The Interest Rate Parity (IRP) Condition states that the rate of return on investment in dollar securities is equal to the expected rate of return on investment in securities valued in a given foreign currency, in this case, the South Korean Won; (This holds on the assumption…
al flaws of the gold standards during the world war one and policy responses by various economies that led to unpredictable international monetary contraction and deflation. In essence, the tying of countries’ money to gold is noted as directly responsible for the onset of the great depression, for example, Hubbard (1991) notes that countries which abandoned the gold standards earlier enough recovered from the great depression comparative to those that remained on gold.
Hubbard, (1991) attributes the collapse of the gold standard to its mismanagement by global financial stakeholders during the interwar period most specifically, the 1920s and the 1930s. They establish that after the World War I, the redrawing of international boundaries limited free circulation of both real bills and consumer goods leading to the distortion of the gold standards. This led to the scuttling of the bill market and the ultimate government control of foreign trade in consumer goods favored due to political rather than economic interests thereby leading to a large scale collapse of the gold standards. According to Hubbard, (1991), the gold standard also collapsed as a result of sabotage by countries during the interwar period rather than the general belief that it collapsed due to its inner contradictions. Additionally, banking panics in the 1939s initiated by deflation which was imposed by the gold standard interfered with the normal flows of credit thereby negatively affecting the performance of the real economy.
Researches indicate that there have been repeated calls for policy considerations for a return to the gold standard due to the growing disillusionment with the presently favored politically controlled monetary policy. The case presented by proponents is that budget deficits and massive federal borrowings would be difficult to finance under the gold standard. They note that at present, the paper money system poses a number of problems hence various treasuries and ...
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