A Look Into the Gold Standard

The gold standard is a monetary system wherein the price of a currency is valued according to a fixed weight of gold. Under this standard currency issuers (i.e. the different nations/countries) would guarantee their notes to other governments in the specified rate/amount of gold. For a time the gold standard had its share of strengths. But due to trends in the different economies a shift was made moving away from the gold standard.

Let us see how the gold standard became a choice for valuing currency. We shall also find the reasons why the gold standard was used. We will also discuss the effects of the gold standard to an economy, its benefits, and its weakness that led to its eventual decline.

Gold has been used as a form of money for many centuries. It's properties that includes rarity, durability, beauty, density, resistance to corrosion, uniformity, easy divisibility, ease of identification and others has made it a commodity of choice for merchants and traders.

Anciently gold was used as a unit of account for other trade goods. For instance, trade goods such as wheat were measured versus a certain weight/standard in gold. The stored value of different commodities were also represented by gold.

When gold was deposited and became transferable across accounts or lent at a certain interest a banking system was started. When paper currency became in use, its main initial functions were to reduce the danger of transporting gold (robbery was somehow rampant), reduce the debasement of coins (when a coin unit reduces it's purity or contains less gold/precious metals it's value also declines), and to curb hoarding.

The development of the use of paper money was originally due to the dangers of transportation and long voyages. Governments also wanted to regulate the flow of commerce within their territories.

Resistance to credit and debt expansion is the primary claim made by supporters of the gold standard. Inflation due to currency devaluation is prevented. The credit of a nation is said to be kept secure thus encouraging lending.

Nowadays the gold standard is no longer in use by any country. It only in is use today by private financial institutions for digital gold currency supply. The gold standard has been replaced by fiat currency. The cessation of the use of gold standard is due to an exhibited weakness.

As one economy gains strength import volumes go up, and the gold reserves would run low. Thus the currency of that country would lose its support in gold. The country would then face a diminishing money supply. This would result in increases to interest rates. Economic activity would then slow down to a halt and an economic recession would be faced by that country applying the gold standard. Since all commodities in such a country would go down, this would attract buyers from other nations. This entry of sales would then inject gold into the economy and increase its money supply. And we have a cycle of recession that has now gone full circle. This economic pattern was common during the era of the gold standard. It was marked by of debt crisis and economic depression. During World War I trade flows were discontinued temporarily so did the movement of gold.

Today the gold standard is no longer the means to dictate the value of a currency. Since the change, currency now moves freely across countries and the price of currencies would be determined by forces of supply and demand.