What is the gold standard?
June 30, 2021, | AtoZ Markets – The gold standard is a money system wherein the currency’s standard unit is a set amount of gold. Its storage is at the amount of a set amount of gold. One can exchange this kind of currency at any point in the world for a set amount of gold in every unit of money.
One way of international paying is gold or money that is convertible to gold at a set price. In systems such as this, the exchange rate has a fixed price. If the exchange rates went up or declined below the rate amounting to more than the rate for shipping gold, massive inflows or outflows will happen before they return to the average level. Gold points are the trigger points.
The gold standard story
Sometime in 1821, United Kingdom started such operations. Before, people consider silver as the world’s monetary metal and not gold. Gold is for coinage in some countries but not a reference metal that coordinates all forms of money. Later on, people beyond the United Kingdom adapted the bimetallic regime where they used silver and gold for 50 years.
Finally, in the 1870’s the gold standard became widely used in the US, Germany, France, and many more. This monometallic regime happened due to a massive gold discovery in North America.
In 1914, the full gold standard gave people the ability to buy and sell gold with no limit at a set price. However, it only lasted until World War I. Albeit being reestablished in 1928, nations switched to a gold exchange standard since gold became scarce. Central bank filled their gold reserves with currencies that are convertible to gold with a stable exchange rate. Again, this gold exchange fell apart due to the Great Depression.
On the other hand, the US made a new dollar price for gold used for trading by central banks abroad called “pegging.” Pegging the gold price became the basis of the restoration of an international gold standard after World War II. Most exchange rate pegs were either in the US dollar or gold after the war.
There was a reestablishment of gold in 1958. Some major European countries allowed people to convert their currencies into gold or US dollars freely when they pay internationally. However, the US stopped this due to low gold reserves and payment balance deficits in 1971. It is where gold ended its part in world exchange. Dollars and other paper currencies became the new international monetary system.
Pros and Cons
There are few advantages that the gold standard brought. One is limited government or bank power to cause price inflation due to the massive issuing of paper currencies. Another is the certainty that it gave when international trade provided a fixed and steady exchange rate model.
In contrast, there are also downsides in gold standards. First, the money supply is not flexible. Second, not all countries can make their economy inflation and depression remote from others. Also, a country’s adjustment process can be challenging when there is a recession or rate of economic expansion decline if they have a deficit payment.