What Was The Gold Standard?
Posted by Allison on 6 April 2009, 14:53
Gold is a valuable commodity everywhere on earth. It has always been that way, and since we cannot replicate it by any means – we simply have to keep looking for more of it which lies hidden in the earth – its value has never come into question. Put simply, there is no real chance that gold will ever lose its value entirely, since there isn't anywhere near enough to go around.
This is the logic that lies behind every currency which has ever succeeded in working in any part of the world to date; there must be a demand for it which is far more than the supply can hope to meet. That is what gives it its value.
Gold has been used as a currency in the past, and the Gold Standard was the name given to the specific monetary system in which a set of coins and banknotes were supported by a promise to replace them in gold should you wish to. In other words, if your currency was supported by the Gold Standard, you could in theory walk into a bank, hand over all the cash you had in your pockets and receive that exact value in return of gold.
You will notice however that the title above is written in past tense. That is because the Gold Standard has been consigned to the past, leaving our modern day currencies to operate on a system of trust more than anything else. Gold still plays a very important part in our societies, but when it comes to currencies it has now taken more of a back seat.
If you take a look back into the pages of the history books however, gold had a more profound effect on money than it does now. For example, when coins were first invented, people looked around for the best thing to make them out of – and came up with the perfect solution, one which is still in use today. That solution was to use a variety of metals.
The only difference was that our ancestors used precious metals such as gold and silver to make their coins from. Nowadays we use other metals which don't have as much value. The reason they used gold and silver was to give each coin a real value. So for example people knew that a gold coin was worth more than a silver one. We know today that this is the case, even though our own currencies are based on what is called a fiat system, which has nothing to do with gold or silver or any other precious metal.
With such a long history of using gold as money it may seem strange that the Gold Standard didn't actually come to pass until 1717, when Britain first adopted it. The idea behind it was that whatever currency the country in question used, it would be guaranteed to be worth a specific set amount of gold. So in each country a single unit of their currency (a British pound, a United States dollar, a German mark, for example) would be guaranteed to be exchanged for a set weight of pure gold if it was ever requested. This Gold Standard, in essence, is what gave the currencies their value.
For a country that is always viewed as being a world leader, the United States was actually the last country to adopt the Gold Standard, of all those who did. While you might think that the United States dollar has been one of the world's strongest currencies throughout history (and you would be right in a sense) it is worth far less today than it ever has been before? Why is this? It's basically because like every other country in the world, it is no longer backed by the Gold Standard. This means that the paper a fifty dollar bill is printed on is worth more than the amount printed on it! You cannot exchange it for fifty dollars worth of gold; you can only exchange it for goods to its value, which is what a fiat system of money is all about.
It is interesting to note that while the Gold Standard continued into the 20th century, it was suspended by some countries during the First World War. The issue of coins and banknotes and the actual supplies of gold that various countries had to back them with could be seen to be at odds with each other, which is why the Gold Standard did not see out the 20th century in the end.
There have been several different versions of a Gold Standard throughout history, but none of them was deemed strong enough in the end to continue into the 21st century.
So what effect did the end of the Gold Standard have on gold itself?
It's obvious that it still holds its value and should continue to do so, for the reasons given earlier. However when various world currencies were tied to it, its value could fluctuate greatly, depending on what was going on in the world at the time. Nowadays that doesn't happen, since it is not connected to the issue of money in any way.
When you consider the fact that gold is in limited supply since it occurs naturally, and banknotes could in theory be produced ad infinitum, there does seem to be an obvious imbalance between the two which is why so many governments were reluctant to carry on with the Gold Standard in the first place.
However there have been occasions in the past when a fiat money system has been misused, leading to a larger amount of banknotes than is needed. In this sense the Gold Standard effectively prevented that from happening, which it is now unable to do.
Will we ever return to this standard in future years? A world built on the trust which is so ingrained into fiat money systems seems shaky at best. In the end, only time will tell whether gold will rule our currencies yet again.