Economics

What Does Gold Standard Money Mean?

Currencies and monetary systems based on elemental gold are said to use the Gold Standard.

Currencies and monetary systems based on elemental gold are said to use the "Gold Standard". The Gold Standard Money is an economic concept where a particular currency is priced according to a specified quantity of gold. The currency is thus backed by and valued in gold, and it can easily be converted into gold reserves. In the gold standard, precious metals, in this case, gold, are considered equivalent to currency and are deemed as valuable.

History

The gold standard for money did not originate from any particular place, and was instead a universal acceptance of gold as currency due to its rarity, and thus its value. Gold coins were used as early as 643 B.C. in what is now present-day Turkey, known then as Lydia. The use of Gold spread across Europe and the Mediterranean, and by the late 19th Century, gold was the standard for the major global currencies. The standard promoted gold mining across the world, such as the Gold Rush in California, the US in 1948. The pursuit of gold deposits led European powers to go as far as Africa such as the British in Witwatersrand, South Africa.

Applications

When using the gold standard, a government sets a fixed price for gold, and it trades in the commodity at that price. For example, the United Kingdom can determine the price of an ounce of gold at ₤400. The set price directly translates to the value of the pound sterling, and it would be 1/400th of an ounce of gold. A country’s domestic money supply is linked to its stock of gold.

Evolution Over Time

In the 18th and 19th Centuries, the gold standard was adopted by most major world economies, including such superpowers as England and the United States. The period between 1880 and 1914 is known as the classical gold standard as it was the de facto monetary system. In this system, paper money was exchanged for gold and gold coins also circulated in economies. The gold standard’s dominance was challenged during World War I, as countries resorted to printing money to finance the war.

A new gold standard was adopted in the 1920s, popularly referred to as the Gold Exchange Standard, wherein central banks purchased a larger quantity of the gold stock and held foreign currency, chiefly American Dollars or British Pounds, as reserves. From 1946 to 1971, another modification of this standard known as the Bretton Woods system was adopted, where most economies exchanged with the US Dollar in the international market. The US, in turn, set the price of gold at $35 per ounce. This move depleted the US gold reserves, and it abandoned the standard in 1971, prompting other countries to drop it as well.

Praises

  • The Gold Standard is self-regulating. The standard prevents the government from printing excess money since money is printed according to the quantity of a country’s gold reserves. Inflation is thus curbed in the standard. If a government prints more money than its gold reserves, the country’s currency loses value, and the citizens exchange their currency for gold at the set exchange price.
  • The Gold Standard facilitated exploration as countries went in search for gold deposits. European countries such as Spain discovered the New World due to the demand for gold standard.
  • The Standard provides economic stability. If gold becomes over-valued, gold production increases and it decreases if gold is undervalued. Since gold is stable in value, such a scenario is prevented from taking place.
  • The government does not run on huge deficits and debts since the standard is self-correcting.

Criticisms

  • The standard has been criticized due to its reliance on a country’s gold supply in such a manner that countries with little or no gold are at competitive disadvantages. Countries which are large gold producers such as the United States, South Africa, Canada, and Australia would be at an advantage if the standard were still in use today. The standard ignores the resourcefulness of a country’s labor and enterprises and rather stresses on its supply of gold.
  • In a scenario where the standard is used in the global economy, a particular country cannot adequately protect itself from negative outcomes driven by inflation or deflation in other parts of the world.
  • The system can impede a government’s ability to deal with a financial crisis or unemployment. Economic activity cannot be facilitated through money printing.

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