Answer to Question #87007 in Macroeconomics for Dennis Gurban

Question

When countries used the gold standard and needed to increase gold reserves to print more money how was it done? How would the government create more gold reserves?

Answer 1

Countries used gold standard for getting more money and reducing of the budget deficit. For this governments exchange gold for the foreign or national currency. For example, during the Occupation of the Ruhr the German central bank issued non-convertible marks to support workers who were on strike against French occupation and to buy foreign currency for reparations; this caused German hyperinflation in 1920s.

The government can create gold reserves by:

1. exchanging it's dollar (or other) reserves for gold at the official exchanging rate (as the administration of President Charles de Gaulle made in 1960s, trying to reduce U.S. economic influence).

2. forcing individuals to sell gold to the Treasury (as it was made in USA in 1934, when the government passed the Gold Reserve Act, which authorized the president to devalue the gold dollar over 40%. Thereat all gold was nationalized; Federal Reserve banks turned over their supply to the U.S. Treasury; in return the banks received gold certificates to be used as reserves against deposits and Federal Reserve notes.