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The gold standard is a monetary system in which a region's common medium of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold. The gold standard is not currently used by any government, having been replaced completely by fiat currency.


The use of paper money, convertible into gold, to replace gold coins, originated in China in the 9th century AD. Gold standards replaced the use of gold coins as currency in the 17th-19th centuries in Europe.

In the 1790s Britain suffered a massive shortage of silver coinage and ceased to mint larger silver coins. It issued "token" silver coins and overstruck foreign coins. With the end of the Napoleonic Wars, Britain began a massive recoinage program that created standard gold sovereigns and circulating crowns, half-crowns, and eventually copper farthings in 1821. In 1833, Bank of England notes were made legal tender, and redemption by other banks was discouraged. In 1844 the Bank Charter Act established that Bank of England notes, fully backed by gold, were the legal standard. According to the strict interpretation of the gold standard, this 1844 Act marks the establishment of a full gold standard for British money.

Dates of adoption of a gold standard

Throughout the 1870s deflationary and depression economics created periodic demands for silver currency. However, attempts to introduce such currency generally failed, and continued the general pressure towards a gold standard. By 1879, only gold coins were accepted through the Latin Monetary Union, composed of France, Italy, Belgium, Switzerland and later Greece, even though silver was, in theory, a circulating medium. This is probably because there was a strong belief that the gold standard system functioned well. The gold standard system was thought by policy makers to be the cause of peace and prosperity among countries. Therefore, there was also strong international cooperation among countries in lending to those having difficulties abiding with the exchange rate.

Suspension of the gold standard

Governments faced with the need to fund high levels of expenditure, but with limited sources of tax revenue, suspended convertibility of currency into gold on a number of occasions in the 19th century. The British government suspended convertibility during the Napoleonic wars and the US government during the US Civil War. In both cases, convertibility was resumed after the war.

Gold standard from peak to crisis (1901–1932)

Suspending gold payments to fund the war

As in previous major wars under its gold standard, the British government suspended the convertibility of Bank of Englandmarker notes to gold in 1914 to fund military operations during World War I. By the end of the war Britainmarker was on a series of fiat currency regulations, which monetized Postal Money Orders and Treasury Notes. The government later called these notes banknotes, which are different from US Treasury notes. The United Statesmarker government took similar measures. After the war, Germanymarker, having lost much of its gold in reparations, could no longer coin gold "Reichsmarks" and moved to paper currency, although the Weimar Republicmarker later introduced the "rentenmark" and later the gold-backed reichsmark in an effort to control hyperinflation.

As had happened after previous major wars, the UK was returned to the gold standard in 1925, by Winston Churchill. Although a higher gold price and significant inflation had followed the wartime suspension, Churchill followed tradition by resuming conversion payments at the pre-war gold price. For five years prior to 1925 the gold price was managed downward to the pre-war level, causing deflation throughout those countries of the British Empire and Commonwealth using the Pound Sterling. But the rise in demand for gold for conversion payments that followed the similar European resumptions from 1925 to 1928 meant a further rise in demand for gold relative to goods and therefore the need for a lower price of goods because of the fixed rate of conversion from money to goods. In order to attract gold, Britain needed to increase the value of investing in itsdomestic assets. They needed to increase the demand for the pound. By doing this, Britain attracted gold from the stronger US, which decreased the US money supply as well as depressed Britain’s own economy. Because of these price declines and predictable depressionary effects, the British government finally abandoned the standard September 21, 1931. Swedenmarker abandoned the gold standard in October 1931; and other European nations soon followed. Even the U.S. government, which possessed most of the world's gold ($175 million flowed into the U.S. in 1929, and $280 million in 1930) moved to cushion the effects of the Great Depression by raising the official price of gold (from about $20 to $35 per ounce) and thereby substantially raising the equilibrium price level in 1933-4. Economic theories claim that a strict adherence to the gold standard during the Great Depression prevented the Federal Reserve from reducing nominal interest rates, which would have led to an expansion of the monetary supply. On the contrary, interest rates were increased to stimulate demand for the U.S. Dollar. This further lowered market demand, thereby augmenting the pressures and risks of deflation (as market demand decreases, prices decrease).


From 1601, the Tokugawa coinage consisted in gold, silver, and bronze denominations. In 1858, Western countries, especially the United States, France and Great Britain imposed through "unequal treaties" (Treaty of Amity and Commerce) free trade, free monetary flow, and very low tariffs, effectively taking away Japanese control of its foreign exchange. The 1715 export embargo on gold bullion was thus lifted:

"All foreign coin shall be current in Japan and pass for its corresponding weight of Japanese coin of the same description... Coins of all description (with the exception of Japanese copper coin) may be exported from Japan"— Treaty of Amity and Commerce, 1858.

This created a massive outflow of gold from Japan, as foreigners rushed to exchange their silver for "token" silver Japanese coinage and again exchange these against gold, giving a 200% profit to the transaction. In 1860, about 70 tons of gold thus left Japan, effectively destroying Japan's gold standard system, and forced it to return to weight-based system with international rates. The Bakufu responded to the crises by debasing the gold content of its coins by two thirds, so as to match foreign gold-silver exchange ratios.

As a consequence, the Tokugawa Bakufu lost the major profit source of recoinage (seniorage), and was forced to issue unbacked paper money, leading to major inflation. This was one of the major causes of discontent during the Bakumatsu period, and one of the causes of the demise of the Shogunate.

Following Germany's example after the Franco-Prussian War of extracting reparations to facilitate a move to the gold standard, Japan gained the needed reserves after the Sino-Japanese War of 1894-1895. Whether the gold standard offered a nation a seal of good housekeeping when it sought to borrow abroad is debated.

For Japan, moving to gold was considered as vital to gaining access to Western capital markets.

Great Britain, Japan, and the Scandinavian countries left the gold standard in 1931.

Depression and World War II

British hesitate to return to gold standard

During the 1939–1942 period, the UK depleted much of its gold stock in purchases of munitions and weaponry on a "cash and carry" basis from the U.S. and other nations. This depletion of the UK's reserve convinced Winston Churchill of the impracticality of returning to a pre-war style gold standard. To put it simply the war had bankrupted Britain. John Maynard Keynes, who had argued against such a gold standard, proposed to put the power to print money in the hands of the privately owned Bank of England. Keynes, in warning about the menaces of inflation, said "By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some". Quite possibly because of this, the 1944 Bretton Woods Agreementmarker established the International Monetary Fundmarker and an international monetary system based on convertibility of the various national currencies into a U.S. dollar that was in turn convertible into gold. It also prevented countries from manipulating their currency's value to gain an edge in international trade.

Post-war international gold standard (1946–1971)

After the Second World War, a system similar to a Gold Standard was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the U.S. dollar. The U.S. promised to fix the price of gold at $35 per ounce. Implicitly, then, all currencies pegged to the dollar also had a fixed value in terms of gold. Under the regime of the French President Charles de Gaulle up to 1970, France reduced its dollar reserves, trading them for gold from the U.S. government, thereby reducing U.S. economic influence abroad. This, along with the fiscal strain of federal expenditures for the Vietnam War, led President Richard Nixon to eliminate the fixed gold price in 1971, causing the system to break down.


The history of money consists of three phases: commodity money, in which actual valuable objects are bartered; then representative money, in which paper notes (often called 'certificates') are used to represent real commodities stored elsewhere; and finally fiat money, in which paper notes are backed only by use of' "lawful force and legal tender laws" of the government, in particular by its acceptability for payments of debts to the government (usually taxes).

Commodity money is inconvenient to store and transport . It also does not allow the government to control or regulate the flow of commerce within their dominion with the same ease that a standardized currency does. As such, commodity money gave way to representative money, and gold and other specie were retained as its backing.

Gold was a common form of money due to its rarity, durability, divisibility, fungibility, and ease of identification, often in conjunction with silver. Silver was typically the main circulating medium, with gold as the metal of monetary reserve.

It is difficult to manipulate a gold standard to tailor to an economy’s demand for money, providing practical constraints against the measures that central banks might otherwise use to respond to economic crises.

The gold standard variously specified how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself is just paper and so has no intrinsic value, but is accepted by traders because it can be redeemed any time for the equivalent specie. A U.S. silver certificate, for example, could be redeemed for an actual piece of silver.

Representative money and the gold standard protect citizens from hyperinflation and other abuses of monetary policy, as were seen in some countries during the Great Depression. However, they were not without their problems and critics, and so were partially abandoned via the international adoption of the Bretton Woods Systemmarker. That system eventually collapsed in 1971, at which time nearly all nations had switched to full fiat money.

According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery from the great depression. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost avoided the depression entirely. The connection between leaving the gold standard as a strong predictor of that country's severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between national economies.

Differing definitions of gold standard

A 100% reserve gold standard, or a full gold standard, exists when a monetary authority holds sufficient gold to convert all of the representative money it has issued into gold at the promised exchange rate. It is sometimes referred to as the Gold Specie Standard to more easily identify it from other forms of the gold standard that have existed at various times. A 100% reserve standard is generally considered difficult to implement as the quantity of gold in the world is too small to sustain current worldwide economic activity at current gold prices. Its implementation would entail a many-fold increase in the price of gold. Furthermore, the "necessary" quantity of money (i.e. one that avoids either inflation or deflation) is not a fixed quantity, but varies continuously with the level of commercial activity.

This is due to the Fractional-reserve banking system. As money is created by the central bank and spent into circulation, the money expands via the money multiplier. Each subsequent loan and redeposit results in an expansion of the monetary base. Therefore, the promised exchange rate would have to be constantly adjusted.

In an international gold-standard system (which is necessarily based on an internal gold standard in the countries concerned) gold or a currency that is convertible into gold at a fixed price is used as a means of making international payments. Under such a system, when exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold from one country to another, large inflows or outflows occur until the rates return to the official level. International gold standards often limit which entities have the right to redeem currency for gold. Under the Bretton Woods systemmarker, these were called "SDRs" for Special Drawing Rights.


The theory of the gold standard rests on the idea that maximal increases in governmental purchasing power during wartime emergencies require post-war deflations, which would not occur without monetary institutions like the gold standard, which insist upon return to pre-war price-levels and therefore deflationary wartime expectations.

The gold standard limits the power of governments to inflate prices through excessive issuance of paper currency. It may tend to reduce uncertainty in international trade by providing a fixed pattern of international exchange rates. Under the classical international gold standard, disturbances in price levels in one country would be partly or wholly offset by an automatic balance-of-payment adjustment mechanism called the "price specie flow mechanism."


Gold prices (US$ per ounce) since 1968, in nominal US$ and inflation adjusted US$.
  • The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons. Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4.5 trillion. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2). Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications. For example, instead of using the ratio of $1,000 per ounce, the ratio can be defined as $2,000 per ounce effectively raising the value of gold to $8 trillion. However, this is specifically a disadvantage of return to the gold standard and not the efficacy of the gold standard itself. Some gold standard advocates consider this to be both acceptable and necessary whilst others who are not opposed to fractional reserve banking argue that only base currency and not deposits would need to be replaced. The amount of such base currency (M0) is only about one tenth as much as the figure (M2) listed above.
  • Many economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns. Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession. Such reason is often employed to partially blame the gold standard for the Great Depression, citing that the Federal Reserve couldn't expand credit enough to offset the deflationary forces at work in the market. Opponents of this viewpoint have argued that gold stocks were available to the Federal Reserve for credit expansion in the early 1930s. Fed operatives simply failed to utilize them. In this case, a causal factor of the Great Depression was not the gold standard but rather a politically usurped monetary system.
  • Monetary policy would essentially be determined by the rate of gold production. Fluctuations in the amount of gold that is mined could cause inflation if there is an increase, or deflation if there is a decrease. Some hold the view that this contributed to the severity and length of the Great Depression.
  • Some have contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak. For example, some believe the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency.
  • If a country wanted to devalue its currency, it would produce sharper changes, in general, than the smooth declines seen in fiat currencies, depending on the method of devaluation.

Advocates of a renewed gold standard

The return to the gold standard is supported by many followers of the Austrian School of Economics, Objectivists and libertarians[6372] largely because they object to the role of the government in issuing fiat currency through central banks. A significant number of gold standard advocates also call for a mandated end to fractional reserve banking; however, this view is far from universal.

Few lawmakers today advocate a return to the gold standard, other than adherents of the Austrian school and some supply-siders. However, many prominent economists have expressed sympathy with a hard currency basis, and have argued against fiat money, including former U.S. Federal Reserve Chairman Alan Greenspan (himself a former Objectivist), and macro-economist Robert Barro. Greenspan famously argued the case for returning to a gold standard in his 1966 paper "Gold and Economic Freedom", in which he described supporters of fiat currencies as "welfare statists" intent on using monetary policies to finance deficit spending. He has argued that the fiat money system of today has retained the favorable properties of the gold standard because central bankers have pursued monetary policy as if a gold standard were still in place. U.S. Congressman Ron Paul used to argue for the reinstatement of the gold standard.

The current global monetary system relies on the U.S. dollar as a reserve currency by which major transactions, such as the price of gold itself, are measured. A host of alternatives have been suggested, including energy-based currencies, market baskets of currencies or commodities, gold being one of the alternatives.

In 2001 Malaysian Prime Minister Mahathir bin Mohamad proposed a new currency that would be used initially for international trade among Muslim nations. The currency he proposed was called the Islamic gold dinar and it was defined as 4.25 grams of pure (24 carat) gold. Mahathir Mohamad promoted the concept on the basis of its economic merits as a stable unit of account and also as a political symbol to create greater unity between Islamic nations. The purported purpose of this move would be to reduce dependence on the United States dollar as a reserve currency, and to establish a non-debt-backed currency in accord with Islamic law against the charging of interest. However, to date, Mahathir's proposed gold-dinar currency has failed to take off.

Gold as a reserve today

During the 1990s Russiamarker liquidated much of the gold reserves of the former USSR, while several other nations accumulated gold in preparation for the Economic and Monetary Union. The Swiss Franc was based on a full gold convertibility until 1999. However, gold reserves are held in significant quantity by many nations as a means of defending their currency, and hedging against the U.S. Dollar, which forms the bulk of liquid currency reserves. Weakness in the U.S. Dollar tends to be offset by strengthening of gold prices. Gold remains a principal financial asset of almost all central banks alongside foreign currencies and government bonds. It is also held by central banks as a way of hedging against loans to their own governments as an "internal reserve". Approximately 19% of all above-ground gold is held in reserves by central banks.

Both gold coins and gold bars are widely traded in liquid markets, and therefore still serve as a private store of wealth. Some privately issued currencies, such as digital gold currency, are backed by gold reserves.

In 1999, to protect the value of gold as a reserve, European Central Bankersmarker signed the Washington Agreement on Gold which stated that they would not allow gold leasing for speculative purposes, nor would they enter the market as sellers except for sales that had already been agreed upon.

See also


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