it will start with one of these countries. • Ireland is in massive debt because it experienced a large real estate bubble in which the government had to bail out Ireland’s banks. Its debt is now 121% of its economy. 179

• Even though countries such as Germany and France have high output and manageable debt, the size of other countries’ debt is putting the whole Eurozone in trouble. Consequently, investors don’t want to buy bonds from any European country because even those who have manageable debt might have to assume responsibility for those weaker countries. 180

• Some economists note that Germany and France, which have the strongest economy in the Eurozone, encouraged the PIIGs (Portugal, Italy, Ireland, Greece, and Spain) to go into debt. German and French banks lent money to the PIIGS so that the PIIGS could buy German and French goods and services, just like a junkie setting up an addict. 181

• Some critics blame the Euro currency for the European debt crisis, arguing that a single currency to meet the needs of 17 different economies is inherently flawed. Nations yoked under one currency cannot adjust a particular nation’s money supply to encourage or inhibit growth in response to economic turmoil. 182

• In 2011, investors in global stock markets lost $6. 3 trillion in wealth mainly due to fears of a Eurozone breakup. • When Reagan took office, U. S. debt was under $1 trillion. After he left eight years later, debt was $2. 6 trillion and the U. S. had moved from being the world’s largest international creditor to the world’s largest debtor nation. 183

• The European debt crisis exploded after Greece admitted that its 2009 budget deficiency would be 12. 7% of its GDP, which was far higher than the Eurozone limit of 3%. After Greece revealed its number, investors panicked, the country could not fund itself, it was forced to take a € 110 billion bailout from the IMF, and it is due to receive a second bailout package in 2012. 184

• Troubled European nations, such as Greece, have implemented austerity measures in an attempt to control massive debt. Some austerity measures include cuts to public sector pay and pensions, reduced benefits, and increased taxes. However, austerity economics have been met not only with public opposition but also speculation that spending cuts and higher taxes will reduce demands for goods and services just when an increase is needed. 185

• The majority of EU member states have agreed on a new treaty that could stave off a Eurozone collapse. The intergovernmental treaty would deepen the integration of national budgets, turn over Europe’s bailout funds to a central European bank, and add € 200 billion to the IMF. Only Britain refused to sign the deal. • In 2004, Greece admitted that it gave misleading financial information to gain admission into the Eurozone. 186

• The euro is used by over 332 million people daily and is the official currency of the Eurozone as well as six other countries that are not part of the Eurozone or the EU. After the U. S dollar, the euro is the second largest reserve currency as well as the second most traded currency in the world. 187

European Debt as a Percentage of GDP (2011) Country Greece Italy Ireland Portugal U. K. France Germany Spain Percentage 165% 121% 109% 106% 100% 86% 82% 67% 188

European Unemployment Rate (2011) Country Spain Greece Ireland Portugal France Italy U. K. Germany Rate 23% 17. 7% 14. 5% 12. 4% 9. 8% 8. 5% 8. 3% 6. 9% 189

European GDP (2012) Country Ireland U. K. Germany Spain France Portugal Greece Italy Rate 1%. 7%. 6%. 3%. 05% -3% -6% 190

EU Countries That Use the Euro Currency (The Eurozone) Austria Belgium Estonia Finland Germany Greece Italy Luxemburg Netherlands Portugal Slovenia Spain Cyprus France Ireland Malta Slovakia 191

Countries in Europe That Use the Euro But Are Not Members of the Eurozone or the EU Kosovo San Marino Monaco Vatican City Andorra Montenegro 192

The 27 European Union Countries Austria Cyprus Estonia Germany Ireland Lithuania Netherlands Romania Spain Belgium Bulgaria Czech Republic Denmark Finland France Greece Hungary Italy Latvia Luxembourg Malta Poland Portugal Slovakia Slovenia Sweden United Kingdom 193

Countries in the EU That Do Not Use the Euro Bulgaria Denmark Czech Republic Estonia Hungary Latvia Lithuania Poland Romania the UK (Scotland, England, Sweden Wales, Northern Ireland) 194

History of the U. S. Debt Ceiling for Last Decade Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Limit $5. 950 trillion $6. 400 trillion $7. 384 trillion $8. 184 trillion $8. 965 trillion $9. 815 trillion $11. 315 trillion $12. 394 trillion $14. 294 trillion 195 $15. 194 trillion