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Gold standard

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A gold standard is a monetary system where the value of money is tied to a fixed amount of gold. In this system, the economic unit of account is defined by a specific quantity of the metal.

Two 20kr gold coins
Two 20kr gold coins

This creates a direct link between paper currency and physical gold reserves. For much of history, this system served as the foundation for international trade and finance. It reached its peak influence between the 1870s and the early 1920s. It also returned in a different form after World War II until 1971.

There are several ways a nation can implement this system. One version is the gold bullion standard. In this model, gold coins do not circulate for daily shopping. Instead, central banks hold large amounts of gold bars, known as bullion. They agree to exchange circulating paper currency for this gold at a fixed price.

US-$100-GC-1882-Fr.1207
US-$100-GC-1882-Fr.1207

Another version is the gold exchange standard. Under this system, a government does not tie its money directly to gold. Instead, it ties its currency to the currency of another country that is on a gold standard. This was the main international system under the Bretton Woods Agreement from 1945 to 1971.

Some countries also experienced a "limping standard." This occurred when a nation maintained significant amounts of silver coins at the same value as gold. This created uncertainty regarding the currency's true value relative to gold. Common examples included the Dutch guilder and the U.S. Morgan dollar.

1879S Morgan Dollar NGC MS67plus Obverse
1879S Morgan Dollar NGC MS67plus Obverse

These nations were often in a state of bimetallism, using both silver and gold. A bimetallic standard attempts to give popular gold coins a fixed value in terms of silver. However, these systems were often unstable due to fluctuating ratios between the two metals.

Historically, gold has been used as money since around 600 BCE in Asia Minor. For thousands of years, however, silver was the primary metal for domestic economies. Silver was used for wages, salaries, and most local retail trade. Gold was difficult to use for daily transactions because it lacked divisibility. A single gold ducat could represent seven days of salary for a high-paid worker.

NNC-US-1849-G$20-Liberty Head (Twenty D.)
NNC-US-1849-G$20-Liberty Head (Twenty D.)

Furthermore, the 19th century saw the rise of banknotes and token coins. Before these tools existed, gold was mostly used for high-value international trade.

Great Britain played a central role in the rise of the gold standard. In 1717, Isaac Newton was the master of the Royal Mint. He set the exchange rate of silver to gold too low. This caused silver coins to leave Great Britain, creating a de facto gold standard.

Sovereign Victoria 1842 662015
Sovereign Victoria 1842 662015

As Britain became a leading global financial power in the 19th century, other nations followed its lead. The British moved from a bimetallic system to a formal gold standard through several steps. This included the Bank Charter Act of 1844, which linked banknote issuance to gold reserves.

Despite its popularity, the gold standard had major drawbacks. It was prone to volatility and placed strict constraints on governments. To keep fixed exchange rates, governments could not easily use expansionary policies. This made it difficult to fight unemployment during economic recessions. Many economists believe the gold standard helped prolong and deepen the Great Depression.

Graph charting income per capita throughout the Great Depression
Graph charting income per capita throughout the Great Depression

A 2012 survey of 39 economists found that 92 percent believed a return to gold would not improve price stability.

Economist Michael D. Bordo identified three specific benefits that made the system popular. He noted its role as a stable nominal anchor and its automaticity. He also mentioned its function as a credible commitment mechanism.

Price of gold
Price of gold

While many economists criticize it, the system is still supported by some followers of the Austrian School. Today, the era of the gold standard has largely ended. This happened when the United States ended the ability to convert dollars to gold in 1971. However, many states still hold substantial gold reserves today.

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🖼️ Images & Media (10)
File:Two 20kr gold coins.png
Two 20kr gold coins.png
File:US-$100-GC-1882-Fr.1207.jpg
US-$100-GC-1882-Fr.1207.jpg
File:Sovereign_Victoria_1842_662015.jpg
Sovereign_Victoria_1842_662015.jpg
File:NNC-US-1849-G$20-Liberty_Head_(Twenty_D.).jpg
NNC-US-1849-G$20-Liberty_Head_(Twenty_D.).jpg
File:Russian Empire-1898-Bill-1-Reverse.jpg
Russian Empire-1898-Bill-1-Reverse.jpg
File:1879S Morgan Dollar NGC MS67plus Obverse.png
1879S Morgan Dollar NGC MS67plus Obverse.png
Price of gold.webp
File:McKinley Prosperity.jpg
McKinley Prosperity.jpg
File:Graph charting income per capita throughout the Great Depression.svg
Graph charting income per capita...
File:Gold-nominal-constant-usd.svg
Gold-nominal-constant-usd.svg
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