A gold standard is a monetary system in which gold is used to measure the value of a country’s currency.
This system ensures that people can get gold in exchange for currency. A gold standard indicates an agreement between a country’s society and financial institutions, whereby the currency that people earn and spend is expressed in gold.
Introduction Of Gold Standard
Throughout history people have chosen gold as their currency of choice at various times. This is because gold is rare, it is not easily collected, it can be converted into ornaments and it does not corrode. The first traces of gold as a currency were found in the region of Lydia (present day Turkey) in 600 BC. Coinage using gold and its use in trade and commerce began a long time ago. However, gold was not used as a standard until the 19th century.
Britain began using gold as a standard around 1816. However, the use of gold as a monetary standard did not gain international recognition until the 1870s. The United States adopted the gold standard in 1879 after unsuccessfully trying to introduce various methods of currency exchange.
With the establishment of the Gold Standard Act in 1900, the United States recognized only gold as a metal coin instead of paper currency. This act guaranteed that the United States government would exchange paper currency of any value with gold of equal value to its bearer. And in this way, there is no need to directly use heavy bars of gold for transactions.
But in establishing the gold standard around the world, the governments of different countries had to rush a lot.
End Of Gold Standard
From 1900 to 1932, the United States suffered a series of severe economic crises. On top of that they also joined the World War. For these reasons, when US customers needed large amounts of cash, such as during the harvest season, banks failed to provide so much cash immediately. Banks did not have enough cash at that time to meet the sudden excess demand.
The Federal Reserve System or the central bank of the United States was established to meet people’s demand for cash. When demand increased, the Federal Reserve helped the banks by printing money, so that the price of goods remained stable in the market.
But unfortunately the results from the Federal Reserve did not come as expected. As a result, the gold standard was discontinued in 1933, as it became unstable. The system could not keep pace with people’s demand for cash.
In addition, the scope of work of the Federal Reserve, the central bank of the United States, was also limited at that time. If they printed more dollars, the value of the dollar would fall, and if they lowered interest rates, those who held gold would sell it abroad. This reduced the supply of gold in the country.
Due to all these reasons, a law was made at one time so that no one could deposit gold except in certain institutions. The Gold Reserve Act of 1934 stopped gold smuggling, as the gold standard had become quite unstable at that time.
After the Act came into force on 30 January 1934, private ownership of gold without a license was prohibited. As a result, the supply of gold in the market stopped and the use of gold as a value also stopped. It turns out that the gold standard in the United States was actually in effect from 1879 to 1933.
After The End Of The Gold Standard
In New Hampshire in 1944, the ‘Bretton Woods’ agreement was signed between the Allies of World War II. All signatories to this agreement accept the US dollar as the basis for stabilizing the value of their currencies.
The value of the US dollar was then fixed as equal to one ounce of gold. An ounce of gold was worth $35 at that time.
The Bretton Woods Agreement of 1944 allowed easy exchange of currencies. As a result, countries could easily exchange their currencies with other countries’ currencies. And it was the duty of the United States to control the price of gold and to keep enough gold in the treasury so that gold could easily be exchanged for dollars when needed.
But transactions and currency flows in international markets increased at one time to the extent that additional US dollars came into the hands of other countries.
The situation then became such that there was no more gold in the US treasury to pay the countries at $35 per ounce. As a result, the gold standard system was finally stopped in 1971. President Nixon announced that gold would no longer be available for dollars.
But the US dollar is still established as a strong currency today, because it is a global currency. In addition, many countries use the US dollar as the basis of their currency value.
What Will Happen If We Return To The Gold Standard?
There is really no way of knowing what will happen. However, in a monetary system based on the gold standard, the central bank has no means of changing interest rates or increasing the money supply in the economy.
In addition, this system limits the amount of cash supplied to the market and the government has to pay gold in exchange for printing currency.
Only 244,000 metric tons of gold have been discovered in the world so far. And the market has more than 2 trillion dollars in supply. If the US government wanted to go back to the old gold standard, it would have to collect all the gold it had ever discovered and set it at $237 per ounce.
That means if you deposit $1 with the government, the government will give you 1/237th of an ounce of gold. But if other countries have gold reserves, you will get less gold for one dollar.