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The changing role of gold in the International Monetary System

  • Economics


By Hang-Sheng Cheng and Nicholas P. Sargen Without any fanfare, the United States has now closed a long chapter in its monetary history. On December 31, 1974, the Government revoked a 41-year ban on U.S. citizens' ownership of gold, and a week later, on January 6, 1975, it started auctioning a portion of its gold stock on the open market. These actions not only signaled the U. S. Government's decision to end the monetary role of gold, but also called into question the metal's fu- ture role in the world economy. Symbolically, the auction was conducted not by the U.S. Treasury, a monetary authority, but rather by the General Ser- vices Administration, a housekeeping arm of the U.S. Government. Thus, in a quiet way the U.S. Government suggested to the world that hence- forth it will handle its gold in the same way it han - dies its used office furniture. This historical decision presaging an end to the monetary role of gold has important implications for the world at large. As far back as mankind's memory extends, gold has been associated with money as a store of value, as a means of payment, and as a backing for national currencies. Because of the deep-rooted association of gold with money, many people will continue to regard gold as a prime financial asset for a long time into the future. Advo- cates of gold will question not only the Government's wisdom in attempting to demonetize the metal, but even its ability to end unilaterally the monetary role of gold, either in the international monetary system or in the minds of the public. Subsequent to the U.S. actions, France an- nounced on January 9 a revaluation of its official 5 gold holdings, from the former official price of $42.22 per ounce to $170.40 per ounce, in order to bring the valuation closer to the market price of gold. It also declared that another revaluation would be made six months later. The operational meaning of the French decision was unclear, since nothing was said about the intended relationship, if any, between th

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