Everything you need to know about the gold standard

Investment 04 Sep 2017

Understanding the gold standard

Did you know that gold was an integral part of the monetary system that existed between 1870 and 1914?

Let’s go back to the era when the monetary system glittered – The gold standard.

How is gold standard determined

The gold standard is a monetary system that linked the value of currencies to gold. Such currencies could be freely converted into a fixed amount of gold. Under this system, the imports and exports of gold were free of restrictions. Countries using the standard would fix a price for gold. All the buying and selling of gold was then carried out at this price. Also, the value of the domestic currency was derived from such a price.

The first advocates of gold standard

Country Period
The United Kingdom 1819
Portugal 1854
Germany 1871

By 1900, all countries adopted the system, except China and some Central American countries.

Rules for determining gold standard

There were no set rules for the gold standard. However, the government and the banks were expected to observe certain rules. These were known as the ‘rules of the game’. Few of the rules:

  1. There is no restriction on the imports and exports of gold between countries.
  2. The central banks must endeavour to accelerate the gold standard.
  3. The gold standard can be non-operational in times of crisis. However, restoration post crisis was a must.
  4. There should be a fair amount of cooperation between the central banks of different countries.

The fall of gold standard

The gold standard could not stand the test of time. The post-World War I era witnessed its major break down. However, several countries tried to adhere to the standard even then. This monometallic standard finally collapsed after the Great Depression in 1929.

The bottom line

“The gold standard is a jealous God. It will work provided it is given exclusive devotion,” said Geoffrey Crowther, a British economist. Gold was an important part of the monetary system for about 50 years, but several economic and political factors led to its fall. It has now been completely replaced by fiat money i.e. currency that is used because of a government's order — or fiat — and is thus accepted as a means of payment.For US, it is Dollar, for India, it is INR, for Dubai, it is Dhiram. Today, gold isn’t used as a currency, but eternally stores economic, social, emotional, and aesthetic value.

Sources:
Source1 Source2

Gold Glossary

ETF (Exchange Traded Funds)

It is an investment fund dealing in bonds, commodities etc. and gets traded on the stock market like normal stocks. A gold-backed ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. Gold-backed ETFs are financial instruments comprised of units backed by physical gold which may be in paper or dematerialised form. One gold-backed ETF unit is typically backed by 1 gram of physical gold.

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