1. The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. Under the gold standard, currency issuers guarantee to redeem notes, upon demand, in that amount of gold. Governments that employ such a fixed unit of account, and which will redeem their notes to other governments in gold, share a fixed-currency relationship. The gold standard is not currently used in any nation, having been replaced completely by fiat currency. However, it is still in use by some private institutions.
2. In economics, fiat currency or fiat money is money backed by government demand for it as legal tender in payment of legal liabilities, such as taxes. It is often associated with paper money because legal liabilities are created and settled by documents which are usually paper. Without government demand for certain kinds of paper as legal tender, such as bank notes, only specie is unlimited legal tender. However this is not universally true, as some currencies, (notably sterling issued by Scottish banks), are not legal tender but are accepted by longstanding confidence.
3. Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Greek for oikos (house) and nomos (custom or law), hence “rules of the house(hold).”
4. In macroeconomics and accounting, a good is contrasted with a service. A good here is defined as a physical (tangible) product capable of being delivered to a purchaser and involves the transfer of ownership from seller to customer, as opposed to an (intangible) service. A more general term that preserves the distinction between goods and services is ‘commodities’. In microeconomics a ‘good’ is often used in this more inclusive sense of a commodity.
5. In macroeconomics, money supply (“monetary aggregates”, “money stock”) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. The rate of interest is the price of money over time, that is, the price paid for deferring payment of monetary debts. The two are related inversely: as money supply increases interest rates will fall. When the interest rate equates the quantity of money demanded with the quantity of money supply, the economy is working at the money market equilibrium.
6. Gradually, after the Second World War, the amount of U.S. dollars outside the United States increased enormously, both as a result of the Marshall Plan and as a result of imports into the U.S., which had become the largest consuming market after peace was reestablished in Europe. As a result, enormous sums of U.S. dollars were in custody of foreign banks outside the United States. Some foreign countries, including the Soviet Union, also had deposits in U.S. dollars in American banks, granted by certificates.
During the Cold War period, especially after the invasion of Hungary in 1956, the Soviet Union feared that its deposits in North American banks would be frozen as a retaliation. It decided to move some of its holdings to the Moscow Narodny Bank, a Soviet-owned bank with a British charter. The British bank would then deposit that money in the US banks. There would be no chance of confiscating that money, because it belonged to the British bank and not directly to the Soviets. On February 28 1957, the sum of $800,000 was transferred, creating the first eurodollars. Gradually, as a result of the successive commercial deficits of the United States, the eurodollar market expanded worldwide.
7. Slave trading had generated astounding wealth for Britain. In the late eighteenth and early nineteenth century a series of technological advances led to the Industrial Revolution. Britain’s position as the world’s pre-eminent trader helped fund research and experimentation. The nation was also gifted by some of the world’s greatest reserves of coal, the main fuel of the new revolution.
It was also fuelled by a rejection of mercantilism in favour of the predominance of Adam Smith’s laissez-faire capitalism. The fight against Mercantilism was led by a number of liberal thinkers, such as Richard Cobden, Joseph Hume, Francis Place and John Roebuck.
8. The basis of the British Empire was founded in the age of mercantilism, an economic theory that stressed maximizing the trade inside the empire, and trying to weaken rival empires. The modern British Empire was based upon the preceding English Empire which first took shape in the early 17th century, with the English settlement of the eastern colonies of North America, which would later become the original United States, as well as Canada’s Maritime provinces, and the colonisations of the smaller islands of the Caribbean such as Trinidad and Tobago, the Bahamas, Barbados, and Jamaica.
9. Foreign trade thus tripled in volume between 1870 and 1914, although (again) most of the activity occurred among the industrialized countries, or between them and their suppliers of primary goods or their new markets. In 1913, only 11 percent of the world’s trade took place between primary producers themselves. Britain ranked as the world’s largest trading nation in 1860, but by 1913 it had lost ground to both the United States and Germany: British and German exports in that year each totalled $2.3 billion, and those of the United States exceeded $2.4 billion. More significant was the emigration of their goods and capital.
10. International accumulation of foreign reserve currencies shows the distribution of USD and Euro dominance on currency.
11. Although a global economy is generally associated with the late 20th century and early 21st century, it may be argued that a global system of exchange existed before that.
Some possible dates for its origins are:
- The Phoenician global trade system,
- The Roman to Han dynasty trade system, Silk Road (1st century AD),
- The Arab global trade system (10th century AD),
- The Great navigations (15th to 17th century AD),
- The New Imperialism (19th century) & Neo-colonialism (20th Century)
12. Fall of the guilds
Despite its advantages for agricultural and artisan producers, the guild became a target of much criticism towards the end of the 1700s and the beginning of the 1800s. They were believed to oppose free trade and hinder technological innovation, technology transfer and business development. According to several accounts of this time, guilds became increasingly involved in simple territorial struggles against each other and against free practitioners of their arts, but the neutrality of these claims is doubted.
13. In part due to their own inability to control unruly corporate behavior, the tide turned against the guilds.
Because of industrialization and modernization of the trade and industry, and the rise of powerful nation-states that could directly issue patent and copyright protections — often revealing the trade secrets — the guilds’ power faded. After the French Revolution they fell in most European nations through the 1800s, as the guild system was disbanded and replaced by free trade laws. By that time, many former handicraft workers had been forced to seek employment in the emerging manufacturing industries, using not closely guarded techniques but standardized methods controlled by corporations.
14. Influence of guilds
Guilds are sometimes said to be the precursors of modern trade unions, and also, paradoxically, of some aspects of the modern corporation. Guilds, however, were groups of self-employed skilled craftsmen with ownership and control over the materials and tools they needed to produce their goods. Guilds were, in other words, small business associations and thus had very little in common with trade unions.
15. A guild is an association of craftspeople in a particular trade. The earliest guilds are believed to have been formed in India circa 3800 BC,
and though they are not as commonplace as they were a few centuries ago, many guilds continue to flourish around the world today.
16. The balance of payments, (or BOP) measures the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific time period, usually a year. The BOP is determined by the country’s exports and imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits). Balance of payments is one of the major indicators of a country’s status in international trade, with net capital outflow.
17. Gold reserves (or gold holdings) are held by central banks as a store of value. At the end of 2004 central banks and official organizations held 19% of all above ground gold as a reserve asset.[1] In 2001, it was estimated that all the gold ever mined totalled 145,000 tonnes.[2] As one metric tonne equals 1,000 kilograms (or 32,150 troy ounces), this equated to a value of US$3.445 trillion in September 2007($739/troy ounces).[3] For comparison, the entire global market capitalization for all stock markets was US$43.6 trillion in March 2006. About one percent of all above ground gold (370 metric tonnes) was mined in the first five years of the California Gold Rush (worth approximately US$7.2 billion at November 2006 prices).[4]
18. To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved – and be predictably useful when it is so retrieved.
This is distinct from the standard of deferred payment function which requires acceptability to parties one owes a debt to, or the unit of account function which requires fungibility so accounts in any amount can be readily settled. It is also distinct from the medium of exchange function which requires durability when used in trade, and a minimum of opportunity to cheat others.
When currency is stable, money can serve all four functions. When it isn’t, such as during times of hyperinflation or when complex and volatile forms of financial capital are involved, it becomes important to identify alternative stores of value, of which common ones are:
• real estate – actual deeds in protectible land
• gold – once the basis of the gold standard
• silver – once the basis of the silver standard
• precious stones, and precious metals
• gold backed currencies, e.g. Swiss franc
• collectibles, e.g. original art by a famous artist or antiques
• livestock (see African currency)
19. The creation of wealth
Wealth is created through several means.
• Natural resources can be harvested and sold to those who want them.
• Material can be changed into something more valuable through proper application of knowledge, skill, labor and equipment.
• Better production methods also create additional wealth by allowing faster creation of wealth.
For example, consider our early ancestors. Building a house from trees created something of greater value for the builder. Hunting and firewood created food and fed a growing family. Agriculture converted labor into more food and resources. Continuing use of resources and effort has allowed many descendants to own much more than that first house.
20. The difference between income and wealth
Wealth is a stock, meaning that it is a total accumulation over time. Income is a flow, meaning it is a rate of change. Income represents the increase in wealth, expenses the decrease in wealth. If you limit wealth to net worth, then mathematically net income (income minus expenses) can be thought of as the first derivative of wealth, representing the change in wealth over a period of time.
21. Per capita income as a measure of wealth
Per capita income is often used as a measure of the wealth of the population of a nation, particularly in comparison to other nations. It is usually expressed in terms of a commonly-used international currency such as the Euro or United States dollar, and is useful because it is widely known and produces a straightforward statistic for comparison.
22. There are three lists of countries of the world sorted by their gross domestic product (GDP) (the value of all final goods and services produced within a nation in a given year). The GDP dollar estimates given on this page are derived from Purchasing Power Parity (PPP) calculations. Using a PPP basis is arguably more useful when comparing generalized differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of the countries, rather than using just exchange rates which may distort the real differences in income.
Rank Country GDP (PPP) $m
— World 66,228,669
— European Union 13,881,051
1 United States 13,020,861
2 People’s Republic of China 9,984,0621
3 Japan 4,170,533
4 India 4,158,922
5 Germany 2,558,908
6 United Kingdom 2,121,766
7 France 1,934,677
8 Italy 1,790,895
9 Russia 1,727,349
10 Brazil 1,701,183
32 Bangladesh 330,383
33 Malaysia 312,959
34 Sweden 312,808
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