Business, Legal & Accounting Glossary
A gold standard is a monetary system in which a fixed weight of gold becomes the store of monetary value. Under the gold standard, banknotes and coins can be exchanged for gold. If multiple countries follow a gold standard, their foreign exchange rates become fixed. The international gold standard emerged in the late nineteenth century following an extended period of monetary instability characterized by disruptions related to silver shortages and the gradual emergence of central banks. The stability subsequently following this international gold standard is credited with facilitating the first era of globalization prior to WWI. A gold standard of some form persisted for about a century until the Bretton Woods agreement collapsed in the 1970s when the US stopped exchanging dollars for gold. A return to the gold standard has contemporary advocates. They claim the gold standard could help insulate the world economy from government monetary mismanagement.
The gold standard is referred to as an obligation taken by several partaking countries, in which they fix prices of their domestic currencies in terms of a particular amount of gold. In the gold standard, national currency along with other forms of money including bank deposits and notes are without restraint changed into gold at a fixed price.
In order to understand the concept of the gold standard a simple example can be used. Let a country under gold standard sets price for gold as $90 an ounce. This is the price at which gold is purchased and sold. This price of gold sets a value for the domestic currency of the country. Thus, $1 would be valued 1/100th of an ounce of gold.
Gold is regarded as the first known metals. During the early 1900’s several countries including the US accepted gold standard. History says that in the year 1717, England adopted a de facto gold standard and formal adoption of gold standard took place in the year 1819. The United States was initially a follower of bimetallic standard but adopted gold standard de facto in the year 1834 and again adhered to gold standard de jure in 1900. The United States fixed price of gold at $ 20.67 per ounce in the year 1834 and it continued to be at $ 20.67 per ounce until 1933. Apart from the United States other leading nations also joined the commitment of gold standard. The classical gold standard is usually referred to as the period ranging from 1880 to 1914. This period is so-called as it is during this period that most of the nations accepted gold standard. This period can be looked upon as a period when there was unparalleled economic growth and there also prevailed trade liberty in goods, labour, and capital.
One of the major benefits drawn from the gold standard is that it provides coverage for even relatively low level of inflation. Inflation is mainly caused due to fluctuations in supply and demand for money. If the supply of gold is fixed then the supply of money will also stay comparatively constant. This will result in less publishing of currencies in an economy.
Adoption of the gold standard brings about stability in the exchange market. This is one of the drawbacks of the gold standard as exchange rates are not allowed to fluctuate according to economic circumstances. The stabilization policies of the Federal Reserve also don’t aid in the proper functioning of exchange rates as gold standard imposes a limit to that. As a result, any economy adopting the gold standard is subjected to rigorous economic shocks.
The economy in the recent time has seen a lot of trade deficit, but with diminishing trade deficit the focus is now distorted. Economic commentators have found out several reasons behind the occurrence of trade deficit. They are of the view that sole the term ‘debt’ is not a problem but how debt is acquired is the real crisis. Trade surplus can’t always be an indication of economic wellbeing. Economic commentators overlooked one of the major factors responsible for the trade deficit. It was none other than “gold”, which was treated as a prime sign of wealth in the nineteenth century. It is observed that countries that diverged from adopting the gold standard were trapped in the trade deficit and there has to be made corrections in monetary policy to restore economic growth.
In the late seventies and eighties, extensive disappointments with elevated inflation rate lead to the adoption of the gold standard. Gold standard could not survive due to various reasons and finally disappeared in 1971 leaving behind an inevitable appeal. The gold standard is now replaced by the system of fiat currency. In this stage of the modern economy almost every leading country’s economy has adopted the system of fiat money. Here money is used as a medium of exchange. Value of money in this economy is determined by both supply and demand forces of money.
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This glossary post was last updated: 27th March, 2020 | 1 Views.