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Gold Standard
What is the gold standard? Gold was valued at par with currency in many parts of the world. The weight and purity of gold were the two parameters used to ascertain its value when it was used as a monetary unit. With the introduction of paper money in the 16th century, there arose a struggle between gold and paper money. By the mid-1800s, the need for standardization was considered much essential to survive in the world trade market. This eventually led to the introduction of the Gold Standard. The Gold Standard came into effect in 1871 and was later abandoned in 1914.
The Gold Standard of a country is a monetary system that links the value of its currency directly to gold. A fixed price is set for gold in the countries that use the Gold Standard, and of course, the buying and selling of gold within these countries happen at this price. The conversion of paper money to gold was made easy with the emergence of this monetary system. The three types of gold standard are: Specie , Bullion, and Exchange.
The Gold Specie Standard involves the circulation of gold coins and consider gold coins more valuable than the coins of other metals. The Gold Bullion and Gold Exchange standards do not involve circulating points. In exchange for circulating currencies, gold bullions are sold at a fixed price by the authorities. In the Gold Standard scheme, a fixed exchange rate is guaranteed in exchange for the currency of another country using the Gold Standard.
Fiat System vs Gold Standard The stability of the value of currency plays an important role in the monetary policies of a government. In contrast to the Gold Standard that takes into account the value of gold, the fiat system as a monetary system does not compare any physical commodity with currency. Instead, it focuses on fluctuations of other currencies in the international market. In the fiat system, the currency a government prints is a legal tender for its financial transactions.
