Gold Trivia 22 Apr 2019
The gold standard was a monetary system that was widely prevalent before the concept of fiat money came in. Under this system, the value of a country’s currency or paper money was directly associated with gold. So, under the gold standard, you could convert money into a set amount of gold, as decided by your country.
This monetary system was given up by all countries decades ago. Great Britain abandoned the gold standard in 1931, and the US started down that same path in 1933 before the Vietnam War completely brushed it aside in 1971.
It is a well-known fact that gold price is a function of demand and supply. Before the gold standard was given up, the demand for gold was supported by it. Therefore, it is interesting to note the shift in gold price before 1971 and post it. After 1971, the price of gold went sideways for decades, until the global financial crisis of 2009.
As an outcome of the Bretton Woods Agreement of 1944, the price of gold was fixed to the US dollar. The US was never a battlefield in the great wars; it was the strongest economy at that time, so choosing the US dollar as a yardstick to value gold – and vice versa – seemed an obvious choice.
The value of gold decided upon at the time was 35 dollars to an ounce, something that stood firm till the Vietnam War. The gold standard, which started as a part of the rebuilding process after World War II, ended somewhat ironically with the Vietnam War in 1971.
No country follows the gold standard anymore. However, it’s left certain traces behind. One of its legacies is the gold reserves that many countries maintain. Countries have continued to hold a considerable amount of gold, which received an impetus after the Economic recession of 2009. The Indian government bought 200 tonnes of gold from the International Monetary Fund (IMF) in 2009.
Related article:The Gold Standard summarised
These statistics give rise to the obvious question: do we, and the world at large, look at gold as a reserve currency?
Watch this video to know more about the history and significance of the relatively ancient monetary system – the Gold Standard.