Gold Standard

During the current recession, different theories were put forward to suggest the decline of the US economy. Some researchers attributed abandoning of gold standard as one of the factors for economic instability. Since then, a lot of people want to know what is the gold standard. Although the gold standard is no longer in use today, the influence it had on the world economy cannot be neglected. The gold standard is a system in which the monetary unit of a country is expressed as a fixed weight of gold. Gold standard was an agreement by several countries that they would value their currencies in such a way that it could buy the exact amount of gold. For example, if a country had X units of gold reserves, then it could mint only a specific amount of currency equivalent to that amount of gold. The Gold Standard Act was passed in 1900 and it established gold as monetary standard all over the world. Richard Nixon ended the convertibility of currency into gold some 40 years ago, and today the incident is known as 'Nixon Shock' or 'Nixon Gold Standard'. A lot of thinkers, to this date, are critical of Nixon's decision and question Nixon's legal right to end the gold standard. Today most of the economies work on the floating exchange system.

Gold Standard Types

Gold was always looked upon as a precious metal and people were well aware of its properties. It was used as a standard by various countries, but with time, some changes were made to the way it was used. Let us take a look at the types of gold standards.

• Gold Specie Standard: This monetary system is one of the oldest in the world. It was based on the actual gold coins of different denominations. In US, it was adopted in 1873, with the American Gold Eagle as its unit. The various denominations in which the gold coins were available were $50, $25, $10 and $5. You can read more on history of American money.
• Gold Exchange Standard: In this type of monetary system the currency used was not made up of gold but it had a value equivalent to that of gold. It was widely used in the late ninetieth century and was in use till the beginning of twentieth century. In this system, coins made of silver and other metals were used for circulation but the government guaranteed an exchange rate that was equivalent to value of gold coins.
• Gold Bullion Standard: This was the last gold standard that was used before the gold standard was completely abandoned. In this system, the government started selling gold bullion at a fixed price. International trade caused a lot of gold bullion to be shipped out of countries like Britain, France, etc. and the gold bullion standard was abandoned as well.

The Gold Standard Act

The Gold Standard Act was approved on March 14, 1900 in US, when gold was declared to be the standard for all the national currency. It had taken around 25 years for the US government to choose between the value of silver or gold. It also set a standard for gold as 1 oz of troy gold was equivalent to $20.67. (one troy is equal to 31.1034768 grams) The gold standard act was dissolved in 1934 with the adoption of the Gold Reserve Act, which stopped the use of gold as a standard for currencies.

Today, most of the economies work on floating money or fiat money. Adopting the gold standard again is very difficult as gold is found only in selected parts of the world and no country has the gold reserves for the amount of currencies they generate. An unstable US dollar is a concern for many countries and many economists are of the opinion that there should be a monetary system in which a precious metal, gold/silver etc., is linked to the currency of the country. In the end, we hope that this article may help in understand what is gold standard and the important part it played in shaping the world economy.