What is Gold Standard?

Published by Thomas Herold in Banking, Economics, Laws & Regulations

The term 'Gold Standard' is included in the Economics edition of the Herold Financial Dictionary. Get yourself a copy now on Amazon - available as Kindle or Paperback.

The gold standard represents a centuries’ used system of money for backing up currencies with tangible, physical gold holdings in a central bank vault. Under the gold standard, the basic economic currency unit proved to be a pre set amount of gold by weight. Several different types of gold standards exist.

The Gold specie standard proves to be a system where the money unit itself is represented by gold coins that are in circulation. Alternatively, it could be represented by an exchange unit of value that is literally expressed in units against a specific gold coin that circulates, along with other coins that are minted from a metal with less value, such as silver or copper.

Conversely, the gold exchange standard usually has to do with silver and other valuable metal coins that are circulating. In this type of exchange system, the monetary authorities promise that a set exchange rate against the currency of another country practicing the gold standard will be maintained. This gives rise to a gold standard that is not literal but still de facto. The silver coins circulating then trade with a set external value in gold terms that stands independently of the actual silver value contained within the coins.

The most common gold standard that has been seen in the last few hundred years turns out to be the gold bullion standard. The gold bullion standard refers to a money system where no gold coins are actually circulating throughout the economy. Instead, the monetary authorities have consented to exchange a set amount of gold in exchange for their paper currency. This is done at a set price that is established for the paper currency that circulates.

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The gold bullion standard existed in the world economy from the 1700’s until 1971. During this span of almost three hundred years, the values of major world currencies proved to be exceptionally stable, as were the supplies of money in existence. This resulted from a restriction of the gold standard that only allowed such paper currency to be printed as greater amounts of gold existed in the respective nation’s treasury and vaults. The positive of this proved to be that the world could count on currencies that did not fluctuate wildly in value or decline consistently over time. Governments disliked the gold standard as it kept them from increasing the money supply or spending more money than the country actually had. They found it too restrictive.

The gold standard in the world collapsed when President Nixon initiated what became known as the Nixon shock by unilaterally taking the country off of gold exchange and convertibility for dollars in 1971. The currency of both the U.S. and most countries of the world then became Fiat currencies, only backed up by the government decree. Since the gold standard was abandoned, the U.S. dollar has declined so severely that a single dollar in 1971 would today be worth $35 2010 dollars.

The term 'Gold Standard' is included in the Economics edition of the Herold Financial Dictionary. Available now on Amazon in Kindle and Paperback.